Getting a jump on senators who are expected to pound him for massive trading losses, JPMorgan Chase Chairman and CEO Jamie Dimon released prepared testimony late Tuesday in which he tried to deflect criticism with a mea culpa and a wag of a finger at regulators.
Dimon is set to testify Wednesday morning before the Senate Banking Committee about trading losses exceeding $2 billion at what has long been considered the nation’s healthiest bank, one that Dimon himself routinely has boasted of having a fortress balance sheet.
“We will not make light of these losses, but they should be put into perspective. We will lose some of our shareholders’ money – and for that we feel terrible – but no client, customer or taxpayer money was impacted in this incident,” Dimon said in his prepared remarks.
JPMorgan Chase’s stock value has fallen by about 20 percent, and its CEO has been in the hot seat in part because he’s been the loudest critic of regulatory attempts to separate risky investments by the nation’s largest banks from their broader banking activities. This effort by regulators, called the Volcker Rule, is part of a massive congressional revamp of financial regulation in 2010 that’s still being implemented.
Dimon’s reference to no customer or client money being lost was a backhanded jab at regulators who are trying to separate these activities, returning to an approach that had existed for most of the years since the Great Depression until rules were relaxed on Wall Street in 2000.
The prepared remarks also cast the trading losses in the context of trying to comply with anticipated new bank rules called the Basel Accords that will require big banks to keep more money on hand to protect against losses.
In anticipation of these new rules, Dimon said, the chief investment office of JPMorgan Chase was instructed last December to lower the risk in the bank’s investment portfolio. But instead of reducing its positions in risky bets in the area of the trading losses – technically called the synthetic credit portfolio – the bank’s London-based chief investment office started adding positions to offset its existing ones.
“This strategy, however, ended up creating a portfolio that was larger and ultimately resulted in even more complex and hard-to-manage risks,” Dimon said in the prepared remarks. “This portfolio morphed into something that, rather than protect the firm, created new and potentially larger risks. As a result, we have let a lot of people down, and we are sorry for it.”
Dimon has been circumspect about what he knew and when he knew it. He’ll be in a no-win position Wednesday in front of the Senate committee. If he didn’t know how exposed the bank was to losses, senators are sure to note that his bank is too large and complex to manage effectively and should be broken into smaller pieces. And if he knew and didn’t intervene to liquidate positions before they became steep losses that damaged the bank’s reputation, senators are likely to question his judgment and capacity to manage.
Shortly after Dimon’s prepared remarks were given to CNBC television and read on the air, Senate Banking Committee Chairman Tim Johnson, D-S.D., issued a statement reminding that Tuesday was the two-month anniversary of Dimon’s dismissing the now-infamous trade as “a tempest in a teapot” when reporters questioned him. Johnson said he’d press Dimon about insufficient controls over risk taking, the very flaw that nearly sank the U.S. financial system in 2008.
“For a bank renowned for its risk management, where were the risk controls? How can a bank take on ‘far too much risk’ if the point of the trades was to reduce risk in the first place? Or was the goal really to make money? Should any hedge result in billions of dollars of net gains or losses, or should it be focused solely on reducing a bank’s risks? As the saying goes, you can’t have your cake and eat it too,” Johnson said in his statement.
In his remarks, Dimon acknowledged that the risky bet on an index of corporate bonds wasn’t carefully analyzed or stress-tested to gauge potential losses, and that “risks controls were generally ineffective” in challenging the decisions made by the chief investment office. Risk committees in place at JPMorgan Chase, he said, “were not as formal or robust as they should have been.”
That explanation mirrored those given by Wall Street after the 2008 crisis, which was brought on by similarly complex financial instruments whose risks to the broader system weren’t sufficiently understood.