Regulator unaware of JPMorgan loss until weeks before disclosure
WASHINGTON — The top U.S. bank regulator had no inkling of JPMorgan Chase & Co.’s more than $2-billion trading loss until just weeks before it became public — even though the agency had 65 examiners working full-time at the firm’s Manhattan headquarters and other company offices.
To some lawmakers, the acknowledgment was another black mark for the Office of the Comptroller of the Currency, which has been criticized for not being more aggressive in its oversight of major financial institutions in the years before the financial crisis.
“The OCC has a well-deserved reputation for being too cozy with the banks it regulates,” Sen. Robert Menendez (D-N.J.) told Thomas J. Curry, the agency’s new chief, at a congressional hearing Wednesday. “Did the OCC screw up in allowing these JPMorgan trades to happen?”
Curry, who took over as comptroller in April, told the Senate Banking Committee that he was trying to determine that.
The OCC is conducting a “critical self-review,” Curry said, to figure out where its oversight went awry, even as it works daily with JPMorgan executives to reduce the risks in the complex trading portfolio that caused the losses.
Besides looking at those trades by JPMorgan’s chief investment office in London, the unit responsible for the loss, the OCC is assessing the bank’s overall risk management, Curry said.
“Part of my goal in reviewing what happened at JPMorgan Chase is not just to see what the bank itself did or did wrong, but also how we can improve our supervisory processes at the OCC,” Curry said.
Last month’s trading loss shook Wall Street, damaged the glittering reputation of JPMorgan Chairman Jamie Dimon and raised the prospects of stiffer federal regulations being enacted to prevent banks from making huge bets on complex securities.
The committee is examining the JPMorgan trading loss as part of its oversight of the 2010 financial reform law, which was designed to prevent excessive risk-taking by banks. Many provisions are still being implemented by regulators, including the so-called Volcker Rule to limit trading that banks do with their own funds.
Dimon will testify before the committee next week and before the House Financial Services Committee the following week.
“When a bank with JPMorgan’s solid reputation announces that it lost billions of dollars on a large trade reportedly designed to reduce the firm’s risks, it reminds us that no financial institution is immune from bad judgment,” said Banking Committee Chairman Tim Johnson (D-S.D.)
“While the JPMorgan trading loss does not appear to have caused systemic problems, it is a clear reminder that Wall Street continues to need better risk management, vigorous oversight and, if the rules are broken, unyielding enforcement,” he said.
But the focus at Wednesday’s hearing was squarely on banking regulators.
Although JPMorgan’s chief investment office created the complex trading portfolio in 2007, the OCC did not begin focusing on the potential problems until early April — just weeks before Dimon announced the huge losses May 10.
“Our interest and concern intensified during the month as losses increased within the portfolio, up to the point that the institution itself announced the significance of the losses that occurred,” Curry said.
The Federal Reserve, which regulates JPMorgan’s bank holding company, has been working with the OCC to help the firm remove the risk from the portfolio.
It’s still unclear exactly what happened with the portfolio, which was supposed to help offset the credit risks of the bank, Curry said.
“It’s a very complicated investment strategy, both in terms of its size and complexity,” Curry said. “We are looking to determine what the actual strategy behind that investment scheme was and also if there were any other factors driving that strategy other than attempting to mitigate known risks in that portfolio.”
Sen. Jeff Merkley (D-Ore.) asked Curry whether Bruno Iksil, the JPMorgan trader known as the “London Whale” for the giant bets he placed as part of the portfolio strategy, was trying to mitigate risk.
“Not necessarily,” Curry said.
Merkley agreed, saying Iksil “woke up each day … trying to make money for the bank.”
Menendez warned regulators that if similar trading losses continue at banks after new financial rules are implemented, then “blood will be on all of your hands if the ‘London Whale’ ultimately goes belly up next time.”
Sen. Richard Shelby (R-Ala.) said that banks need to take risks, but that regulators need to make sure the firms don’t go too far.
“Job creation and economic growth depend on banks taking such risks,” Shelby said. “It is the job of regulators, however, to prevent banks from taking risks that expose taxpayers.”
But Sen. Bob Corker (R-Tenn.) said it was not realistic to think banking regulators could prevent complex trades like the ones that caused JPMorgan’s loss.
“I think it’s a fool’s errand to think regulators are going to be ahead of bankers,” he said.
