By Peter Schroeder - 06/11/12 08:01 PM EDT
Members of the Senate Banking Committee are looking for answers on JPMorgan Chase's multibillion-dollar trading losses, and expect chief executive Jamie Dimon to provide them.
The head of the nation's largest bank is set to testify Wednesday before the Banking panel in the latest round of the congressional investigation into how a complex bet on corporate debt left the bank with $3 billion and counting in losses.
The high-profile losses are not expected to threaten JPMorgan’s solvency, but are serving as fodder for the latest fight over what limits the federal government should impose on the financial sector and whether further steps should be taken to stabilize the system following the financial crisis.
The incident has also threatened to undercut Dimon’s position as the public face of industry criticism of the Dodd-Frank financial reform law.
An aide with the Banking Committee said members expect Dimon to come "fully prepared" to answer questions on the trade.
In particular, Dimon will be asked if he understood the risks involved in the trade when he told analysts on a conference call that stories about the substantial loss amounted to a “tempest in a teapot.”
The losing trade, which was made out of JPMorgan’s London chief investment office, has reinvigorated proponents of a tough "Volcker Rule." That piece of Dodd-Frank prohibits banks from making so-called proprietary trades — trades made with bank money in the hunt of profits — but permits banks to make trades of their own accord if the goal is to hedge against risk in other deals.
Lawmakers plan to probe Dimon on whether he believes the trade would have been permitted under the Volcker Rule, which is still being implemented.
Dimon will also face questions from lawmakers about requiring banks to hold higher capital as a cushion against losses. In discussing the London trade with regulators earlier this month, a number of Republicans critical of Dodd-Frank said the best way to protect the financial system is by simply requiring banks to hold more capital. That way, banks would be free to make investments as they see fit, and a heftier cushion would be there to protect the bank and the financial system if the trades go awry.
But JPMorgan and other banks have bristled at being required to hold a heightened amount of capital. Barry Zubrow, the bank’s chief risk officer, told House lawmakers in June of 2011 that a proposed added capital requirement on the nation’s biggest banks was “a bridge too far” and could drive banking activity abroad to less restricted institutions.
A spokesman for Sen. Richard Shelby (Ala.) said the ranking Republican on the panel plans to press Dimon on the issue, among others.
"He will also ask Mr. Dimon why he is so adamantly opposed to the primary measure that would protect taxpayers against further bailouts — higher capital requirements," Shelby’s spokesman said.
Once Dimon is done explaining himself to the Senate, he can get ready for an encore performance across Capitol Hill. The House Financial Services Committee has announced it will call Dimon to testify alongside regulators on June 19.