A scathing report released by a Senate panel Thursday shows the financial crisis never really abated: The forces that delivered it -- a toxic combination of reckless speculation, balance sheet manipulation and outright disdain for regulators -- remained fully at work inside the biggest bank of them all, JPMorgan Chase, as recently as last spring.
The 300-page report, which unfolds in tones worthy of an indictment, says JPMorgan executives brazenly misled and bullied their regulators, going so far as to call them "stupid."
This, the report concludes, explains how a bet engineered by a trader called the London Whale for his enormous, market-moving positions burgeoned into losses reaching $6.2 billion. Chief executive Jamie Dimon initially dismissed the Whale losses as a “tempest in a teapot.”
"In contrast to JPMorgan Chase’s reputation for best-in-class risk management, the whale trades exposed a bank culture in which risk limit breaches were routinely disregarded, risk metrics were frequently criticized or downplayed, and risk evaluation models were targeted by bank personnel seeking to produce artificially lower capital requirements," the report concludes.
The top in-house regulator at JPMorgan, from the U.S. Office of the Comptroller of the Currency, told the Senate subcommittee that it was "very common" for the bank to push back on examiner filings and recommendations. The regulator recalled one instance in which bank executives yelled at OCC examiners and derided them as “stupid.”
"The bank's initial claims that its risk managers and regulators were fully informed and engaged ... were fictions irreconcilable with the bank’s obligation to provide material information to its investors in an accurate manner," says the report from the Senate Permanent Subcommittee on Investigations.
The report traces responsibility for JPMorgan’s trading fiasco to its highest offices, all the way to CEO Dimon.
A JPMorgan spokeswoman rejected the report’s findings, maintaining that the bank has
consistently been truthful to regulators and the public about the state of its balance sheet and overall health.
"While we have repeatedly acknowledged mistakes, our senior management acted in good faith and never had any intent to mislead anyone,” Jennifer Zuccarelli, a spokeswoman for the bank, said in a statement. “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 report is likely to intensify calls to finalize the so-called Volcker Rule, aimed at limiting trades that banks make for their own benefit.
Inside JPMorgan, the loss-making trade was the handiwork of the Chief Investment Office -- a unit officially described as a source of hedging -- investments that diminished the risks on the institution by balancing its positions. But hedging was merely a euphemism, the report asserts, describing the CIO as a locus of increasingly speculative trading made for no reason other than to amplify the bank’s potential profits. Regulators reviewing the CIO’s trades after the blowup described the portfolio as a “make believe voodoo magic composite hedge,” the sub-committee report notes.
The Senate report, the most detailed and damning examination of the Whale trading to date, promises to revive the controversy over Dimon's stewardship of the bank, and the ability of regulators to keep tabs on the nation's biggest financial institutions. It comes on the eve of eagerly-awaited Senate testimony by Ina Drew, who resigned as head of JPMorgan's Chief Investment Office after the Whale bet soured.
The trade involved outsized bets by one trader, Bruno Iksil, on financial instruments known as credit default swaps. The trade tarnished Dimon's once-sterling reputation as Wall Street's savviest leader.
The report cites emails, documents, instant message conversations and recorded telephone conversations between high-level JPMorgan employees. The Senate subcommittee collected nearly 90,000 documents, according to the report.
Key JPMorgan executives claimed to be in the dark about the London Whale losses or downplayed them, even after Drew ordered the trades stopped on March 23, 2012, according to the report.
John Hogan, JPMorgan's chief risk officer, told the Senate subcommittee that the first media reports about the losses in April surprised him and that the portfolio was not on his radar in an "alarming way" before then.
The report reveals the thoughts of those most closely involved with the trade, including Iskil and Drew. In February 2012, JPMorgan asked the CIO’s office to document the ongoing losses and provide an explanation. The bank specifically asked the traders in that group to mark their losses in a way that would look good to investors.
Iksil told the Senate subcommittee he wrote to his superiors he was attempting to reduce paper losses “as much as I can in a bleeding book."
In a phone conversation on March 16, Iksil said to a junior trader: “I can’t keep this going ... I don’t know where he wants to stop but it’s getting idiotic.”
On March 9, 2012, in a recorded conversation with Iksil, a junior trader said, “we’re lagging,” predicting “a big fiasco” and “big drama when, in fact, everybody should have ... seen it coming a long time ago. Anyway, you see, we cannot win here. ... I believe that it is better today that it’s dead, that we are going to crash. The firm will service the debt. ... It’s going to be very uncomfortable but we must not screw up. … It’s going to be very political in the end.”
By the time Drew ordered traders to stop trading on March 23, emails and recorded phone conversations show, the traders were describing the portfolio as “huge” and “more and more monstrous.”
Publicly, the bank was taking a very different tack. On April 13, Douglas Braunstein, then JPMorgan's chief financial officer, said on an earnings call with analysts and investors that the bank was "very comfortable with our positions."
UPDATE: 9:52 p.m. -- The Office of Comptroller of the Currency released a statement, saying it recognizes "that there were shortcomings in the OCC supervision leading up to and responding to the unfolding events" in the bank's Chief Investment Office."
The statement continues:
As the bank revealed the true nature of the CIO operation and the level of loss exposure, the Comptroller escalated the agency’s response and ordered a two-pronged review into the bank’s actions as well as the OCC’s. As a result of that review, we have taken specific steps to improve our supervisory process across the large complex financial institutions we supervise.