WASHINGTON — Traders in the JPMorgan unit behind a $2 billion loss had little understanding of the risks they took, CEO Jamie Dimon told US lawmakers Tuesday as they grilled regulators for failing to spot the debacle.
Regulators said there were supervisory failures at the banking giant but assured there was no threat of “contagion” to other banks, although a key author of sweeping US financial reform insisted the trading debacle signaled broader problems that extend well beyond JPMorgan Chase.
Dimon returned to Capitol Hill for the second time in a week to explain the loss by JPMorgan’s London-based Chief Investment Office (CIO), acknowledging that the bank’s trading strategy was “poorly conceived and vetted.”
“The strategy was not carefully analyzed or subjected to rigorous stress testing within CIO and was not reviewed outside CIO,” Dimon told a House Finance Committee hearing.
“In hindsight, CIO’s traders did not have the requisite understanding of the risks they took.”
Dimon was building on his earlier comments before a Senate hearing when he acknowledged the bank’s poor judgment and apologized for the losses, but argued it was an “isolated event” dwarfed by the bank’s huge capital cushion.
He repeated the argument Tuesday, saying the firm’s “fortress balance sheet” at the end of the first quarter showed $190 billion in equity and over $30 billion in reserves, part of the bank’s overall deposits of $1.1 trillion and loans of $700 billion.
“In short, our strong capital position and diversified business model did what they were supposed to do: cushion us against an unexpected loss in one area of our business,” Dimon said.
But Barney Frank, the committee’s ranking Democrat and an author of the Dodd-Frank financial industry reform legislation of 2010, said “micromanaging” JPMorgan was not the goal. But he said the losses were emblematic of a greater problem with large and complex derivatives trades.
“To me this is not a hearing about JPMorgan Chase. They are an example of a larger issue,” Frank told regulators at the hearing, including Thomas Curry, head of the Office of the Comptroller of the Currency (OCC).
“If in a very well-run bank we get this loss of several billion dollars — three (billion) and counting, we’re told — in a fairly short period of time, it’s an indication of the problem with derivatives,” Frank said.
JPMorgan shocked investors on May 10 by revealing a $2 billion loss in derivatives trading over just six weeks and said an additional $1 billion loss was possible by the end of June.
The New York Times reported that the losses could rise to $5 billion.
Dimon has publicly led a fight against Dodd-Frank and especially the Volcker Rule, aimed at halting the often lucrative proprietary trade that critics say JPMorgan was doing when it suffered the loss.
At last week’s hearing, senators were largely deferential to Dimon, but some lawmakers sounded more stern Tuesday, asking whether the nation’s largest bank by assets had become too big to fail.
“No, we’re not too big to fail,” Dimon stressed, adding that “I don’t think there’s any chance we’re going to fail.”
But some lawmakers sounded exasperated over regulators’ inability — even with dozens of investigators monitoring JPMorgan full time — to flag the risky trades before they went sour.
Part of the investigation should involve “talking to your people who are on location to find out if they’re doing their job or if they’re sitting there with feet on the desk drinking coffee,” congressman Steve Pearce told the regulators.
“I come here and I read all of this testimony, and it’s all kind of just angling toward the same thing,” he added.
“Nobody is really in charge. Nobody is really supervising. We’re finding out after the fact, through press releases or whatever. This gets very frustrating from our point of view.”
Gary Gensler, chairman of the US Commodity Futures Trading Commission, testified on the need for greater transparency in the swaps market, and warned that slashing the funding of regulators, as proposed by Republicans, was a dangerous mistake.
“I think we’d all sleep better if the complex roads of the swaps market were well lit with transparency, had rules to lower risk to the bystanders, the American public, and that the agency tasked with overseeing them had enough funding to police them,” Gensler said.