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Bank regulators trying to reduce risk in JPMorgan portfolio

June 06, 2012|By Jim Puzzanghera
  • Federal Reserve Governor Daniel K. Tarullo, left, speaks with Sen. Tim Johnson before testifying at hearing held by the Senate Banking Committee.
Federal Reserve Governor Daniel K. Tarullo, left, speaks with Sen. Tim… (Joshua Roberts/Bloomberg…)

WASHINGTON -- Federal banking regulators have been meeting daily with JPMorgan Chase & Co. executives to reduce the risks in the trading portfolio that led to the loss of more than $2 billion and are conducting a broader inquiry into risk management at the nation's largest bank.

"We are not limiting our inquiry to the particular transactions at issue. We are assessing the adequacy of risk management throughout the bank," Thomas J. Curry, head of the Office of the Comptroller of the Currency, told the Senate Banking Committee on Wednesday. "If corrective action is warranted, we will pursue appropriate informal or formal remedial measures."

Among those measures could be forcing bank executives to return some of their compensation, a process known as clawback, Curry said.

The OCC is the chief regulator of JPMorgan's banking activities and has 65 examiners in the bank's offices. In response to questioning from senators about whether the agency should have caught the risky trades before they resulted in such huge losses, Curry said that was under review.

"We are looking at whether there were gaps in our assessment or risk controls," Curry said.

Although JPMorgan's London-based chief investment office created the complex trading portfolio in 2007, the OCC did not begin focusing on the potential problems until April -- just weeks before Chief Executive Jamie Dimon announced the huge losses.

"Our interest and concern intensified during the month as losses increased within the portfolio, up to the point that the institution itself announced the significance of the losses that occurred," Curry said.

The Federal Reserve, which regulates JPMorgan's larger bank holding company, has been working with the OCC to remove the risk from the portfolio. Curry said the goal was a "soft-landing" for those investments.

Curry said it still was unclear exactly what happened with the portfolio, which was supposed to reduce the credit risks of the bank, not increase them.

"It’s a very complicated investment strategy, both in terms of its size and complexity," Curry said. "We are looking to determine what the actual strategy behind that investment scheme was and also if there were any other factors driving that strategy other than attempting to mitigate known risks in that portfolio."

Sen. Bob Corker (R-Tenn.) said it was not realistic to think banking regulators could prevent complex trades like the ones that caused JPMorgan's loss.

"I think it’s a fool’s errand to think regulators are going to be ahead of bankers," he said.

Curry and other banking regulators said the more than $2-billion loss at no point threatened the solvency of JPMorgan or posed a threat to the financial system. Part of the reason for that was the increased amount of capital held by the bank to offset losses.

Federal Reserve Governor Daniel Tarullo said the most recent stress test of JPMorgan showed that it could withstand a trading loss of at least $28 billion combined with another $56 billion in credit losses.

Committee Chairman Tim Johnson (D-S.D.) said the trading loss showed the need for tough implementation of the Dodd-Frank financial reform law enacted in 2010, and said Wall Street needs stronger regulatory oversight.

"When a bank with JPMorgan’s solid reputation announces that it lost billions of dollars on a large trade reportedly designed to reduce the firm’s risks, it reminds us that no financial institution is immune from bad judgment," Johnson said. "While the JPMorgan trading loss does not appear to have caused systemic problems, it is a clear reminder that Wall Street continues to need better risk management, vigorous oversight and, if the rules are broken, unyielding enforcement."

Dimon will testify about the trading loss before the Senate Banking Committee on June 13, and again the following week before the House Financial Services Committee.


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