JPMorgan officials told a Senate panel Friday that $6.2 billion in trading losses resulting from the “London whale” were a regrettable but isolated incident.
The questions came on the heels of a 307-page report issued by the subcommittee Thursday, which accused the bank of dodging regulators, hiding losses, manipulating models, and misleading investors as it scrambled to deal with the losses.
“This whole thing is regrettable and unacceptable, and we believe isolated,” said Ashley Bacon, the bank’s acting chief risk officer. “The onus of proof is on us to now demonstrate how this cannot happen again.”
While they agreed mistakes were made, the employees deferred blame to other employees or resisted claims the bank sought to mislead investors or regulators during the summer when the losses were revealed.
Ina Drew, the former head of CIO who resigned shortly after the losses were made apparent, stepped down to take responsibility. But she said a new risk model adopted by the banks and applied to the trades was flawed, and that her oversight efforts were “undermined” by other traders in her London office.
The officials faced hours of probing questions, primarily from the head of the panel, Sen. Carl Levin (D-Mich.), dissecting their actions leading up to and in the wake of the revelation of the losses.
The report from Levin’s panel accused JPMorgan of downplaying the risks of the trades in public comments even though they knew the potential damage.
Douglas Braunstein, the vice chairman of the bank and former chief financial officer, defended his actions, telling senators that comments he made that the bank would be comfortable with the losses reflected his best knowledge at the time.
“The bank and I were both misinformed and incorrect when I said the bank was very comfortable,” he said.
Levin was unconvinced and pressed Braunstein for several minutes on comments he made on an investor call days after the trades were revealed.
“I have a lot of trouble, a lot of trouble, I’ve got to tell you, Mr. Braunstein, that those statements were anything other than an effort to calm the seas,” he said.
Sen. John McCain (R-Ariz.), the ranking member on the panel, was similarly critical of the bank, and accused officials of dodging accountability.
“It’s hard for me to accept that serious responsibility was assumed by the top management of JPMorgan,” he said.
The report also accused JPMorgan of depriving its primary regulator, the Office of the Comptroller of the Currency (OCC), of data. The report found that JPMorgan Chief Executive Jamie Dimon halted the delivery of daily profit and loss data from its investment bank in 2011, and was angry when Braunstein reinstated their delivery after being contacted by the OCC.
However, Braunstein maintained that the bank did not halt the information to deprive the OCC of information, but because the bank had data security concerns they wanted to address before resuming providing the daily reports.
He repeatedly insisted he could not remember Dimon’s reaction to the decision to reinstate the reports, but the OCC examiner overseeing JPMorgan said the report’s take was accurate.
Bank examiner Scott Waterhouse said Dimon raised his voice and “expressed his dismay” at the move. He added that Dimon told regulators, “I don’t think you need this amount of detail. You can still do your supervision without it.”
Dimon was not invited to testify at the hearing, and had previously discussed the trading losses with House and Senate panels after they occurred. Levin did not rule out inviting Dimon to testify at a follow-up hearing if the situation called for it.
OCC Director Thomas Curry said banks have no right to tell regulators what information they can and cannot have, calling that access “the fundamental cornerstone of banking supervision.”
Amid the accusations and defense, a top JPMorgan official indicated that the bank is coming around to a stricter application of a key piece of the financial reform law. Before the London whale debacle, JPMorgan had been a leading advocate among banks pressing for a broad interpretation of the “Volcker Rule,” a Dodd-Frank provision that bans banks from engaging in risky proprietary trading for profits. The rule allows banks to make trades with their own funds for the sake of hedging risk, and JPMorgan and others were pushing regulators to write rules allowing for broad hedging permissions, which would permit a broader range of trading activity by banks.
But on Friday, Michael Cavanagh, the co-chief executive officer of JPMorgan’s corporate and investment bank, said JPMorgan was updating its policies in the wake of the trades, so that any hedging activity will be accompanied by “contemporaneous documentation” detailing exactly what risk is being hedged against by trades.
With regulators still writing rules implementing the provision, Levin, who helped write the measure, had been adamant that having any banks claim a trade is permitted due to hedging prove exactly what purpose the hedge is serving.
“If they’re going to claim that trades are a hedge, they’ve got to be able to identify what is being hedged against,” he said Thursday when he unveiled the report.