Senate Panel Says J.P. Morgan Misled Regulators and Investors, Ignored Risks in Big Trades

Comment from thebrackpipe.com:  More douchebaggery from one of America’s biggest banks.  Now, does J.P. Morgan snatch ‘supreme douche’ status from Goldman Sachs?  You be the judge.

Article below by Dan Fitzpatrick, Scott Patterson and Gregory Zuckerman of the WSJ:

J.P. Morgan Chase & Co. brushed off internal warnings and misled regulators and investors about the scope of losses on its “London whale” trades last year, according to a scathing Senate report.

One risk gauge at the largest U.S. bank projected in February 2012 that the firm could lose $6.3 billion on the trades.  But the warning was dismissed by a key risk manager as “garbage,” according to the 301-page report by the Senate’s Permanent Subcommittee on Investigations.  The New York company’s trading losses ultimately exceeded $6 billion.

The report, the product of more than 50 interviews and a review of 90,000 documents, found that the bank ignored alarms triggered weeks and in some cases months before Chief Executive James Dimon dismissed concerns about them as a “tempest in a teapot” on an April 13, 2012, earnings conference call.  “While we have repeatedly acknowledged mistakes, our senior management acted in good faith and never had any intent to mislead anyone,” J.P. Morgan said Thursday.

The Senate effort is the first comprehensive account of an episode that has hit the company’s reputation for risk management, which once was viewed as the best on Wall Street.  J.P. Morgan’s board halved Mr. Dimon’s 2012 pay following the trading losses, even as the company posted a record profit of $21.3 billion.

In an unrelated move, on Thursday the Federal Reserve cited the company for weaknesses in its capital planning and said J.P. Morgan would have to resubmit this year a plan to expand its share buyback and raise its dividend.

Senate investigators “found a trading operation that piled on risk, ignored limits on risk taking, hid losses, dodged oversight and misinformed the public,” said Sen. Carl Levin (D., Mich.), head of the subcommittee, in a press briefing Thursday.

The panel’s report, which includes 1,654 footnotes, details several episodes previously reported by The Wall Street Journal—including the doubts and reservations of the J.P. Morgan trader nicknamed the “London whale” and pressure exerted on him to boost valuations on the losing positions.

The report shows that traders at the bank’s Chief Investment Office were highly paid.   Former Chief Investment Officer Ina Drew was paid a combined $29 million for 2010 and 2011.  Achilles Macris, the trader in charge of the unit’s Europe operations, pulled in $31.75 million over the two years, and Bruno Iksil, nicknamed for his large trading positions, made $14.1 million.

On Friday, several J.P. Morgan officials who oversaw the trades, including Ms. Drew, will testify before the Senate panel.  While Mr. Dimon won’t testify, Mr. Levin said at the Thursday press briefing that the subcommittee might hold additional hearings.

The panel will also question officials with the Office of the Comptroller of the Currency, the bank’s front-line regulator, including its head, Thomas Curry.

Sen. John McCain (R., Ariz.), ranking member of the subcommittee, said the firm “misled investors and the American taxpayer,” calling the losses a “massive failure not only by J.P. Morgan but also by the federal government.”

An OCC spokesman said in a statement Thursday that the regulator recognizes “shortcomings” in its supervision and is taking “steps to improve our supervisory process.”

The Chief Investment Office, which manages the bank’s excess cash, was a little known profit center that pulled off winning trades through the financial crisis and into 2011.

But then a group of traders in its London office, which included Mr. Iksil, started building a complicated position in indexes that track the health of a group of companies.  That bet morphed into a hard-to-unwind position that led to losses starting in January 2012.

In mid-March 2012, Mr. Iksil called the positions “more and more monstrous” and referred to the values the company had booked them at as “idiotic,” according to recorded conversations released by the panel.  Another trader told Mr. Iksil that the outcome of the trading would be “a big fiasco” and “big drama when, in fact, everybody should have…seen it coming a long time ago.”

Later in March, Mr. Iksil became despondent as the losses mounted.  “It is over/it is hopeless now…I tell you, they are going to trash/destroy us,” he says in one message to a colleague.  Ms. Drew also became alarmed as she learned that the size of the positions was growing.  “Ina is freaking,” said one risk manager, referring to Ms. Drew.

Ms. Drew and lawyers for Messrs. Iksil and Macris couldn’t be reached for comment.

J.P. Morgan has acknowledged in its own reports on the trading fiasco that some expressed concerns about the portfolio as early as January 2012 and traders placed inaccurate values on certain positions as they debated the size of the losses in late March and early April.

But the Senate report alleges that traders began hiding these losses as early as January 2012 and the bank didn’t have a problem with how the positions were being treated.  A May 10 internal assessment from the bank’s controller concluded that the pricing decisions were “consistent with industry practices.”

J.P. Morgan has acknowledged it didn’t have the necessary limits in place to catch the mounting problems.

But the Senate panel concludes J.P. Morgan disregarded multiple warnings.  Of the five big risk measures that are tracked almost continuously at the bank, all five were breached during the first three months of 2012.  From Jan. 1 through April 30, the measures were breached more than 330 times.

In February 2012, a warning system known as the Comprehensive Risk Measure showed the portfolio could incur a yearly loss of $6.3 billion, the report said.  Peter Weiland, who at the time was a top risk executive called the $6.3 billion estimate “garbage” in an email to one trader.  But the head of the bank’s model risk group, C.S. Venkatakrishnan, defended the model and attributed the sizable figure to the additional positions taken in the portfolio.  He communicated that in an email to Ms. Drew and chief risk officer John Hogan, among others.

On April 10, when the total losses in the portfolio climbed above $1 billion for the first time due to a one day loss of $412 million, Chief Financial Officer Douglas Braunstein said to Mr. Hogan in an email: “A bit more than we thought.”

Mr. Hogan replied: “Lovely.”

The OCC told the panel that J.P. Morgan provided “material misrepresentations” about the size of the losses and denied the positions had been valued unfairly despite disputes with counterparties about prices assigned to certain positions.  Mr. Dimon was aware of the disputes, the panel’s report said.

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