JPMorgan Chase & Co. (JPM:US)’s Douglas Braunstein repeatedly said he couldn’t remember specifics as U.S. senators grilled him about Chief Executive Officer Jamie Dimon’s role in withholding data from regulators.
Lawmakers pressed Braunstein, the bank’s former finance chief, yesterday on statements he made to investors about trading losses and on Dimon’s decisions as the firm held back details about the investment bank from regulators. Carl Levin, the head of the Permanent Subcommittee on Investigations, asked about Dimon’s reaction when the division resumed the daily profit and loss reports to the Office of the Comptroller of the Currency. An examiner at the OCC had said Dimon halted them because the CEO “believed it was too much information.”
“I don’t recall the specifics of his reaction,” answered Braunstein, in one of at least three exchanges in which he said he couldn’t remember details. A Senate report released this week said Dimon “reportedly raised his voice in anger” when told the profit and loss reports had resumed.
Lawmakers expressed exasperation throughout the hearing as current and former JPMorgan executives deflected assertions that the bank, Dimon and other executives misled investors and dodged regulators while losses mounted on the so-called London Whale bets. The senators’ 301-page report examined the trading debacle, which cost the New York-based firm $6.2 billion in last year’s first nine months.
Ina Drew, who led the bank’s chief investment office, where the losses occurred, said it was “reasonable” for her to rely on the expertise of her U.K. office’s trading supervisors, Javier Martin-Artajo and Achilles Macris.
“I made sure that key members of the company’s senior management were fully informed of the issues,” she said, adding that she didn’t learn of “deceptive conduct” at the London office until after stepping down.
JPMorgan shares (JPM:US) fell 1.9 percent to $50.02 yesterday, the worst performance on the 30-company Dow Jones Industrial Average. More than 60 million shares changed hands, the highest volume since July.
Dimon, Martin-Artajo, Macris and Bruno Iksil, the U.K. trader known as the London Whale, didn’t appear at the hearing. The other current and former bank executives testifying outnumbered senators, with 12 of the 14 subcommittee members absent most of the time.
“Braunstein’s testimony in particular returns the focus to Mr. Dimon’s actions,” said Isaac Boltansky, a policy analyst at Compass Point Research & Trading LLC, in an e-mail. “It is difficult to imagine how Mr. Dimon will not be asked to testify.”
Senators and congressmen questioned Dimon, 57, about the Whale trades at hearings last June, when some lawmakers sought his advice on regulations and the economy.
The Senate’s report said JPMorgan withheld the disclosures to the OCC in late January or early February of 2012. Scott Waterhouse, the lead OCC examiner assigned to JPMorgan, said during testimony today that it occurred in August 2011. Bob Garsson, an OCC spokesman, Mark Kornblau at JPMorgan and Tara Andringa at Levin’s office either declined to comment on the date or didn’t respond to messages.
JPMorgan stopped the OCC disclosures because of concern information wouldn’t be secure, Braunstein said yesterday. The executive, now vice chairman, said he expressed that worry to the agency before restarting the reports.
Waterhouse testified that he got resistance from Dimon during talks about why the bank had halted the reports. Dimon kept pressing, “Why do you need this information?” Waterhouse recalled. “He said, ‘I don’t think you need this amount of detail. You can still do your supervision without it.’”
Dimon expressed “dismay” and raised his voice during a conversation to Braunstein after discovering that the finance chief had already resumed the statements, Waterhouse said.
By withholding data “they gave rise to an immense amount of regulatory risk, as we’re seeing right here,” said Clifford Rossi, a former risk manager and managing director at Citigroup Inc. who now teaches at the University of Maryland’s Robert H. Smith School of Business. “In this situation, it makes it look like he had something more to hide,” Rossi said of Dimon.
Arizona Senator John McCain, the ranking Republican on the panel, pressed Braunstein on whether data-security concerns should allow JPMorgan to duck oversight.
Can firms “just decide, ‘Well, because we’re concerned about something, we’re not going to comply with the regulations,’?” McCain asked. “Is that how JPMorgan works?”
“No sir, it does not,” replied Braunstein, 52.
“Banks are much too protective of this data,” said Paul Miller, an analyst covering the financial industry at FBR Capital Markets, by phone. They are particularly worried about illiquid investments, because their inability to sell quickly gives other market participants a chance to place opposite bets and profit, he said. “That is a legitimate concern. But the OCC should have pushed back.”
Thomas Curry, the U.S. Comptroller of the Currency, said the agency should have noticed “red flags,” and that JPMorgan’s failure to provide data doesn’t excuse the OCC from questioning the bank.
“The risk-management culture and processes that led to the significant trading losses at the bank are unacceptable,” Curry said in written testimony. “Corporate governance and oversight were lacking with respect to the CIO risk-taking.”
Braunstein and Dimon were named in the report as executives who misled investors in April last year when they discussed the CIO’s credit-derivatives portfolio on a conference call with analysts. Dimon dismissed press accounts of the trades as a “tempest in a teapot,” while Braunstein said the company was “very comfortable” with the positions.
Braunstein said yesterday that his April statements were his “best, good-faith effort” based on knowledge at the time.
Levin said he had “a lot of trouble” believing the statements were “anything other than an effort to calm the seas, because they all were exaggerations or inaccurate.” The Michigan Democrat asked whether investors should have been told during the call that the CIO’s portfolio was losing money, difficult to exit and violated risk limits.
“You gave this very glowing call,” Levin said, calling the presentation “one-sided.”
Levin also questioned Michael J. Cavanagh, who is now co- CEO of the corporate and investment bank, on changes to JPMorgan’s bookkeeping that appeared to reduce the size of the losses as the trade soured. Levin asked Cavanagh, who led the internal review of the losses, whether the favorable marking was “a coincidence.”
“It’s not consistent with accounting practice to change the way you mark these things in order to make your losses go away,” Levin said after several exchanges with Cavanagh on the topic. Toward the end, Cavanagh acknowledged that changes reduced reported losses (JPM:US).
“I clearly know now, having done the review, that the people ultimately were mismarking, were not properly marking their books, at least during the course of the middle of March to the end of March,” he said.
Levin then asked whether the purpose of the change was to reduce reported losses.
“Yes,” Cavanagh responded.
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