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JPMorgan Chase & Co ignored risks, misled investors, fought with regulators and tried to work around rules as it dealt with mushrooming losses in a derivatives portfolio, a Senate report alleged in a damning review of the largest US bank's management.
Senior managers at the bank were told for months about the bad derivatives bets that ended up costing the bank more than $6.2 billion but did little to rein them in, according to the Permanent Subcommittee on Investigations report on Thursday. The Senate report came on the same day the US Federal Reserve separately asked JPMorgan to improve its capital planning process as part of an annual “stress tests” of banks.
The barrage of bad news for JPMorgan, long seen as the safest and best-managed US bank, could taint the reputation of the bank, as well as CEO Jamie Dimon. Dimon has been one of the most outspoken critics of Washington's attempts to tightly regulate Wall Street after the 2007-2009 financial crisis.
The report also gives ammunition to advocates calling for stricter financial reform regulations. In particular, the 301-page Senate report will likely give new energy to regulators crafting the Volcker rule, which proposes to put limits on banks betting with their own funds.
A JPMorgan spokeswoman said, “While we have repeatedly acknowledged mistakes, our senior management acted in good faith and never had any intent to mislead anyone.”
Committee sources said the losses from the trades appeared to total more than $6.2 billion. But these sources said they could not determine how much because the trades originally made by the bank's Chief Investment Office were moved to other parts of the bank.
They said JPMorgan declined to provide them more information about the values of the positions.
The Senate subcommittee will hear directly from senior JPMorgan executives — but not from Dimon — at a hearing on Friday morning on the derivatives bets that came to be known as the “London whale” trades.
Senator Carl Levin, who chairs the subcommittee, said he had not yet decided whether to refer the report to criminal or civil authorities.
He said the panel could hold further hearings and left the door open to calling Dimon for the hearing.
Clashes with regulators
Dimon publicly criticised lawmakers for creating onerous new rules for banks after the crisis, but the report shows JPMorgan also frequently clashed with regulators behind the scenes as the losses mounted last year.
At one point, Dimon ordered the bank to stop sending daily trading profit and loss reports to the Office of the Comptroller of the Currency (OCC), one of its main regulators, Senate investigators said. The bank feared that information from the reports was being leaked.
Douglas Braunstein, the bank's chief financial officer at the time, resumed sending the reports to the OCC a few days later. When Dimon found out that Braunstein had done so, at a meeting with an OCC examiner, the CEO “raised his voice in anger at” the CFO, the report said. Braunstein left his CFO spot early this year, moving to a spot as vice-chairman of JPMorgan, focusing on clients.
Another senior bank executive, Chief Investment Officer Ina Drew, complained to the OCC that the agency was trying to “destroy” JPMorgan's business. In another episode, bank executives yelled at OCC examiners and called them “stupid”.
The Senate report also accused the bank of changing its risk models to work around capital rules. The report includes emails from a quantitative analyst for the bank in which he explained how he could rearrange its modelling procedures to mask the ballooning risk inside the chief investment office.
But bank employees were also cautious when it came to leaving evidence of those efforts.
“I think, the, the email that you sent out, I think there is a, just FYI, there is a bit of sensitivity around this topic,” a member of the bank's central risk modeling group warned the analyst afterward in a phone call.
The bank “increased risk by mislabelling the synthetic credit portfolio as a risk-reducing hedge when it was really involved proprietary trading,” the sub-committee's top Republican, John McCain, said in a briefing with reporters.
Senate investigators also faulted regulators at the OCC for missing red flags and failing to be aggressive in monitoring problems at the bank.
The agency was informed of JPMorgan's risk limit breaches and of changes to the model the bank was using to calculate its risk, yet raised no concerns at the time, the report said.
An OCC spokesman said the agency recognizes shortcomings in its supervision and has taken steps to improve its supervisory process. The spokesman also said the agency is continuing to investigate the matter and “will take additional action as appropriate”.
'Let the book simply die'
In 2011, the bank's large credit bets surprisingly paid off after American Airlines filed for bankruptcy, generating $400 million in unexpected revenue for the bank.
The employees most closely associated with the trades were among the highest paid that year. Drew made $29 million in 2010 and 2011, and Achilles Macris, who reported to her, made $32 million during the same time frame.
So in January 2012, when the strategy began producing sustained losses and traders began warning of additional losses, managers decided to stay the course.
The trader responsible for the position, Bruno Iksil pushed for the bank to take the losses and let the existing positions expire, according to emails in the report.
He wrote to his boss that in his view the “only” course of action was “to stay as we are and let the book simply die”.
But the traders continued to add to the positions, and by March supervisors were urging them to mark the values at levels that portrayed them in the most positive light, even if it meant skirting the bank's normal valuation practices.
“I don't know where he wants to stop, but it's getting idiotic,” Iksil wrote in an instant message, referring to his supervisor who had ordered the marks.
On March 23, Iksil estimated in an email that the portfolio had lost about $600 million using midpoint prices and $300 million using the “best” prices, but it reported a daily loss of only $12 million.
Drew ordered a halt in the derivatives trading that same day.
But the group continued to understate the extent of losses in the position through May, the report said.
