The Senate Banking Committee Discusses JPMorgan ‘s Trading Loss with CEO Jamie Dimon
AT TODAY’S SENATE BANKING COMMITTEE HEARING, Jamie Dimon, Chairman and CEO of JPMorgan Chase, explained how risk management lapses led to more than $2 billion in trading losses and outlined corrective actions the bank has taken to ensure that a similar event does not happen in the future.
In his opening remarks, Chairman Tim Johnson (D-S.D.) said the trading loss at JPMorgan was the result of “an out-of-control trading strategy” with “little to no risk controls.”
“No financial institution is immune from bad judgment,” Johnson said, “but for a bank renowned for its risk management, where were the risk controls and how can a bank take on ‘far too much risk’ if the point of the trades was to reduce risk?”
In closing, Johnson dismissed concerns that the Dodd-Frank Act is “micromanaging the operations of banks” and urged Congress to adequately fund the regulatory agencies in charge of implementing reforms.
Ranking Member Richard Shelby (R-Ala.) said it “normally is not and should not be the role of Congress to second-guess the private sector,” however, he believes Congress’ charge to delegate financial oversight means the Committee should examine the effects of “poor risk management.” Shelby stressed that strong capital reserves, in conjunction with proper risk management, are the “single best way” to protect against financial contagion. In closing, Shelby urged the committee to turn their focus to the “massive losses” sustained by the Government Sponsored Enterprises (GSEs).
In his opening statement, Dimon provided an overview of the causes and extent of JPMorgan’s recent trading loss. He explained that while the primary function of the Chief Investment Office (CIO) is to manage a $350 billion portfolio and control long-term interest rate and currency exposure, the CIO also maintains a smaller synthetic credit portfolio that protects the company from a systemic event. He said when the CIO was instructed to reduce its risk exposures, they followed a “poorly conceived” strategy that entailed hedging the synthetic credit portfolio with more assets instead of reducing their existing position. Noting that personnel in the CIO were in transition and that risk controls were largely ineffective, Dimon added that the CIO traders did not have the “requisite understanding” of the risk of its trades.
Dimon also discussed the steps JPMorgan has taken to prevent further losses, including appointing new leadership for the CIO, analyzing and reducing existing risk, establishing a new risk committee structure for the CIO, and conducting a review of the incident. While he apologized for losing shareholder money, Dimon stressed that the loss did not, and will not affect clients, customers, or taxpayers. He emphasized the strength of JPMorgan’s capital ratios and the success of the bank’s capital position in minimizing the impact of unexpected losses. In closing, Dimon said JPMorgan will “learn from these losses, and emerge from this moment a stronger, smarter, better company.”
Question and Answer
Johnson asked Dimon why he told analysts in April that the media attention on the trades made by the CIO was “a tempest in a teapot,” when he did not have all of the relevant information. Dimon said he was inadequately informed and “dead wrong” when he made that statement. He added that the CIO assured him their trading losses in early April were “isolated and not a big problem.”
Johnson asked if the CIO had a $20 million loss limit that was ignored and if he knew whether the loss limit was removed. Dimon said he is unaware of a $20 million loss limit, but acknowledged that the CIO had its own credit, exposure and risk limits in place. He noted that in March some of the CIO’s risk limits were triggered and traders were instructed to reduce their risk.
Following up, Johnson asked if Dimon exempted the CIO from a review of its risk controls. Dimon said the CIO demonstrated “a little complacency and overconfidence” in the unit’s risk management controls. He said the CIO has its own risk committee, which was supposed to properly review the office’s risk, but was not “independent-minded enough” to be effective. He added that the synthetic credit portfolio should have had more scrutiny because it contained more risk.
Additionally, Johnson asked if the pay structure at the CIO incentivized the risky behavior that led to the trading loss and whether JPMorgan will seek clawbacks from traders and executives within the CIO. Dimon said compensation at JPMorgan is not based on a formula and members of the CIO were compensated based on the performance of the whole company, the performance of the unit, and each individual’s performance. “I don’t believe that [JPMorgan’s] compensation structure made the problem worse,” he said.
With regard to clawing back compensation, Dimon said after the Board of Directors fully reviews the incident, clawbacks will be “likely.” Following up, Sen. Charles Schumer (D-N.Y.) asked Dimon to detail JPMorgan’s clawback policy. Dimon said the clawback policy for senior executives is applicable for a wide range of actions, including bad judgment. He added that JPMorgan is able to clawback unvested stock, compensation and cash bonuses paid over the last two years.
Johnson and several other members asked Dimon about the changes JPMorgan made to the CIO’s risk model, specifically asking why the model was changed, and if the new model hid the risks of the CIO’s trading activities. Dimon said in 2011 the CIO asked senior management if they could update its risk model in response to the new Basel requirements and noted that models are changed “all the time” in an attempt to improve their accuracy. Additionally, he said risk model reviews are performed by an independent model review group and, upon completion of the six month review, the new model was implemented in January of 2012.
Dimon acknowledged that the new model allowed the CIO to take more risk than the old model, but was unaware of this until the hedge started producing losses. He said the old model was re-implemented immediately after the new model was determined to be a cause of the trading losses.
Sen. Jack Reed (D-R.I.) asked why the changes to the CIO’s model were not applied firm-wide. Dimon said the firm uses hundreds of models, and the model in question was “very specific” to the synthetic credit portfolio.
Shelby and Reed asked Dimon to provide more details on the unit and trades that ultimately led to the multi-billion dollar loss. Dimon said JPMorgan’s greatest liability is credit risk, noting that the bank has a $700 billion lending portfolio. He said the CIO has a $350 billion portfolio, largely comprised of excess deposits, which is “rated AA+, conservatively managed and has unrealized profits of over $7 billion.” Dimon said the CIO also has a $150 billion synthetic credit portfolio that is meant to offset the liabilities of the entire firm during a crisis and, during periods of stability, “make a little bit of money.” He noted that the synthetic credit portfolio was profitable during the 2008 crisis.
Dimon said during the first quarter of 2012, JPMorgan leadership asked the CIO to reduce the risk in its synthetic credit portfolio, but instead of going long or selling positions, the CIO increased the assets in its portfolio, introducing more complex risks to the hedging strategy. He said the way the CIO changed its hedging strategy in February and March, morphed the strategy into “something I cannot defend.”
Shelby asked Dimon to explain his expectations for the CIO, specifically asking if the unit’s purpose was to hedge against risk or turn a profit. Dimon said the CIO unit “invests money and earns income in a broad array of diversified investments,” and is supposed to earn revenue. He said the synthetic credit portfolio, however, is only supposed to generate revenue if there is a crisis, “which I consider to be a hedge.”
Shelby also asked Dimon what he, and the bank, has learned from this situation. “I think that no matter how good you are or how competent people are, never, ever, get complacent in risk management, challenge everything, and always make sure that risk committees are always asking questions, sharing information and setting granular limits when taking risk,” Dimon said. “We had those disciplines in place in the rest of the company, we didn’t have it here [in the CIO] and that’s what caused the problem.”
Dimon noted that he will make “far more disclosures” about the situation on July 13.
Schumer asked Dimon if there is a danger that this type of loss could occur in another institution, specifically asking if it could happen in a nonbanking institution that does not have the same capital requirements as banks. Dimon said that it could happen at a nonbanking institution and regulators are currently deciding which of the nonbank financial institutions are going to be subject to systemic risk oversight.
Schumer and Reed asked what went wrong with the CIO’s risk committee and what suggestions he would make to regulators as they formulate rules concerning risk committees. Dimon said he thinks it is “a little unrealistic” to expect the risk committee to anticipate the impact of the particular strategy the CIO office used because JPMorgan’s management did not fully understand it either. He noted that the risk committee in question led JPMorgan through the recent financial crisis “with flying colors,” and said the blame for not adequately reviewing the risk of the hedging strategy is “completely on management.”
Sen. Mike Crapo (R-Idaho) asked what the function of regulators should be. Dimon said regulators currently audit and criticize the business practices and products of the firms they regulate, which he said has directly led to improvements at those firms. However, he said that regulators need realistic objectives and should focus on promulgating capital standards, liquidity standards, proper disclosures, appropriate governance, and properly functioning risk committees.
Crapo also asked Dimon if it is possible to make a distinction between proprietary trading and hedging. Dimon said it is very hard to make a bright line distinction because one could look at his firm’s activities and “call them one or the other.” He added that while he understands and appreciates the intent of the Volcker rule, “the devil is going to be in the details.”
Sen. Bob Corker (R-Tenn.) asked Dimon what would happen to a bank if it was unable to hedge lending risk. Dimon said the bank would most likely reduce the amount of lending it did and raise fees on loans it did make. He added that taking away a bank’s ability to hedge would prevent it from protecting itself from a systemic event.
Corker asked if Dodd-Frank has “more than marginally made the U.S. banking system safer.” Dimon said parts of Dodd-Frank, in conjunction with higher capital liquidity, has made the financial markets safer than they were in 2007. When pressed on whether the regulatory regime that Dodd-Frank authorized has made the system safer, Dimon said, “I don’t know.”
Following up, Corker and Sen. Jim DeMint (R-S.C.) asked Dimon to explain what he would do to make the financial system safer. Dimon said he believes in “strong regulation, not always more regulation.”
“What we set up is a system with more and more regulators,” Dimon said, “and we don’t actually know who has jurisdiction over many of the issues we’re dealing with anymore. I would prefer a simple, clean, strong regulatory system with real intelligent design, and that’s not what we did.”
Additionally, Dimon said the “biggest disappointment he has experienced since the crisis” is that Republicans, Democrats and the business community never had a conversation about what really sparked the crisis and the best way to fix it.
“The American business machine is the best in the world, and we are all blessed to have it,” Dimon said. “We should focus on getting it working again as opposed to constantly just shooting each other all the time,” he concluded.
Corker also asked Dimon to explain the purpose of a “highly complex institution,” and if there are institutions that are too complex to manage. Dimon said institutions like JPMorgan provide a wide range of services to its global clients and noted that the institution’s size creates economies of scale and allows for a diversified asset base, a “huge source of strength” during the crisis.
Sen. Robert Menendez (D-N.J.) criticized the way that JPMorgan characterized the trades that led to the loss and criticized Dimon for being so outspoken against financial regulatory reform. Dimon disagreed with the Senator’s characterization of the trades that the CIO made and said he supports some aspects of reform, including higher capital standards, improved liquidity, standardized derivative products, derivative clearinghouses, and “proper” transparency.
Sen. Sherrod Brown (D-Ohio) asked if Dimon personally approved the trades that the CIO made and if the OCC was told about the trades prior to the April 6 media reports. Dimon said he was aware of the trade, but did not approve them. He said JPMorgan is “very open” with its regulators and they do receive JPMorgan reports. “We give them the information that they want,” he said. He added that in this case, JPMorgan management was misinformed about the trades the CIO was making and probably misinformed the regulators.
Sen. Mike Johanns (R-Neb.) asked Dimon how much JPMorgan’s regulatory costs have increased as a result of Dodd-Frank and the Volcker Rule. Dimon said the “rough estimate” would be about $1 billion a year. Following up, Johanns asked if the regulatory burden that the financial sector is experiencing will force them to move abroad. Dimon said JPMorgan is prepared to navigate the U.S. regulatory environment, but noted that several business have relocated overseas or are planning to.
Sen. Jon Tester (D-Mont.) asked about JPMorgan’s role in MF Global’s bankruptcy. He cited reports saying that JPMorgan returned $168 million of MF Global’s funds seven months after the bankruptcy, and asked Dimon why JP Morgan returned the money so late. Dimon said JPMorgan immediately reached out to the trustees and courts to explain the money transfer in question, and had to wait for their guidance before returning the money. “We were not deliberately withholding the money,” he clarified. Tester followed up by asking why JPMorgan processed the transfer of funds from MF Global without confirmation that the funds were not customer segregated. Dimon explained that such a confirmation is not required to make a transfer.
Sen. Jerry Moran (R-Kan.) discussed the idea of a “living will” and asked about ways to ensure that taxpayers do not bear the burden of failing institutions. Dimon stressed the need of eliminating “too big to fail,” and the importance of clawbacks in the event of a failure. He suggested a system where the costs of dissolution of a major bank would be paid for by other large banks. He also confirmed that JPMorgan could be “concluded” with no cost to taxpayers.
Sen. Herb Kohl (D-Wis.) asked why JPMorgan’s loan-to-deposit ratio was 10-20 percent lower than other large banks, and if this suggests that JPMorgan is prioritizing risky trading activities over lending. Dimon said JPMorgan needs enormous liquidity and has several hundred billion dollars invested in central banks around the world. He added that the bank’s middle-market lending activity is up 17 percent, small business lending is up 52 percent, and that loan-to-deposit ratios are generally different for each bank for different reasons.
Sen. Roger Wicker (R-Miss.) asked how the Volcker Rule would impact banks’ ability to hedge. Dimon said he thought banks would be allowed to portfolio hedge under Volcker, but emphasized the greater importance of raising capital in making markets safe. He praised the American financial system for lowering financial transaction costs to a tenth of the cost a year ago and being the “widest, deepest and best capital markets in the world,” stressing the importance of tailoring regulations to be “size and institution specific.”
Wicker also asked if JPMorgan has a “living will.” Dimon said one has been drafted and circulated to regulators, but it is not finalized.
Sen. Jeff Merkley (D-Ore.) pointed out that in 2008 and 2009, JPMorgan benefited from the Troubled Asset Relief Program (TARP) and other low cost federal assistance. He asked if JPMorgan would have “gone down without massive federal intervention.” Dimon said Merkley was misinformed, and stated that JPMorgan accepted TARP loans when the Fed and other institutions requested their participation.
Following up, Merkley asked why Dimon was not taking personal responsibility for the trading losses. Dimon replied that JPMorgan made a mistake. “I am absolutely responsible, and the buck stops with me,” he said.
Sen. David Vitter (R-La.) asked Dimon what the capital requirement should be for a financial institution of JPMorgan’s size. Dimon suggested an 8 percent capital requirement would be appropriate, arguing that the real problem arises from confusion over new capital rules and the long period of implementation.
Vitter asked if there is any version of the Volcker Rule that Dimon would accept. Dimon replied that the Rule could be “unnecessary when added on top of everything else [other regulation].” He recommended focusing on regulation that addressed proper capital requirements, liquidity, risk measures and risk controls.
Sen. Kay Hagan (D-N.C.) noted that the CIO added positions in order to reduce risk in anticipation of Basel requirements and asked why these positions would be problematic. Dimon said that these positions were an ineffective use of risk-related assets, and that other parts of JPMorgan are working to reduce their risk-related assets.
Sen. Michael Bennett (D-Colo.) asked why the CIO dealt with hedging activities and the synthetic credit portfolio. Dimon said the CIO did not have to have both functions, but said the assignment of both functions made sense when designing the office.
Bennett asked why the CIO added assets to the synthetic credit portfolio instead of reducing its existing positions. Dimon responded that the CIO believed they were following a more cost-effective strategy to reduce risk while still maintaining a large position in hedging.
Bennett asked Dimon to comment on the domestic and global fiscal environment. Dimon said Europe is experiencing “serious issues,” but the U.S. also has serious issues as well, highlighting the “fiscal cliff’ and the unresolved deficit. He urged Congress to address the fiscal cliff before the election and before businesses start taking action to hedge against a stalemate on the issue.
Regarding the deficit, Dimon said the U.S. must “get its fiscal house in order,” and expressed his support for the Simpson-Bowles deficit reduction plan. He added that Simpson-Bowles would reduce uncertainty about the tax system, increase confidence in U.S. markets, and prove to the world that the U.S. can solve complex fiscal problems.
For testimony and a webcast of the hearing, please click here.
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AT TODAY’S SENATE BANKING COMMITTEE HEARING, Jamie Dimon, Chairman and CEO of JPMorgan Chase, explained how risk management lapses led to more than $2 billion in trading losses and outlined corrective actions the bank has taken to ensure that a similar event does not happen in the future.
In his opening remarks, Chairman Tim Johnson (D-S.D.) said the trading loss at JPMorgan was the result of “an out-of-control trading strategy” with “little to no risk controls.”
“No financial institution is immune from bad judgment,” Johnson said, “but for a bank renowned for its risk management, where were the risk controls and how can a bank take on ‘far too much risk’ if the point of the trades was to reduce risk?”
In closing, Johnson dismissed concerns that the Dodd-Frank Act is “micromanaging the operations of banks” and urged Congress to adequately fund the regulatory agencies in charge of implementing reforms.
Ranking Member Richard Shelby (R-Ala.) said it “normally is not and should not be the role of Congress to second-guess the private sector,” however, he believes Congress’ charge to delegate financial oversight means the Committee should examine the effects of “poor risk management.” Shelby stressed that strong capital reserves, in conjunction with proper risk management, are the “single best way” to protect against financial contagion. In closing, Shelby urged the committee to turn their focus to the “massive losses” sustained by the Government Sponsored Enterprises (GSEs).
In his opening statement, Dimon provided an overview of the causes and extent of JPMorgan’s recent trading loss. He explained that while the primary function of the Chief Investment Office (CIO) is to manage a $350 billion portfolio and control long-term interest rate and currency exposure, the CIO also maintains a smaller synthetic credit portfolio that protects the company from a systemic event. He said when the CIO was instructed to reduce its risk exposures, they followed a “poorly conceived” strategy that entailed hedging the synthetic credit portfolio with more assets instead of reducing their existing position. Noting that personnel in the CIO were in transition and that risk controls were largely ineffective, Dimon added that the CIO traders did not have the “requisite understanding” of the risk of its trades.
Dimon also discussed the steps JPMorgan has taken to prevent further losses, including appointing new leadership for the CIO, analyzing and reducing existing risk, establishing a new risk committee structure for the CIO, and conducting a review of the incident. While he apologized for losing shareholder money, Dimon stressed that the loss did not, and will not affect clients, customers, or taxpayers. He emphasized the strength of JPMorgan’s capital ratios and the success of the bank’s capital position in minimizing the impact of unexpected losses. In closing, Dimon said JPMorgan will “learn from these losses, and emerge from this moment a stronger, smarter, better company.”
Question and Answer
Johnson asked Dimon why he told analysts in April that the media attention on the trades made by the CIO was “a tempest in a teapot,” when he did not have all of the relevant information. Dimon said he was inadequately informed and “dead wrong” when he made that statement. He added that the CIO assured him their trading losses in early April were “isolated and not a big problem.”
Johnson asked if the CIO had a $20 million loss limit that was ignored and if he knew whether the loss limit was removed. Dimon said he is unaware of a $20 million loss limit, but acknowledged that the CIO had its own credit, exposure and risk limits in place. He noted that in March some of the CIO’s risk limits were triggered and traders were instructed to reduce their risk.
Following up, Johnson asked if Dimon exempted the CIO from a review of its risk controls. Dimon said the CIO demonstrated “a little complacency and overconfidence” in the unit’s risk management controls. He said the CIO has its own risk committee, which was supposed to properly review the office’s risk, but was not “independent-minded enough” to be effective. He added that the synthetic credit portfolio should have had more scrutiny because it contained more risk.
Additionally, Johnson asked if the pay structure at the CIO incentivized the risky behavior that led to the trading loss and whether JPMorgan will seek clawbacks from traders and executives within the CIO. Dimon said compensation at JPMorgan is not based on a formula and members of the CIO were compensated based on the performance of the whole company, the performance of the unit, and each individual’s performance. “I don’t believe that [JPMorgan’s] compensation structure made the problem worse,” he said.
With regard to clawing back compensation, Dimon said after the Board of Directors fully reviews the incident, clawbacks will be “likely.” Following up, Sen. Charles Schumer (D-N.Y.) asked Dimon to detail JPMorgan’s clawback policy. Dimon said the clawback policy for senior executives is applicable for a wide range of actions, including bad judgment. He added that JPMorgan is able to clawback unvested stock, compensation and cash bonuses paid over the last two years.
Johnson and several other members asked Dimon about the changes JPMorgan made to the CIO’s risk model, specifically asking why the model was changed, and if the new model hid the risks of the CIO’s trading activities. Dimon said in 2011 the CIO asked senior management if they could update its risk model in response to the new Basel requirements and noted that models are changed “all the time” in an attempt to improve their accuracy. Additionally, he said risk model reviews are performed by an independent model review group and, upon completion of the six month review, the new model was implemented in January of 2012.
Dimon acknowledged that the new model allowed the CIO to take more risk than the old model, but was unaware of this until the hedge started producing losses. He said the old model was re-implemented immediately after the new model was determined to be a cause of the trading losses.
Sen. Jack Reed (D-R.I.) asked why the changes to the CIO’s model were not applied firm-wide. Dimon said the firm uses hundreds of models, and the model in question was “very specific” to the synthetic credit portfolio.
Shelby and Reed asked Dimon to provide more details on the unit and trades that ultimately led to the multi-billion dollar loss. Dimon said JPMorgan’s greatest liability is credit risk, noting that the bank has a $700 billion lending portfolio. He said the CIO has a $350 billion portfolio, largely comprised of excess deposits, which is “rated AA+, conservatively managed and has unrealized profits of over $7 billion.” Dimon said the CIO also has a $150 billion synthetic credit portfolio that is meant to offset the liabilities of the entire firm during a crisis and, during periods of stability, “make a little bit of money.” He noted that the synthetic credit portfolio was profitable during the 2008 crisis.
Dimon said during the first quarter of 2012, JPMorgan leadership asked the CIO to reduce the risk in its synthetic credit portfolio, but instead of going long or selling positions, the CIO increased the assets in its portfolio, introducing more complex risks to the hedging strategy. He said the way the CIO changed its hedging strategy in February and March, morphed the strategy into “something I cannot defend.”
Shelby asked Dimon to explain his expectations for the CIO, specifically asking if the unit’s purpose was to hedge against risk or turn a profit. Dimon said the CIO unit “invests money and earns income in a broad array of diversified investments,” and is supposed to earn revenue. He said the synthetic credit portfolio, however, is only supposed to generate revenue if there is a crisis, “which I consider to be a hedge.”
Shelby also asked Dimon what he, and the bank, has learned from this situation. “I think that no matter how good you are or how competent people are, never, ever, get complacent in risk management, challenge everything, and always make sure that risk committees are always asking questions, sharing information and setting granular limits when taking risk,” Dimon said. “We had those disciplines in place in the rest of the company, we didn’t have it here [in the CIO] and that’s what caused the problem.”
Dimon noted that he will make “far more disclosures” about the situation on July 13.
Schumer asked Dimon if there is a danger that this type of loss could occur in another institution, specifically asking if it could happen in a nonbanking institution that does not have the same capital requirements as banks. Dimon said that it could happen at a nonbanking institution and regulators are currently deciding which of the nonbank financial institutions are going to be subject to systemic risk oversight.
Schumer and Reed asked what went wrong with the CIO’s risk committee and what suggestions he would make to regulators as they formulate rules concerning risk committees. Dimon said he thinks it is “a little unrealistic” to expect the risk committee to anticipate the impact of the particular strategy the CIO office used because JPMorgan’s management did not fully understand it either. He noted that the risk committee in question led JPMorgan through the recent financial crisis “with flying colors,” and said the blame for not adequately reviewing the risk of the hedging strategy is “completely on management.”
Sen. Mike Crapo (R-Idaho) asked what the function of regulators should be. Dimon said regulators currently audit and criticize the business practices and products of the firms they regulate, which he said has directly led to improvements at those firms. However, he said that regulators need realistic objectives and should focus on promulgating capital standards, liquidity standards, proper disclosures, appropriate governance, and properly functioning risk committees.
Crapo also asked Dimon if it is possible to make a distinction between proprietary trading and hedging. Dimon said it is very hard to make a bright line distinction because one could look at his firm’s activities and “call them one or the other.” He added that while he understands and appreciates the intent of the Volcker rule, “the devil is going to be in the details.”
Sen. Bob Corker (R-Tenn.) asked Dimon what would happen to a bank if it was unable to hedge lending risk. Dimon said the bank would most likely reduce the amount of lending it did and raise fees on loans it did make. He added that taking away a bank’s ability to hedge would prevent it from protecting itself from a systemic event.
Corker asked if Dodd-Frank has “more than marginally made the U.S. banking system safer.” Dimon said parts of Dodd-Frank, in conjunction with higher capital liquidity, has made the financial markets safer than they were in 2007. When pressed on whether the regulatory regime that Dodd-Frank authorized has made the system safer, Dimon said, “I don’t know.”
Following up, Corker and Sen. Jim DeMint (R-S.C.) asked Dimon to explain what he would do to make the financial system safer. Dimon said he believes in “strong regulation, not always more regulation.”
“What we set up is a system with more and more regulators,” Dimon said, “and we don’t actually know who has jurisdiction over many of the issues we’re dealing with anymore. I would prefer a simple, clean, strong regulatory system with real intelligent design, and that’s not what we did.”
Additionally, Dimon said the “biggest disappointment he has experienced since the crisis” is that Republicans, Democrats and the business community never had a conversation about what really sparked the crisis and the best way to fix it.
“The American business machine is the best in the world, and we are all blessed to have it,” Dimon said. “We should focus on getting it working again as opposed to constantly just shooting each other all the time,” he concluded.
Corker also asked Dimon to explain the purpose of a “highly complex institution,” and if there are institutions that are too complex to manage. Dimon said institutions like JPMorgan provide a wide range of services to its global clients and noted that the institution’s size creates economies of scale and allows for a diversified asset base, a “huge source of strength” during the crisis.
Sen. Robert Menendez (D-N.J.) criticized the way that JPMorgan characterized the trades that led to the loss and criticized Dimon for being so outspoken against financial regulatory reform. Dimon disagreed with the Senator’s characterization of the trades that the CIO made and said he supports some aspects of reform, including higher capital standards, improved liquidity, standardized derivative products, derivative clearinghouses, and “proper” transparency.
Sen. Sherrod Brown (D-Ohio) asked if Dimon personally approved the trades that the CIO made and if the OCC was told about the trades prior to the April 6 media reports. Dimon said he was aware of the trade, but did not approve them. He said JPMorgan is “very open” with its regulators and they do receive JPMorgan reports. “We give them the information that they want,” he said. He added that in this case, JPMorgan management was misinformed about the trades the CIO was making and probably misinformed the regulators.
Sen. Mike Johanns (R-Neb.) asked Dimon how much JPMorgan’s regulatory costs have increased as a result of Dodd-Frank and the Volcker Rule. Dimon said the “rough estimate” would be about $1 billion a year. Following up, Johanns asked if the regulatory burden that the financial sector is experiencing will force them to move abroad. Dimon said JPMorgan is prepared to navigate the U.S. regulatory environment, but noted that several business have relocated overseas or are planning to.
Sen. Jon Tester (D-Mont.) asked about JPMorgan’s role in MF Global’s bankruptcy. He cited reports saying that JPMorgan returned $168 million of MF Global’s funds seven months after the bankruptcy, and asked Dimon why JP Morgan returned the money so late. Dimon said JPMorgan immediately reached out to the trustees and courts to explain the money transfer in question, and had to wait for their guidance before returning the money. “We were not deliberately withholding the money,” he clarified. Tester followed up by asking why JPMorgan processed the transfer of funds from MF Global without confirmation that the funds were not customer segregated. Dimon explained that such a confirmation is not required to make a transfer.
Sen. Jerry Moran (R-Kan.) discussed the idea of a “living will” and asked about ways to ensure that taxpayers do not bear the burden of failing institutions. Dimon stressed the need of eliminating “too big to fail,” and the importance of clawbacks in the event of a failure. He suggested a system where the costs of dissolution of a major bank would be paid for by other large banks. He also confirmed that JPMorgan could be “concluded” with no cost to taxpayers.
Sen. Herb Kohl (D-Wis.) asked why JPMorgan’s loan-to-deposit ratio was 10-20 percent lower than other large banks, and if this suggests that JPMorgan is prioritizing risky trading activities over lending. Dimon said JPMorgan needs enormous liquidity and has several hundred billion dollars invested in central banks around the world. He added that the bank’s middle-market lending activity is up 17 percent, small business lending is up 52 percent, and that loan-to-deposit ratios are generally different for each bank for different reasons.
Sen. Roger Wicker (R-Miss.) asked how the Volcker Rule would impact banks’ ability to hedge. Dimon said he thought banks would be allowed to portfolio hedge under Volcker, but emphasized the greater importance of raising capital in making markets safe. He praised the American financial system for lowering financial transaction costs to a tenth of the cost a year ago and being the “widest, deepest and best capital markets in the world,” stressing the importance of tailoring regulations to be “size and institution specific.”
Wicker also asked if JPMorgan has a “living will.” Dimon said one has been drafted and circulated to regulators, but it is not finalized.
Sen. Jeff Merkley (D-Ore.) pointed out that in 2008 and 2009, JPMorgan benefited from the Troubled Asset Relief Program (TARP) and other low cost federal assistance. He asked if JPMorgan would have “gone down without massive federal intervention.” Dimon said Merkley was misinformed, and stated that JPMorgan accepted TARP loans when the Fed and other institutions requested their participation.
Following up, Merkley asked why Dimon was not taking personal responsibility for the trading losses. Dimon replied that JPMorgan made a mistake. “I am absolutely responsible, and the buck stops with me,” he said.
Sen. David Vitter (R-La.) asked Dimon what the capital requirement should be for a financial institution of JPMorgan’s size. Dimon suggested an 8 percent capital requirement would be appropriate, arguing that the real problem arises from confusion over new capital rules and the long period of implementation.
Vitter asked if there is any version of the Volcker Rule that Dimon would accept. Dimon replied that the Rule could be “unnecessary when added on top of everything else [other regulation].” He recommended focusing on regulation that addressed proper capital requirements, liquidity, risk measures and risk controls.
Sen. Kay Hagan (D-N.C.) noted that the CIO added positions in order to reduce risk in anticipation of Basel requirements and asked why these positions would be problematic. Dimon said that these positions were an ineffective use of risk-related assets, and that other parts of JPMorgan are working to reduce their risk-related assets.
Sen. Michael Bennett (D-Colo.) asked why the CIO dealt with hedging activities and the synthetic credit portfolio. Dimon said the CIO did not have to have both functions, but said the assignment of both functions made sense when designing the office.
Bennett asked why the CIO added assets to the synthetic credit portfolio instead of reducing its existing positions. Dimon responded that the CIO believed they were following a more cost-effective strategy to reduce risk while still maintaining a large position in hedging.
Bennett asked Dimon to comment on the domestic and global fiscal environment. Dimon said Europe is experiencing “serious issues,” but the U.S. also has serious issues as well, highlighting the “fiscal cliff’ and the unresolved deficit. He urged Congress to address the fiscal cliff before the election and before businesses start taking action to hedge against a stalemate on the issue.
Regarding the deficit, Dimon said the U.S. must “get its fiscal house in order,” and expressed his support for the Simpson-Bowles deficit reduction plan. He added that Simpson-Bowles would reduce uncertainty about the tax system, increase confidence in U.S. markets, and prove to the world that the U.S. can solve complex fiscal problems.
For testimony and a webcast of the hearing, please click here.