Nearly a year after a series of botched credit trades cost JPMorgan Chase billions of dollars, a U.S.Senate report argues that the bank misled both regulators and investors about the nature and size of the losses and that derivatives still pose a significant threat to the financial system.
JPMorgan's "London Whale" trade, as the series of corporate-credit derivative trades that led to at least $6.2 billion in losses last year have come to be called, "provides a startling and instructive case history of how synthetic credit derivatives have become a multibillion-dollar source of risk within the U.S. banking system," the 301-page report issued by the Permanent Subcommittee on Investigations said.
Ina Drew, who ran the chief investment office within JPMorgan's investment bank where the trades occurred and former Chief Financial Officer Doug Braunstein, are singled out for particular criticism. The report also raises sharp questions about the behavior of JPMorgan employees at a variety of levels – including Chief Executive Jamie Dimon.
The report, which stemmed from a nine-month investigation of the Whale trade and the massive loss that resulted, argues among other things for a tough interpretation of the "Volcker Rule" provision of the Dodd-Frank Act, whose curbs on risky internal bank trading are still being hashed out by regulators from multiple agencies.
In the course of reviewing nearly 90,000 documents, including hundreds of recorded telephone calls and instant messages and dozens of interviews with JPMorgan employees and regulators, the subcommittee, led by Sen. Carl Levin, uncovered what appear to be troubling details about the bank's trading, marking, oversight, and reporting.
"There's a lot of evidence that they are maybe too big to manage," Sen. Levin said in a press briefing Thursday morning. But "our focus,"he said, "is on the danger of derivatives which are not regulated properly."
Levin and other subcommittee members will gather at 9:30am ET Friday on Capitol Hill to question JPMorgan executives as part of a day-long hearing on the London Whale debacle. Drew will be a star attraction, along with Braunstein and Thomas Curry, the Comptroller of the Currency.
In a statement, JPMorgan defended its past actions. "We cooperated fully with the subcommittee staff and welcome the opportunity to respond to the senator's questions," the firm said. We know we have made many mistakes related to the CIO matter, and we have already identified many of the issues cited in the report. We have taken significant steps to remediate these issues and to learn from them."
The Senate report accuses the bank of mismarking the valuations of its corporate-credit trades, hiding losses from the Office of the Comptroller of the Currency and from investors, and adopting low-tech, insufficient risk and financial controls that allowed mistakes to mushroom, worsening the financial hit.
Drew at one point chided OCC regulators"sternly" for requesting better documentation from her division, the report states, and Braunstein made a series of misleading comments to regulators and investors, including stating that losses from the Whale trade amounted to $1.6 billion at a point in May when they were actually $2.3 billion.
The report raised questions about Dimon's conduct: In 2012, he "had ordered the bank to cease providing the investment bank's daily P&L reports," a reference to the profit-and-loss statements for the company's overall trading and underwriting unit which was separate from the chief investment office, "because he believed it was too much information to provide to the OCC." Dimon was upset about leaks of the daily renderings, the Senate report added. When Braunstein reinstated the OCC's daily briefings less than a week later, Dimon "raised his voice in anger" at the CFO, the report said.
Dimon's concerns centered on the confidentiality of the information being provided to the OCC, said a person familiar with the matter.