Bloomberg News

JPMorgan’s Specific Trades Weren’t Monitored

May 15, 2012

Bloomberg News first reported April 5 that London-based JPMorgan trader Bruno Iksil had amassed positions linked to the financial health of corporations that were so large he was driving price moves in the $10 trillion market. Photographer: Peter Foley/Bloomberg

Bloomberg News first reported April 5 that London-based JPMorgan trader Bruno Iksil had amassed positions linked to the financial health of corporations that were so large he was driving price moves in the $10 trillion market. Photographer: Peter Foley/Bloomberg

JPMorgan Chase & Co. (JPM:US)’s individual trades that led to a $2 billion loss weren’t monitored by the Office of the Comptroller of the Currency, which said it didn’t expect to be notified about the positions.

The job of the OCC, which oversees U.S. national banks including JPMorgan Chase Bank N.A., is to oversee wider risk- management policies and limits and to alert company management when it sees activities that range far from expectations, said Bryan Hubbard, an OCC spokesman.

“There is no requirement to notify regulators of specific trades and positions or the performance of those trades and positions, although we do expect to be apprised of significant developments affecting the bank,” Hubbard said yesterday. “It is possible that losses could be incurred even when all controls function properly.”

JPMorgan Chief Executive Officer Jamie Dimon said on May 10 the bank made “egregious” mistakes and had so far lost about $2 billion tied to synthetic credit securities. Federal regulators are examining what happened, including the Securities and Exchange Commission and Commodity Futures Trading Commission, according to people familiar with the probes. The U.S. Justice Department and Federal Bureau of Investigation in New York have also begun a criminal probe, a person familiar with the matter said.

OCC examiners don’t approve loans, models or investments, focusing instead on risk controls, Hubbard said, adding that they don’t typically track a firm’s activities on a live basis.

70 Monitoring JPMorgan

The OCC has about 70 people devoted full-time to monitoring JPMorgan’s banking activities, including the activity of its chief investment office where most of the losing trades happened in a London unit. OCC examiners overseas operate from their own regional offices -- including one in London -- and aren’t housed inside the banks as they are in the U.S.

Even if that particular unit was in New York, “it wouldn’t have an examiner looking at it all the time,” said Robert L. Clarke, who was comptroller of the currency from 1985 to 1992. He said examiners set a schedule for how they’ll review major risk areas of a bank, checking out control mechanisms for each throughout the year. “They clearly can’t catch all the major activities.”

Arthur Wilmarth, a law professor specializing in banking and financial regulation at George Washington University, said the JPMorgan incident raises questions about how closely regulators are watching the biggest banks.

Major Risk Positions

“Although JPMorgan’s loss apparently didn’t occur in their trading book, one would think that the regulators would be asking for reports on all of the major risk positions held by the largest banks, wherever those positions are booked,” Wilmarth said in an e-mail. “One would also think that the OCC and the Fed would be taking a closer look at trading operations in London” after trades at a London unit of American International Group Inc. (AIG:US) contributed to the need for a federal rescue.

Clarke, a senior partner at Bracewell & Giuliani LLP in Houston, said the OCC should be held accountable if it missed shortcomings in the controls. “The examiners should be expected to test those controls and be sure that they’re working and be sure that they’re adequate,” he said.

Since the 2008 financial crisis, the OCC has “raised our bar and expect that our large, systemically important institutions achieve strong risk management,” Hubbard said, referring to agency rankings of a bank’s risk management as weak, satisfactory or strong.

Not Enough People

“It’s enormously challenging for an agency to play catch- up” in the largest banks, said Clifford Rossi, a former managing director of Citigroup Inc.’s consumer lending group and an executive-in-resident at the University of Maryland’s Robert H. Smith School of Business. “There simply aren’t enough people to watch over all of those things.”

The OCC said yesterday that it is evaluating risk management strategies and practices at other large banks to validate their understanding of risk levels and controls.

Blending “hedging and for-profit activities” is a recipe for trouble, Rossi said. This activity was “vastly complex,” he said, and couldn’t be easily understood by regulators -- or even some people at the firm.

To contact the reporter on this story: Jesse Hamilton in Washington at jhamilton33@bloomberg.net.

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net. JPM US <EQUITY> CN


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Companies Mentioned

  • JPM
    (JPMorgan Chase & Co)
    • $54.8 USD
    • -0.16
    • -0.29%
  • AIG
    (American International Group Inc)
    • $49.84 USD
    • 0.27
    • 0.54%
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