UPDATE 3-Dimon says JPMorgan failed to rein in traders

Tue Jun 12, 2012 8:09pm EDT

* Dimon to appear before Senate Banking panel on Wednesday

* Says bank is in solid shape, trading problems isolated

* Says CIO unit started complex trading plan in January

* Does not give update on size of trading losses

By Dave Clarke and David Henry

WASHINGTON, June 12 (Reuters) - JPMorgan Chief Executive Jamie Dimon will tell lawmakers that the bank's recent multibillion-dollar trading loss occurred because poorly managed traders embarked in January on a misguided hedging strategy they did not fully understand.

His written testimony prepared for a hearing on Wednesday gives a few more details about what went wrong, and what the nation's largest bank by assets plans to do about it.

Dimon does not, however, give an update on whether the losses have grown beyond last month's $2 billion estimate.

Known for smoothly navigating JPMorgan Chase & Co through the recent financial crisis, Dimon will appear before the Senate Banking Committee to tell lawmakers that the trading loss is an isolated incident and that the bank is in solid shape.

"Our fortress balance sheet remains intact," he said. "While there are still two weeks left in our second quarter, we expect our quarter to be solidly profitable."

Dimon is contrite in his testimony, saying that "we feel terrible" that the bank has lost some of shareholders' money.

But he makes clear his view that the bank's size was not the core problem but an asset, a rebuttal to some critics who have seized upon the incident as evidence that some banks are too big to manage.

"In short, our strong capital position and diversified business model did what they were supposed to do: cushion us against an unexpected loss in one area of our business," he said.

Dimon first flagged the trading losses last month, when he announced on a surprise May 10 conference call that a hedging strategy by the bank's Chief Investment Office (CIO) in London had gone awry and produced at least $2 billion in unexpected trading losses.

The surprising admission, from a bank previously praised for its ability to manage risks that have felled its competitors, has also prompted questions about whether regulators can adequately oversee a bank as large as JPMorgan.

Analysts have estimated the losses could reach $5 billion, based on market talk about the exact trades.

Even at $5 billion, the loss would not be debilitating for the company, which last year spent $3.2 billion on litigation and still made a $19 billion profit.

A central part of the hearing is expected to be whether bank executives and regulators can spot risks before they grow to the point of damaging the institution and the broader financial system.

Dimon avoids wading deeply into the debate in his four-page testimony but he will likely be called on to do so Wednesday by senators who say the incident shows Wall Street banks remain a threat to the economy.

Senators are also sure to press Dimon on whether he believes new trading restrictions, known as the Volcker rule, would have prevented the bank from engaging in its failed hedging strategy.

Dimon has been critical of this crackdown on banks' proprietary trading.

PROBLEMS STARTED IN JANUARY

Dimon laid out more details in his testimony about the genesis of the trading strategy and how it went wrong, and is expected to be asked for more information during the hearing.

"How can a bank take on 'far too much risk' if the point of the trades was to reduce risk in the first place?" Senate Banking Committee Chairman Tim Johnson said in remarks prepared to be delivered at Wednesday's hearing. "Or was the goal really to make money?"

Dimon portrays the losses as the result of miscalculations and failures of oversight related to the bank's decision to reduce the amount of risky assets it held in order to prepare for the rollout of new capital standards agreed to as part of the international Basel agreement.

Dimon said the bank could have simply reduced the amount of these risky assets on its books but the CIO office instead, starting in mid-January, "embarked on a complex strategy" that involved adding positions traders believed could offset the existing risky assets.

"The strategy was not carefully analyzed or subjected to rigorous stress testing within CIO and was not reviewed outside CIO," Dimon said.

Faced with mounting losses in March and early April, Dimon said, the traders did not retrench but instead viewed the losses as "the result of anomalous and temporary market movements."

"In hindsight, CIO's traders did not have the requisite understanding of the risks they took," he said.

Nancy Bush, a veteran bank analyst and contributing editor at SNL Financial, said Dimon's testimony raises questions about how losses could have become so large if the trading strategy only started in January.

"You would really have to be piling the positions on," she said. "He will have to explain that."

In the wake of the loss, Ina Drew, who headed the CIO unit responsible for the trading debacle, has resigned from JPMorgan.

Dimon in his testimony seeks to reassure that the bank has made "real progress" in managing and reducing the risk associated with these trading positions.

"While this does not reduce the losses already incurred and does not preclude future losses, it does reduce the probability and magnitude of future losses," he said.

JPMorgan has shed more than $26 billion in market value since the losses were announced.

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