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OCC Said to Admit Missing JPMorgan’s VaR Change in Probe

The U.S. Office of the Comptroller of the Currency told lawmakers it missed changes to JPMorgan Chase & Co. (JPM)’s risk-tracking system that could have alerted the watchdog sooner to the lender’s mounting derivatives bets, a person with direct knowledge of the matter said.

The OCC described the lapse in a report sent in last year’s second half to the Senate Permanent Subcommittee on Investigations, said two people, requesting anonymity because the discussions aren’t public. The congressional panel is set to release its own findings in coming weeks after examining how JPMorgan and regulators handled the bank’s botched trades, which resulted in losses exceeding $6.2 billion in the first nine months of 2012.

The admission of responsibility is among the first by regulators since an initial hearing in June of the oversight roles they played. Thomas J. Curry, then two months into his tenure as head of the OCC, told the Senate Banking Committee that his agency was examining whether there were “gaps within our assessment of the risks and risk controls in place” in JPMorgan’s chief investment office, where the losses occurred.

The lawmakers’ report will criticize the bank and the OCC for lax oversight of the trades, two people with knowledge of the matter said last month.

The OCC, which oversees national banks, didn’t catch a January 2012 change in the way JPMorgan calculated so-called value-at-risk for the chief investment office, one of the people said. The revised model, which was later scrapped, cut the firm’s reported risk in half and ultimately exacerbated losses by underestimating their potential size as they began to mount, Chief Executive Officer Jamie Dimon told lawmakers in June.

‘Error-Prone’

JPMorgan released the results of its own review on Jan. 16. It said that internal controls were inadequate, traders sought to hide losses and leaders, including Dimon, 56, weren’t aggressive enough in responding. His pay for 2012 was cut by 50 percent to $11.5 million.

The report described the CIO’s risk-modeling system as “error-prone,” because it required employees to cut and paste electronic data to a spreadsheet. Workers inadvertently used the sum of two numbers instead of the average in calculating value- at-risk, or VaR, which represents the maximum amount that traders would expect to lose on 95 out of 100 trading days.

Curry told lawmakers in June that the agency had opened a review into the loss that would look at the board’s oversight, compensation practices within the CIO, and the adequacy of risk controls at JPMorgan and other banks.

Capital Requirements

The OCC typically reviews and decides on allowing changes in a bank’s VaR model if the calculation relates to current capital requirements, the person said. JPMorgan’s change was intended to reduce the impact of future regulatory capital rules and therefore escaped the OCC’s normal scrutiny, according to the person.

The bank also is supposed to notify the OCC of changes in risk management, and should have made the regulator aware of changes to the VaR formula, said another person with direct knowledge of the situation, who also requested anonymity because talks with the company weren’t public.

Bryan Hubbard, an OCC spokesman, and Joe Evangelisti at JPMorgan declined to comment. The regulator and the Federal Reserve both issued cease-and-desist orders against the bank last month, citing deficiencies in the firm’s risk modeling, audit functions and the process for alerting the board of directors to problems.

London Whale

The JPMorgan trader who made bets on credit derivatives that led to the losses was nicknamed the London Whale because the position he amassed was big enough to move the market. John Walsh, who was acting comptroller at the time the wagers were made, didn’t respond to an e-mail seeking comment.

Carl Levin, the Michigan Democrat who is chairman of the Senate investigations panel, has interviewed Dimon and former CIO head Ina Drew, 56, among others. Elise Bean, the subcommittee’s staff director, declined to comment.

The Fed’s internal investigative arm, the Office of Inspector General, also has opened its own investigation into the central bank’s supervision of JPMorgan’s CIO loss to assess the effectiveness of its oversight.

To contact the reporters on this story: Dawn Kopecki in New York at dkopecki@bloomberg.net; Cheyenne Hopkins in Washington at chopkins19@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net

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