June 12 (Bloomberg) -- JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said traders in a London unit responsible for a $2 billion loss didn’t understand the risks they were taking and weren’t properly monitored.
“This portfolio morphed into something that, rather than protect the firm, created new and potentially larger risks,” Dimon said in prepared remarks ahead of his appearance tomorrow before the Senate Banking Committee. “We have let a lot of people down, and we are sorry for it.”
Lawmakers plan to question Dimon at hearings this week and next about the bank’s blunders on credit derivatives in its chief investment office after he initially called April news reports about the trades “a complete tempest in a teapot.” Shares of the bank, the biggest in the U.S., have dropped 17 percent since Dimon disclosed the mounting losses May 10, lopping about $26.5 billion from the firm’s market value.
“CIO’s traders did not have the requisite understanding of the risks they took” on bets that were supposed to hedge credit risk, Dimon said. “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.”
Dimon, who’s also set to face the House Financial Services Committee on June 19, finds himself in the middle of a renewed debate about whether the so-called Volcker rule, which would curb trading by deposit-taking banks, should be tightened. While Dimon didn’t comment on the size of the loss from the trades, he said the second quarter would be “solidly profitable.”
“The lessons learned from the recent failures in risk management at JPMorgan Chase will be an important input into efforts to design the Dodd-Frank Act reforms including a strong Volcker rule,” U.S. Treasury Department Deputy Secretary Neal Wolin told the Senate panel last week.
The bank instructed the CIO in December to reduce its risk- weighted assets to prepare for new international capital rules. Instead, the office in mid-January “embarked on a complex strategy that entailed adding positions that it believed would offset the existing ones,” Dimon said. The portfolio instead got larger and the problem got worse, he said.
Dimon said that the risk committee structures and processes were not as robust in the CIO as they should have been. The division’s London team built up a book of credit derivatives that became so large that employees couldn’t unwind it without roiling markets or incurring large losses, current and former executives have said.
The strategy for reducing the portfolio was “poorly conceived and vetted,” Dimon said. “The strategy was not carefully analyzed or subjected to rigorous stress testing within CIO and was not reviewed outside” the division.
Risk oversight personnel were “in transition” and the derivatives credit portfolio responsible for the loss should have “gotten more scrutiny from both senior management and the firmwide risk control function,” he said.
The position of chief risk officer inside the CIO was a revolving door, with at least five executives holding the job in six years, people familiar with the matter said. Irvin Goldman, appointed in February and replaced in May, had been fired in 2007 by brokerage Cantor Fitzgerald LP for money-losing bets that led to a regulatory sanction of the firm, said three people with knowledge of the matter. Goldman wasn’t directly accused of wrongdoing.
Chief Investment Officer Ina Drew retired after the loss was disclosed and was replaced by Matt Zames, who was co-head of fixed-income trading in the investment bank. Zames told staff that top London-based trading executive Achilles Macris would hand off duties.
“When we make mistakes, we take them seriously and often are our own toughest critic,” Dimon said. “While we can never say we won’t make mistakes -- in fact, we know we will -- we do believe this to be an isolated event.”
JPMorgan’s biggest competitors, including Bank of America Corp., Citigroup Inc. and Wells Fargo & Co., have said their corporate investment offices avoid using the kind of derivatives that led to the trading losses and buy fewer bonds exposed to credit risk. The rivals said their offices don’t trade credit- default swaps on indexes linked to the health of companies.
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