JPMorgan Trading Losses of $6.2 Billion: Senate Report Reveals JPM Disregarded Warning Signs and Deceived Regulators

By Gretchen Wegrich

The debate in Washington over regulating Wall Street received some fuel for the fire yesterday with the Senate’s disclosure that JPMorgan Chase racked up $6.2 billion in losses last year while ignoring internal controls and manipulating documents. JPM’s chief executive, Jamie Dimon, is also indicted in the Senate Report for briefly withholding information from regulators last year.

In an internal email from May 2012, a regulator called JPMorgan’s high-risk trading strategies a “make believe voodoo magic ‘composite hedge.’”

Along with Wells Fargo and Bank of America, JPMorgan is one of the big three financial institutions that offer mortgage loans to consumers.

JPM’s costly trading blunder has taken down top executives and placed the bank under investigation by authorities. The details of JPM’s financial misconduct were disclosed by a 300-page report released just a day before a Senate subcommittee will question bank executives and regulators in a hearing.

The report reveals several embarrassing alleged incidents that illustrate a larger failing; after surviving the financial crisis more intact than its competitors, JPMorgan behaved as if it were immune to regulation. In one incident, an overly-egoistical executive screamed at examiners and told them they were “stupid.” In another report, chief executive Jamie Dimon withheld facts about JPM’s daily losses from regulators, then “raised his voice in anger” at the unfortunate deputy who later disclosed the information. 

The senate report reveals how JPMorgan managers “pressured” traders to report losses at a fraction of their real value –to the tune of $660 million –and then deceived authorities by downplaying these losses.

The trader at the center of the bank’s losses, Bruno Iksil, also known as the London Whale, told a colleague last year that the bank’s loss estimations were growing increasingly “idiotic.” A phone transcript also reveals Iksil saying, “I can’t keep this going,” and questioning where his boss would finally stop. 

The senate report may boost support for new limits on Wall Street trading. The Senate subcommittee is expected to highlight JPMorgan’s abuse of financial power as an example of how desperate the financial market is for increased transparency and regulation.

“Our investigation opens a window into the hidden world of high stakes derivatives trading by a major bank,” commented Senator Carl Levin, D-Michigan, a leader of the Permanent Subcommittee on Investigations, which is behind the incriminating report.

Levin criticized the bank’s strategy, drawing parallels between a “runaway train that barreled through every risk warning.”

He also noted that JPMorgan’s actions spotlighted gaping vulnerabilities in the financial system.

A spokeswoman for JPMorgan spoke on behalf of the company, saying, “While we have repeatedly acknowledged significant mistakes, our senior management acted in good faith and never had any intent to mislead anyone.”

As its traders created increasingly complicated financial bets, JPMorgan disregarded its own risk alarms, found the subcommittee. Between January and April 2012, the bank’s chief investment office breached five of its critical risk controls more than 330 times.

Following these red flag warnings, the JPM changed its value-at-risk measures to enable traders to continue making outsize financial wagers, reported the subcommittee. Although Mr. Dimon denies remembering authorizing any changes to the internal alarm system, he approved the changes in a January 2012 email in which he wrote, “I approve.”

Regulators also failed to act in response to the risk taking, which the Senate report shows they were well-informed about. A spokesman for the comptroller’s office admitted “there were shortcomings in the O.C.C. supervision leading up to and responding to the unfolding events,” with JPMorgan’s chief investment office. However, he added, as more information about JPM’s financial risk-taking was exposed, the agency’s response was strengthened and a multidirectional review was initiated into both JPM and the OCC’s actions.

The report contains further incriminating details about JPMorgan’s misconduct, including incomplete and deceptive reports made to investors, and instances in which JPMorgan lied to regulators about future changes to the bank’s investment policies. JPMorgan employees also reportedly balked at requests by regulators to provide more information about their investment practices.

A spokesman for the comptroller reported that the agency took its investigation of JPMorgan with the utmost seriousness, issuing a cease and desist order in January. The order was intended to “address deficiencies identified by our examiners as they relate to derivatives trading activities conducted on behalf of the bank by the chief investment office.”

Gretchen Wegrich

Gretchen Wegrich is an editor at Lender411. She specializes in mortgage basics, personal finance and green living. She graduated with a bachelor's degree in writing from University of California, San Diego and previously worked at the Santa Cruz Sentinel. Contact her at gretchen@lender411com.