JPMorgan’s Dimon to Senators: $2 Billion Loss ‘Isolated Event’

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.”