By Aruna Viswanatha and Emily Flitter
WASHINGTON, March 14 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 U.S. 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 U.S. 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 U.S. bank, could taint the reputation of
the bank, as well as Chief Executive 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
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could not determine how much because the trades originally made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 criticized 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, 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 modeling 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 mislabeling the synthetic credit
portfolio as a risk-reducing hedge when it was really involved
proprietary trading," the subcommittee'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
'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
But the group continued to understate the extent of losses
in the position through May, the report said.