June 13 (Bloomberg) -- U.S. senators preparing to hear testimony from JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said they will press him to explain what led to more than $2 billion in trading losses and will be looking closely at whether they need to tighten exemptions in the so-called Volcker rule.
U.S. Senator Jeff Merkley, the Oregon Democrat pushing for stronger restrictions on banks’ bets with their own money through proprietary trading, said this morning that JPMorgan took too much risk through a strategy the company described as hedging.
“Portfolio hedging is just a name for saying anything goes, and we’ll continue proprietary trading,” Merkley said in an interview on Bloomberg Television.
Merkley, who co-wrote the Volcker provision in the Dodd- Frank Act along with Senator Carl Levin of Michigan, has said that the draft rule released by regulators in 2011 had loopholes that would allow banks to maintain much of their proprietary trading operations.
“I want to know whether or not he is determined to continue pressing for loopholes in the Volcker rule so he can continue proprietary trading or whether he recognizes that really is a role for hedge funds that shouldn’t be subsidized by American taxpayers,” Merkley said.
In testimony prepared for the hearing, Dimon told Congress the bank let traders take risks they didn’t understand while he didn’t answer key questions about the losses.
[To read Dimon’s prepared testimony, click here.]
Dimon expressed regret over losses in the bank’s chief investment office, saying that its trading strategy was “poorly conceived and vetted” by senior managers who were “in transition” and not paying adequate attention.
“This portfolio morphed into something that, rather than protect the firm, created new and potentially larger risks,” Dimon said in the remarks ahead of his appearance today before the Senate Banking Committee. “We have let a lot of people down, and we are sorry for it.”
Dimon, 56, makes his first of two appearances on Capitol Hill to face lawmakers probing how the largest and most profitable U.S. bank, often praised for its “fortress” balance sheet, could have taken such risks after coming through the 2008 financial crisis largely unscathed. His prepared remarks left unanswered what he knew when about the trading strategy and losses that accelerated in March and April.
Dimon also didn’t address changes made earlier this year to a company measurement known as value-at-risk, or VaR, that underestimated the potential for losses. The switch -- and the timing of the firm’s disclosures -- are the focus of an inquiry by the Securities and Exchange Commission, agency chairman Mary Schapiro told the Senate panel on May 22.
Other government investigations of New York-based JPMorgan include a study of internal oversight by the Federal Reserve, a probe of the trades by the Comptroller of the Currency, and additional inquiries by the Department of Justice and the Commodity Futures Trading Commission.
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 by that employees couldn’t unwind it without roiling markets or incurring large losses.
Dimon said he feels “terrible” that the firm will lose shareholder money, yet defended the bank by saying lawmakers needed to put the losses “into perspective,” noting that no client, customer or taxpayer money was impacted. He said the second quarter would be “solidly profitable.”
Dimon explained that 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 grew and the problem got worse.
Shares of the bank have dropped 17 percent from May 10, when Dimon disclosed the losses, through yesterday, lopping about $26.5 billion from the firm’s market value. The furor cost former Chief Investment Officer Ina Drew her job.
Senator Tim Johnson, the panel’s chairman, said in remarks prepared for the hearing that he expected Dimon to answer how the investment office, a unit designed to protect the company from risk, could lose billions of dollars instead.
“How can a bank take on ‘far too much risk’ if the point of the trades was to reduce risk in the first place?” the South Dakota Democrat asked. “Or was the goal really to make money? Should any hedge result in billions of dollars of net gains or losses, or should it be focused solely on reducing a bank’s risks?”
Senator Richard Shelby of Alabama, the top Republican on the panel, said this morning that the panel could go into a closed session of Dimon is worried about disclosing too much.
“I would be interested in seeing what really happened” that led to the trading loss, Shelby said in a television interview on CNBC.
Dimon, who’s also set to face the House Financial Services Committee on June 19, is finding himself in the middle of a renewed debate about whether regulators should tighten curbs on trading by deposit-taking banks after mortgage bets pushed the financial system to the brink of collapse four years ago.
Five U.S. agencies are working to complete the Volcker rule, which is named for former Fed Chairman Paul Volcker and is intended to reduce risky trading by banks with federally insured deposits and access to the central bank’s discount window.
Investors and bankers, including Dimon, have speculated that the loss may hurt their efforts to soften the Volcker rule and other provisions of Dodd-Frank, which was passed to curb the kinds of banking practices that contributed to the 2008 financial crisis.
Dimon’s apology is a first step in the company’s plan to assuage concerns of investors, said David Hendler, an analyst at CreditSights Inc. in New York.
“It’s not like you went through a stop sign and got a slap-on-the-wrist ticket,” Hendler said. “It’ll have to be every quarter for the next couple of years or so. That’s basically job No. 1 for Jamie Dimon.”
Christopher Whalen, senior managing director at Tangent Capital Partners LLC, said he didn’t expect Congress to do more than scold Dimon.
“This is precisely why we have to break up these odious monopolies,” he said in an interview on Bloomberg Radio with Tom Keene and Ken Prewitt. “All these members are going to scold Jamie Dimon and then they are going to ask him for an autograph.”