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Senate Report Said to Fault JPMorgan

U.S. Sen. Carl Levin
Alex Wong | Getty Images
U.S. Sen. Carl Levin

While a trader known as the "London whale" has come to represent a multibillion-dollar blowup at JPMorgan Chase, Congressional investigators have discovered that the problems involved more senior levels of the nation's largest bank.

A report by the Senate Permanent Subcommittee on Investigations highlights flaws in the bank's public disclosures and takes aim at several executives, including Douglas Braunstein, who was chief financial officer at the time of the losses, according to people briefed on the inquiry. The report's findings — scheduled to be released on March 15 — are expected to fault the executives for allowing JPMorgan to build the bets without fully warning regulators and investors, these people said.

The subcommittee, led by Senator Carl Levin, could ask Mr. Braunstein and other senior executives to testify at a hearing this month, according to the people. The subcommittee does not currently intend to call the bank's chief executive, Jamie Dimon, but Congressional investigators interviewed Mr. Dimon last year.

JPMorgan, which has been cooperating with the investigation and discussed the findings with the subcommittee, declined to comment. Mr. Braunstein and other bank executives have not been accused of any wrongdoing, and he is not the focus of a separate law enforcement investigation into the trading loss.

Congressional officials have yet to set the final details of the hearing and plans may change, the people cautioned. Politico earlier reported the scheduled date for the release of the report.

The Congressional investigation could revive questions about the role of senior executives in the $6 billion trading loss at a time when the bank has started to put the blunder behind it.

Mr. Dimon declared last year that the "Whale has been harpooned." The bank reported record earnings in January and has forced out the architects of the bet.

The Senate report, however, shifts the focus from lower-level traders in London who placed the bet to senior executives and regulators who failed to stop it. Expanding on a sweeping report the bank released in January, the Congressional inquiry is expected to open a window into how executives ignored warning signs and failed to alert investors about changes to its method for detecting risk.

Because a large majority of the executives involved in the trade have since departed the bank, the hearing could increase scrutiny of Mr. Braunstein and Mr. Dimon, the remaining senior executives. Within JPMorgan, people close to the bank say, executives have expressed dismay about the lingering questions.

The report, a reminder that Wall Street blowups continue even four years after the financial crisis, could galvanize support for regulations like the Volcker Rule that aim to rein in risky trading. Mr. Levin, a Democrat of Michigan who champions the Volcker Rule, is expected to use the report to endorse policy changes, including stricter public disclosures.

But Mr. Levin's staff is still negotiating with the committee's Republicans over the recommendations. John McCain, the ranking Republican, has largely approved the report's findings but continues to examine the policy ideas, the people said.

A spokesman for Mr. McCain declined to comment.

The subcommittee's report coincides with a federal investigation into four employees in London, including Bruno Iksil, the so-called Whale, who carried out the trades at the bank's chief investment office. The Federal Bureau of Investigation is conducting inquiries into some of the traders, according to officials, suspecting they hid problems from the bank.

But the subcommittee's investigators seized on e-mails suggesting that Mr. Iksil had raised alarms about the bet. In an e-mail to a more senior trader in January 2012, he advised against increasing the bet, according to people who reviewed the message. The size of the trades, Mr. Iksil said, were becoming "scary" and advised that the investment office take the "full pain" now, according to a person briefed on the e-mails. JPMorgan released the e-mails without naming the traders.

By February, Mr. Iksil grew worried as he struggled to understand why losses were escalating. Later that month, he instructed a junior trader to temporarily halt trading. Their boss later reversed that decision.

The subcommittee's report is expected to detail how senior executives failed to heed warnings from London. Some of those findings echo JPMorgan's report, released this January, which examined the role of Mr. Braunstein; Ina Drew, who led the chief investment office; and Barry L. Zubrow, a former chief risk officer. Ms. Drew and Mr. Zubrow have since left the bank.

Scrutiny around Mr. Braunstein, who is now a vice chairman at the bank, partly focused on his reliance on other people's assurances about the safety of the trades. In its own analysis of the trade, JPMorgan said Mr. Braunstein incorrectly assumed that the positions in the chief investment office were "manageable."

The focus on Mr. Braunstein also stems from the bank's inconsistent statements. He dismissed concerns about the positions in April 2012, assuring analysts in a conference call that the bank was "very comfortable with our positions." The subcommittee has examined whether those disclosures were misleading.

The subcommittee further examined whether the bank failed to alert investors about a change in its internal alarm system. The bank in January 2012 introduced a new value-at-risk model that underestimated the losses in the investment office. The bank did not inform investors about the model change until May.

In the lead-up to the subcommittee's reports, the bank faced questions about similar disclosures to regulators. In some instances, the people briefed on the report said, bank employees initially resisted requests from regulators at the Office of the Comptroller of the Currency who sought deeper details.

But regulators will not escape criticism in the report.

The bank warned some regulators about the changing risk model, a person briefed on the matter said. In an e-mail to an official in the comptroller's office, the bank disclosed that the new model could cut its risk in half, something that might have been viewed as a startling revelation.

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