JPMorgan Chase & Co. needs to win back public trust after losses on a derivative portfolio swelled to more than $6.2 billion and eroded confidence in the largest U.S. bank, a company risk manager told lawmakers.
“This whole thing is regrettable and unacceptable,” Ashley Bacon, acting chief risk officer of the bank, told the Senate Permanent Subcommittee on Investigations today in Washington. “The onus of proof is on us now to demonstrate how this can’t happen in other places, how we weathered the financial crisis well everywhere else, and how we can make the entire firm a safer place to the satisfaction of you, everybody else and our regulators.”
JPMorgan is seeking to restore confidence in a company that withstood the 2008 housing crisis better than most rivals and then stumbled last year with losses on bets by U.K. traders. The Senate panel released a report yesterday saying the New York-based bank hid losses and dodged regulators.
“You had to figure Congress would hold JPMorgan to the fire,” Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York, said by e-mail. The bank and Chief Executive Officer Jamie Dimon are “thought to be the best in the business in managing a global bank and the risks that come with it. So when high expectations come up short,” Wall Street and Washington demand answers, he said. “Someone was going to be taken to task.”
JPMorgan fell 2.1 percent to $49.95 at 11:25 a.m. in New York. While the lender won approval yesterday to raise its dividend 27 percent to 38 cents a share and buy back $6 billion in stock, as part of a review of top U.S. banks, the Federal Reserve ordered the company to address weaknesses in its capital plan and resubmit a proposal by the end of the third quarter.
The derivative bets “caused regulators to rethink capital needs” for banks with large trading operations, said Charles Peabody, an analyst with Portales Partners LLC in New York, in an interview yesterday. “Much more broadly, are we going to get more heat on the too-big-to fail, too-big-to jail, too-big-to-manage theme?”
Carl Levin, the Michigan Democrat who leads the panel, and Arizona’s John McCain, the ranking Republican, today grilled current and former JPMorgan executives about the loss as lawmakers weigh further limits on banks’ trading. Yesterday’s report said the bank initially hid losses from investors.
Ina Drew, 56, who led the chief investment office responsible for the loss and was forced to step down last year, said she relied on other executives to manage a complex book of credit derivatives and didn’t learn of their “deceptive conduct” until after she left the company.
“I was, and remain, deeply disappointed and saddened to learn of such conduct and the extent to which the London team let me, and the company, down,” Drew said in testimony prepared for delivery in the Senate today.
Drew was among Wall Street’s most powerful women until she resigned in May four days after the initial trading loss was disclosed. Today is her first public appearance since leaving the New York-based bank.
JPMorgan’s efforts to hide the losses, outlined in the 301-page report, probably will ignite debate over whether the largest U.S. bank is too big to manage and ratchet up pressure on Dimon to surrender his role as chairman.
The bank “mischaracterized high-risk trading as hedging,” and withheld key information from its primary regulator, sometimes at Dimon’s behest, Senate investigators found. Managers manipulated risk models and pressured traders to overvalue their positions in an effort to hide growing losses.
“Our findings open a window into the hidden world of high-stakes derivatives trading by big banks,” Levin said at the hearing. “It exposes a derivatives-trading culture at JPMorgan that piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight and misinformed the public.”
Drew said London trading supervisors Javier Martin-Artajo and Achilles Macris continually reassured her that the derivatives trades were under control and that losses would dissipate. That turned out to be false, she said.
Macris and Martin-Artajo, who no longer work for the bank, declined to be interviewed by Senate investigators. The panel said it couldn’t require them to cooperate because they lived outside the U.S.
Bacon said it could have “been easy to catch this in many ways, and regrettably, it did not happen.”
Trading oversight and management oversight “failed completely,” he said. “I believe we have taken corrective action.”