Regulators take heat for JPMorgan loss

Financial regulators on Wednesday took heat from lawmakers who questioned how they could have allowed JPMorgan to suffer multibillion-dollar trading losses.

Members of the Senate Banking Committee were visibly frustrated with regulators as they grilled them about the trading losses incurred by Bruno Iksil, the U.K. trader dubbed "the London Whale."

"The blood will be on all your hands if the London Whale ultimately goes belly up next time," said Sen. Robert Menendez (D-N.J.). "I don't know what it takes to get everyone to understand that we are serious in purpose here.”

The big losses on the corporate debt transaction have reignited the debate on Wall Street reform, and renewed the push from Democrats for tough implementation of the Dodd-Frank law.

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Senate Banking Committee Chairman Tim Johnson (D-S.D.) said that if a bank with a "solid reputation" like JPMorgan could suffer such staggering losses, it proves that "no financial institution is immune from bad judgment."

In particular, backers of a tough Volcker Rule, which would ban profit-seeking trades banks make with their own funds, are using the bank's highly publicized mistake to press their case.

JPMorgan officials have indicated that the Volcker Rule, which is still being implemented, would not have prohibited the trade. They maintained that the trade was intended to hedge risk from other investments, but Democrats were unconvinced.

"Does anyone on this panel think that Bruno Iksil ... woke up each day trying to mitigate the risks of excess deposits?" asked Sen. Jeff Merkley (D-Ore.), who helped write the legislation for the Volcker Rule.

Regulators did not explicitly say whether the trades would have been banned under Volcker, but said the incident does help inform regulators as they move forward with it.

Although a number of top financial regulators testified, Merkley and several other lawmakers directed their ire primarily toward the Office of the Comptroller of the Currency, which directly supervised JPMorgan.

Thomas Curry, the Comptroller of the Currency, told lawmakers that his team had 65 regulators onsite full-time at the bank, which is the nation's largest by assets. That news did little to assuage lawmakers.

"The OCC has dozens and dozens of examiners at JPMorgan," Johnson said. "Did your agency check the risk management and internal controls of all aspects of the bank ... before this event, or did you miss this?"

"Were you on top of things?" asked Sen. Richard Shelby (R-Ala.), the top Republican on the panel.

Curry, who took over the regulatory agency in April, said the trading mishap suggested the bank had "inadequate risk management" within the office that authorized the trades. He said his team is examining the practices elsewhere in the bank for other potential shortcomings. 

But at the same time, he said the OCC would be focusing attention not just on the bank's missteps, but also their own.

"Part of my goal with reviewing what happened is not just to see what the bank itself did or did wrong, but also how we can improve our supervisory processes," he said. "It will be a critical self-review."

As most Democrats trained their fire on the OCC, Republicans took aim at the Dodd-Frank law.

"Dodd-Frank was a political response instead of real reform in so many ways," said Sen. Bob Corker (R-Tenn.). "The notion of having a regulator besides every banker is ... a fool's errand."

Republicans pointed out that JPMorgan is expected to weather the loss while posing no threat to taxpayers or the broader financial system. The losses, they said, are not evidence that tougher regulation of Wall Street is needed.

"Some of those banks, especially during tough economic times, are going to fail," said Sen. Pat Toomey (R-Pa.). "That is unfortunate, but that is acceptable. It is unavoidable."

The hearing marked the second the panel has held on Dodd-Frank in the wake of the trading losses, and served as a precursor to the June 13 testimony of Jamie Dimon, JPMorgan’s chief executive. 

"Maybe Mr. Dimon would explain what's going on," said Shelby following the hearing. "I think sooner or later we need an explanation. Was it managing risk, or was it something else?"