JPMorgan Chase CEO Jamie Dimon faced a grilling by senators on Wednesday regarding the $2 billion in surprise losses incurred by the bank’s chief investment office (CIO) in London.
After being jeered by demonstrators chanting, "Stop foreclosures now!" Dimon told members of the Senate Banking Committee that while he was “ultimately responsible” as CEO for the trading blunder, JPMorgan believes the losses to be “an isolated event.”
Senate Banking Committee Chairman Tim Johnson, D-S.D., noted in his remarks that Wednesday marked the two-month anniversary of Dimon’s “tempest in a teapot” comments, where he "downplayed concerns from initial media reports” of the company’s CIO trades. However, Johnson said, “we later learned…it was an out-of-control trading strategy with little to no risk controls that cost the company billions of dollars.”
Dimon told Johnson that he regretted that statement and admitted several times during the hearing that traders took on too much risk. “In hindsight,” Dimon told lawmakers, the chief investment office’s “traders did not have the requisite understanding of the risks they took.”
“No financial institution is immune from bad judgment,” Johnson said, reminding Dimon and lawmakers of the statements Dimon later made: “We made a terrible egregious mistake. There’s almost no excuse for it…. We know we were sloppy. We know we were stupid. We know there was bad judgment…. [I]n hindsight, we took far too much risk. The strategy we had was badly vetted. It was badly monitored. It should never have happened.’”
Dimon said at the hearing that JPMorgan was still “reviewing the facts” around the losses and stated that the bank executives responsible may have some of their pay clawed back.
“In December 2011, as part of a firmwide effort in anticipation of new Basel capital requirements, we instructed CIO to reduce risk-weighted assets and associated risk,” Dimon testified. “To achieve this in the synthetic credit portfolio [of things like index swaps and credit derivatives], the CIO could have simply reduced its existing positions; instead, starting in mid-January, it embarked on a complex strategy that entailed adding positions that it believed would offset the existing ones. This strategy, however, ended up creating a portfolio that was larger and ultimately resulted in even more complex and hard-to-manage risks.”
Dimon explained that while the CIO’s “primary purpose is to invest excess liabilities and manage long-term interest rate and currency exposure, it also maintains a smaller synthetic credit portfolio whose original intent was to protect—or 'hedge'—the company against a systemic event, like the financial crisis or eurozone situation.” However, he continued, this synthetic portfolio “morphed into something that, rather than protect the firm, created new and potentially larger risks. As a result, we have let a lot of people down, and we are sorry for it.”
As a result JPMorgan “will lose some of our shareholders’ money—and for that, we feel terrible—but no client, customer or taxpayer money was impacted by this incident,” Dimon said. He told lawmakers that JPMorgan has told shareholders that on July 13 the firm would “make more disclosures on this [synthetic] portfolio and how we would reduce risk.”
When asked what lesson he has learned from the losses, Dimon replied: “Never get complacent in risk and have a ‘granular limit’ when dealing with risk.” The “rest of the company” had this type of risk controls in place, but the firm “didn’t have it in the CIO area and that’s what caused the problem.”