Bloomberg News

Levin Report on JPMorgan Whale Said to Fault Regulator

January 17, 2013

JPMorgan Chase & Co. (JPM:US) and a U.S. regulator will face criticism for lax oversight in a report by Senate investigators on the bank’s $6.2 billion “London Whale” trading loss, said two people with knowledge of the matter.

The report by the Senate Permanent Subcommittee on Investigations will probably be released in the next few weeks, according to the people who spoke on condition they not be identified because the matter isn’t public. Its release comes as five U.S. regulators are putting the final touches on the Volcker rule, which might curb the kind of trades that led to the losses.

“This increases pressure on the regulators to ensure the Volcker rule prohibits these so-called portfolio-wide hedges,” said Jaret Seiberg, senior policy analyst at Washington Research Group, a unit of Guggenheim Securities LLC. “Reports like this keep the pressure on regulators to ensure the portfolio hedging exemption remains very narrow.”

The report by the committee led by Chairman Carl Levin, a Michigan Democrat, criticizes the biggest U.S. bank for risk- management lapses and the Office of Controller of the Currency’s supervision of the institution, said the people.

Jennifer Zuccarelli, a JPMorgan spokeswoman, Tara Andriga, a spokeswoman for Levin, and Bob Garsson, an OCC spokesman, said they could not comment.

The subcommittee document will follow a 129-page report JPMorgan released Jan. 16 that found employees were overwhelmed by the complexity of their bets, risk managers were ill-equipped and leaders including Chairman and Chief Executive Officer Jamie Dimon weren’t aggressive enough in responding. The bank also reiterated an assertion that London traders initially tried to hide the losses.

‘Black Mark’

“It’s going to be a black mark on Jamie Dimon’s otherwise spotless record,” said Joseph Engelhard, senior vice president of Washington-based investment advisory firm Capital Alpha Partners LLC.

The board of directors cut the CEO’s compensation for 2012 to $11.5 million. The decision was announced as the firm reported a 53 percent jump in fourth-quarter profit to $5.69 billion, driven by earnings on mortgages.

Levin’s subcommittee probed Wall Street for two years following the 2008 credit crisis, issuing a 640-page report that focused on Goldman Sachs Group Inc. (GS:US) and pinned much of the blame on the largest banks for the near-collapse of the financial system. The panel’s investigations of HSBC Holdings Plc (HBC:US) led to a $1.92 billion fine for money laundering, the largest such accord ever.

Staff Interviewed

For the JPMorgan probe, the committee interviewed staff at the bank including former Chief Investment Officer Ina Drew, as well as OCC officials including Scott Waterhouse, the examiner- in-charge for the bank, and Julie Williams, the agency’s former chief counsel, the people said.

The subcommittee was unable to interview former JPMorgan staff from the London unit, according to the people. Among those not interviewed was former London-based trader Bruno Iksil, nicknamed the London Whale because his large positions.

The losses at JPMorgan, which had been praised for remaining profitable during the credit crisis, has prompted lawsuits and probes in the U.S. and abroad. This week, it led to the first regulatory sanctions from the Federal Reserve and the OCC citing deficiencies in the bank’s internal controls.

May Disclosure

JPMorgan first disclosed losses on the trades in May, almost a month after Dimon dismissed initial news reports on the bets as a “tempest in a teapot.” Dimon, 56, said Jan. 16 the bank is almost done accounting for losses from the trades conducted by its Chief Investment Office and won’t disclose the size of future declines.

The CIO unit used credit derivatives as part of a hedging strategy, and the trades became so large the bank couldn’t easily unwind them. Dimon ousted three London traders involved in the loss, shuffled senior managers and accepted resignations from executives including Drew.

Levin, 78, has called the JPMorgan loss a “textbook” example of why regulators need to tighten the so-called Volcker rule that restricts banks from trading with their own funds except to hedge portfolio risks. Levin and Senator Jeff Merkley, a Democrat from Oregon, were advocates for including the rule in the 2010 Dodd-Frank Act that overhauled U.S. financial regulation.

Tightening Exemption

Regulators issued their first version of the rule in October 2011 and have yet to finalize it. Following the disclosure of the JPMorgan loss, lawmakers and regulators, including Commodity Futures Trading Commission, have called for the hedging exemption to be tightened.

Comptroller of the Currency Thomas Curry said in a Jan. 11 speech that regulators are trying to complete it “in a relatively short order.”

A division between the two Democrats and two Republicans on the Securities and Exchange Commission could also stymie approval of the rule. The commission’s two Republican members oppose the rule, and President Barack Obama hasn’t nominated anyone to fill the vacant fifth position on the commission.

To contact the reporter on this story: Cheyenne Hopkins in Washington at chopkins19@bloomberg.net

To contact the editor responsible for this story: Maura Reynolds at mreynolds34@bloomberg.net


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  • JPM
    (JPMorgan Chase & Co)
    • $55.56 USD
    • -0.46
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  • GS
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