Alvarez Says Fed Hasn’t Seen Other JPMorgan Risk Problems

Scott Alvarez
Scott Alvarez, general counsel for the U.S. Federal Reserve, speaks during a House Financial Services Committee hearing in Washington on May 17, 2012. Photographer: Andrew Harrer/Bloomberg

The Federal Reserve’s chief attorney said central bank supervisors reviewing a trading loss of at least $2 billion at JPMorgan Chase & Co. haven’t found other weaknesses, such as handling of risk, at the firm.

“The Federal Reserve continues to evaluate whether the governance, risk management and control weaknesses exposed by this incident may be present in other parts of the firm,” Scott Alvarez, general counsel for the Board of Governors, said in remarks prepared for testimony tomorrow to a U.S. House panel. The text was by obtained by Bloomberg News.

“To date, we have found no evidence that they are, but this work is not yet complete,” Alvarez said in comments to the Financial Services Committee.

New York-based JPMorgan announced its chief investment office’s trading loss in May, prompting scrutiny among lawmakers and regulators seeking to curb speculation by lenders with federally insured deposits. Chief Executive Officer Jamie Dimon is scheduled to testify to the same House panel tomorrow after saying last week that the bank’s switch to a new risk model may have helped bring about the losses.

JPMorgan’s shares have tumbled 15 percent since Dimon announced the bank’s flawed positions on May 10. The “egregious mistakes” made by the chief investment office, which oversees about $360 billion, may cost JPMorgan an additional $1 billion, Dimon said at the time.

Large Losses

Alvarez said in his testimony that while the bank’s losses were large, the incident also underscored the importance of bank capital in averting taxpayer-funded bailouts.

“Every dollar of these losses will be borne by JPMorgan Chase’s shareholders, and not by depositors or taxpayers, a result that is a function of the substantial amounts of high-quality capital that JPMorgan holds,” Alvarez said. “The Federal Reserve and other federal banking regulators continue to take important steps to strengthen bank capital regulation, especially for the largest, most complex firms.”

In his testimony to Congress last week, Dimon said a new formula for estimating possible losses, implemented in January, failed to properly account for risk.

On April 13, when Dimon downplayed the risks of trades on a call with analysts, “we were still unaware that the model might have contributed to the problem,” he said. “So when we found out later on, we went back to the old model,” he said.

The U.S. central bank is “working closely” with the Office of the Comptroller of the Currency, which is the regulator of the national bank, to “manage and de-risk the portfolio in question,” Alvarez said in his prepared testimony.

The Fed is also cooperating with the Federal Deposit Insurance Corporation to “fully assess any risk-management failures” and ensure that such issues are “promptly and appropriately addressed,” he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE