SEC Focusing on JPMorgan’s Disclosure of Risk Models

Options for Review of JPMorgan Loss Described by SEC’s Schap
U.S. Securities and Exchange Commission Chairman Mary Schapiro. Photographer: Andrew Harrer/Bloomberg

U.S. Securities and Exchange Commission Chairman Mary Schapiro said the agency is “very focused” on determining whether JPMorgan Chase & Co. appropriately disclosed changes it made during the first quarter to a complex risk calculation.

“We are very focused on the accuracy and timeliness of that disclosure,” she said yesterday during an appearance before the Senate Banking Committee in Washington.

Schapiro’s comments were the most extensive she has made since the biggest U.S. bank announced a $2 billion trading loss on May 10. The remarks indicated that the SEC is examining how JPMorgan measured its “value at risk,” or VaR, which is a measure of how much the company estimates it could lose on securities on 95 percent of days.

JPMorgan Chief Executive Officer Jamie Dimon told investors on May 10 that the company used a new model, which later proved to be “inadequate,” to calculate VaR some time during the first quarter. The change ended up cutting the unit’s estimated risk profile by about half. When JPMorgan reported earnings on April 13, it said the division’s VaR was $67 million when it was actually $129 million, according to a presentation on the company’s website that day and company disclosures since then.

“In the first quarter, we implemented a new VaR model, which we now deemed inadequate,” Dimon said on May 10. “We went back to the old one, which had been used for the prior several years, which we deemed to be more adequate.”

Model Changes

JPMorgan, the biggest U.S. bank by assets, disclosed the losses in its Chief Investment Office after Bloomberg News first reported on April 5 that trader Bruno Iksil had accumulated large bets in credit markets. Ina Drew, who as head of the CIO unit was among the most powerful women on Wall Street, resigned on May 14.

In response to questioning from Senator Kay Hagan, a North Carolina Democrat, Schapiro cited news reports that JPMorgan changed its model and said that companies are supposed to disclose when that happens.

“When there are changes to the VaR model, as newspapers have reported was done at JPMorgan -- they changed their VaR model -- those changes to the model characteristics also have to be disclosed,” she said.

JPMorgan spokesman Joseph Evangelisti declined to comment on Schapiro’s remarks. The bank did disclose the change in an official financial statement filed on May 10, though not in the earlier earnings release.

Schapiro told lawmakers that VaR models are an imperfect snapshot of risk at a company in part because it doesn’t measure the maximum possible losses that can hit a portfolio. Michael Loughlin, Wells Fargo & Co.’s chief risk officer, said yesterday that VaR is an “adequate ratio.”

“Though we can all do better,” he said in a presentation at the bank’s investor day. “I don’t mean to sound trite but I think maybe walking trading floors is a better risk management tool than VaR.”

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