Jamie Dimon Strikes an Apologetic Tone, Defends JPMorgan in Senate Testimony
JPMorgan's CEO (NYSE: JPM) Jamie Dimon testified in front of the Senate Banking Committee on Wednesday, striking an apologetic tone for the risky trades made by the firm's Chief Investment Office. Those market bets saddled JP Morgan with multi-billion dollar losses and resulted in a steep decline in the bank's share price, angering investors.
In his statement, Dimon said "We have let a lot of people down, and we are sorry."
Dimon acknowledged that he was "dead wrong," when he initially described media reports about the trades made by JP Morgan's London-based Chief Investment Office as a "tempest in a teapot." He explained that Ina Drew, the CIO's former head, had assured him that "this was an isolated small issue and it wasn't a big problem."
With regards to how the massive losses could have occurred in a unit which was designed to make investments that hedged the firm's risk, Dimon claimed incompetence by some of his traders. “Traders did not have the requisite understanding of the risks they took. When the positions began to experience losses in March and early April, they incorrectly concluded that those losses were the result of anomalous and temporary market movements, and therefore were likely to reverse themselves."
The question of whether the trades, which took the form of extremely large bets on an index of credit default swaps, were really designed to hedge the firm's business risks, or whether they were proprietary trades designed to generate a profit, was at the center of the CEO's testimony.
Tim Johnson, a Democratic senator from South Dakota, asked "how can a bank take on 'far too much risk' if the point of the trades was to reduce risk in the first place? Or was the goal really to make money?"
In addition to placing blame on executives such as Drew and the actual traders who made the bets, Dimon said that the adoption of a new risk model in January could have contributed to the losses.
Dimon also noted that the position would be very profitable in the event of a credit crisis, an occurrence that would severely impact other parts of JPMorgan's business. The execution, and oversight of the trade, however, was where problems cropped up, according to Dimon. "This particular synthetic credit portfolio was intended to earn a lot of revenue if there was a crisis. I consider that a hedge," Dimon said. "What it morphed into, I will not try to defend."
The JPMorgan trader who is thought to be primarily responsible for the losses, dubbed the "London Whale" by market participants, had built such a large position in credit derivatives that hedge funds and other sophisticated investors began betting against him. These funds figured rightly, that due to the size of the position, it could not be easily liquidated if the market started moving against it.
As more and more hedge funds began piling onto the other side of the London Whale's trade, and the European debt crisis started roiling credit markets once again, the position started moving sharply against JP Morgan, erasing earlier profits. There was no way for the bank to exit without dramatically pushing prices further against its position. As a result, the "House of Dimon" was stuck. Hence, last month's surprise disclosure of a $2 billion trading loss in the firm's Chief Investment Office.
Those losses are now believed to have grown to $3 billion or more. While Dimon certainly struck a conciliatory tone, he also stressed that the losses are an isolated event and that they will not materially effect the firm's "fortress balance sheet." He also would not commit to a definitive answer about whether the CIO's trades would have been banned under the Volcker Rule, which is designed to outlaw proprietary trading by Wall Street banks.
The prop trading business, whereby banks and brokers make market bets for their own accounts, has formerly been very lucrative for Wall Street firms, but is also risk-laden. Previously, Dimon had argued that the Volcker Rule would not have outlawed the CIO's activities, but he changed his tune somewhat on Wednesday, allowing that it might have limited the size of the trades responsible for the losses. “It may have stopped part of what this portfolio morphed into,” Dimon said.
Lawmakers were also interested in knowing whether the bank plans on utilizing so-called "clawbacks" to reclaim compensation from those deemed responsible for the debacle. Ina Drew, for example, was one of the highest paid women on Wall Street prior to leaving the bank in the wake of the losses. Dimon said that while the investigation into what happened is not complete, “it's likely there will be clawbacks." He also admitted, however, that the bank has never clawed back pay from its employees before, so such a move, would be a first.
Clawback clauses have become commonplace in the banking industry in light of the 2008 financial crisis. Overall, the general consensus appears to be that Dimon comported himself admirably in front of the panel, despite the unfortunate set of circumstances that brought him there in the first place. Market investors are backing this initial interpretation of his testimony, as JPMorgan shares have been rising throughout the day.
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