Dimon Sees More Regulator Scrutiny After Whale Loss

JPMorgan Chase & Co., which is under regulatory orders to tighten internal controls following a record trading loss last year, will face more sanctions in the coming months, Chief Executive Officer Jamie Dimon said.

The bet on credit derivatives that lost more than $6.2 billion was “extremely embarrassing, opened us up to severe criticism, damaged our reputation and resulted in litigation and investigations that are still ongoing,” Dimon said yesterday in a letter to shareholders. “We received regulatory orders requiring improved performance in multiple areas, including mortgage foreclosures, anti-money laundering procedures and others. Unfortunately, we expect we will have more of these.”

Dimon, 57, again accepted blame on the New York-based bank’s behalf for the mistakes and said he felt “terrible that we let our regulators down.” The loss was “the stupidest and most embarrassing situation I have ever been a part of.”

The comments mark a shift in tone from Dimon’s letter a year ago, when he criticized regulators in the U.S. and abroad for producing rules that he said threatened to impair economic growth. JPMorgan released last year’s letter April 4, one day before Bloomberg News first reported on market-distorting derivatives bets by the bank’s chief investment office that erased as much as $51 billion in shareholder value and prompted multiple regulatory probes.

Oversight Group

While Dimon said then that he agreed with the intent of most reforms passed by Congress, the result lacked “intelligent design” with rules that were “uncoordinated and inconsistent with each other.” He also faulted authorities for taking too long to implement rules.

Dimon was put on the defensive about five weeks later as the bank disclosed mounting losses in the CIO. Its illiquid positions were amassed by U.K. trader Bruno Iksil, known as the London Whale because the bets were so big.

Banking regulators censured JPMorgan in January over risk-control and anti-money laundering lapses. Last month, Senate investigators said the firm and its leaders dodged regulators and then misled investors as the losses escalated.

Dimon has come under increasing pressure to resign as chairman since the bank disclosed the initial losses last May. The board of directors has stood by him so far, urging investors in March to vote against a shareholder proposal naming a separate chairman. They said Dimon’s dual role remains the “most effective leadership model” for JPMorgan. A similar proposal last year failed with 40 percent of the vote.

Bank One

The CEO may leave the bank if he’s forced to relinquish the chairmanship, said Charles Peabody, an analyst with Portales Partners LLC. Dimon told investors in February that he wouldn’t have agreed to take a previous job, leading Bank One Corp., if the board hadn’t given him both roles, Peabody said. JPMorgan acquired Bank One in 2004.

“Troubled company, big turnaround, divided board,” Dimon said in February. “Not me. Life is too short.”

If Dimon leaves, “shareholders may just find that the stock loses its premium valuation,” wrote Peabody, whose firm predicts JPMorgan will underperform the Standard & Poor’s 500 Financials Index in the next 12 months.

The board cut Dimon’s pay in half for 2012 after concluding that he bore some responsibility for the trading loss. It also credited his leadership for the lender’s performance. JPMorgan, the biggest U.S. bank with $2.4 trillion in assets, reported a third straight year of record profit in 2012 with $21.3 billion of net income.

Internal Controls

JPMorgan has made bolstering internal controls and regulatory compliance its priority, Dimon wrote in yesterday’s letter to investors.

The bank named Shannon Warren to lead a new companywide oversight and control group, according to an internal memo sent when she was promoted in January.

Her group has “the authority to make decisions top down, in a command and control fashion, similar to the way we operate when we undertake a major acquisition,” Dimon wrote yesterday.

Warren was promoted from co-chief control officer, a job she shared with Cindy Armine, according to the memo. Armine became the bank’s head of global compliance and regulatory management, according to the memo.

Separately, JPMorgan is becoming increasingly concerned about “malicious activity” by hackers seeking to disrupt its business, Dimon wrote yesterday. Executives across Wall Street and the U.S. have warned that costs are mounting as they seek to deflect attacks by foreign nations, organized crime or terrorists on websites including retail-banking portals.

“We must confess that this issue worries us,” Dimon wrote, adding that JPMorgan spends about $200 million on cyber defense and data safety. “This number will grow dramatically over the next three years.”