JPMorgan’s Risk Gauge Aggravated Trading Loss, Dimon Says
“It may have aggravated what happened, I wouldn’t say it was the cause of what happened,” Dimon told the House Financial Services Committee during a hearing in Washington.
Regulators are probing why JPMorgan changed the gauge called value-at-risk, or VaR, for its chief investment office in mid-January before losses began piling up on derivatives held by the unit. Dimon, 56, said May 10 that the new VaR erroneously pegged risk at about half the level of the old formula, making the potential damage look smaller.
JPMorgan reported the figure in its April 13 earnings statement without telling investors about the new formula. That has caught the attention of regulators including Securities and Exchange Commission Chairman Mary Schapiro, who said today that voluntary disclosures on trading risk in a news release will be scrutinized as if they were reported in formal quarterly filings where such information is usually published.
The measure “is not required to be disclosed in the earnings release, but if you choose to speak to it, you must speak truthfully and completely,” Schapiro, who turned 57 today, told the House panel.
VaR represents the maximum amount that traders would expect to lose on 95 out of 100 trading days, according to New York- based JPMorgan. It’s recalculated daily, and the quarterly average is reported in securities filings.
The VaR at the CIO was reported as averaging $67 million in a regulatory filing on April 13, the day JPMorgan posted first- quarter results. When JPMorgan realized the new version was flawed and reverted to the old model, it showed VaR averaged $129 million and ended the quarter at $186 million.
The SEC is studying whether the bank met requirements for disclosing how it calculated VaR, including “changes to key model characteristics, assumptions and parameters,” Schapiro said in prepared remarks for the hearing.
The new measurement was “implemented in January and did effectively increase the amount of risk this unit was able to take,” Dimon told a Senate hearing last week. While the change coincided with derivatives trades that later proved to be illiquid and prone to losses, Dimon said he didn’t believe the change “was done for nefarious purposes.”
Timing of Change
Dimon said in prepared remarks for today’s hearing that the chief investment office’s hedging strategy was “poorly conceived and vetted,” and that traders at the unit “did not have the requisite understanding of the risks they took.”
The chief investment office and an independent group began trying to change the VaR model in June 2011, Dimon said during today’s hearing. The changes were approved and put into use in January, Dimon testified.
In April, Dimon called news reports about the dangers of trading by his chief investment office “a complete tempest in a teapot.” Schapiro, asked about the comment today, said it would be viewed in the context of how VaR doubled when the bank reverted to the old formula.
Dimon said today the change in January was made to improve the gauge, and that when he made that comment in April, “we had no reason to think it wasn’t a better model and didn’t better reflect some of the risks that were being taken there.”
Dimon said during a CNBC interview on June 13 that he was copied on an internal e-mail discussing the VaR model change before it was made, and that he paid little attention to it.