Dimon Says Change in Risk Model May Have Fueled Loss

Dimon Says Change in Risk Model May Have Fueled Trading Loss
Jamie Dimon, chief executive officer of JPMorgan Chase & Co., during a Senate Banking Committee hearing in Washington on June 13, 2012. Photographer: Andrew Harrer/Bloomberg

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said the bank’s switch to a new risk model in the first quarter may have helped fuel a $2 billion trading loss at the chief investment office.

The new measurement of value at risk was “implemented in January and did effectively increase the amount of risk this unit was able to take,” Dimon told the Senate Banking Committee today. “On April 13, we were still unaware that the model might have contributed to the problem, so when we found out later on, we went back to the old model.”

Dimon is under pressure from lawmakers to explain how he was caught off guard by the loss as regulators seek to curtail speculation by lenders with federally insured deposits. He said May 10 that the loss on credit derivatives was the result of “egregious mistakes” in risk management. A month earlier, he defended the CIO as a “sophisticated” guardian of the New York-based bank’s funds.

Dimon doesn’t believe the change in the VaR model “was done for nefarious purposes,” he said today, telling the senators that risk managers should rely on more than the formula to assess the possibility of losses.

“We don’t run the business on models,” Dimon said. “They’re one input. You should be looking at lots of other things” to make sure risks are managed properly.

The changes in VaR-- and the timing of the firm’s disclosures about them -- are the focus of an inquiry by the U.S. Securities and Exchange Commission, Chairman Mary Schapiro told the Senate panel on May 22.

‘Backward Looking’

VaR is a formula calculated by banks to gauge the size of their trading risks. Under JPMorgan’s methodology, the figure represents the maximum amount that traders would expect to lose on 95 out of 100 trading days, according to quarterly filings with regulators. It’s calculated daily, and the average for a quarter is reported in regulatory filings.

The chief investment office asked to change the VaR model “sometime in 2011,” Dimon said during the hearing. An independent group reviewed the proposed change and the new formula “back-tested better” than the old one, he said. It was put into use on Jan. 15 Dimon said.

“I was copied on a memo that said there was a change in the VaR model,” Dimon said afterward in an interview with CNBC, according to a transcript. “I paid virtually no attention to it. I didn’t think it was significant at the time.”

The VaR at the CIO was reported as $67 million in a regulatory filing on April 13, the day JPMorgan posted first-quarter results. When JPMorgan reverted to the old model, it showed the average VaR was $129 million.

“I’d just caution you that models are backward-looking,” Dimon said. “The future isn’t the past. They never are totally accurate in capturing changes in business, concentration, liquidity or geopolitics or things like that.”

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