Democrats Seize on JPMorgan Loss to Push for More Regulation

Monday, 14 May 2012 11:27 AM

 

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JPMorgan's large trading losses affirm the need for Wall Street oversight, the White House said on Monday, declining to comment on the specifics of the case while the Securities and Exchange Commission investigates it.

"This event only reinforces why it was so important to pass Wall Street reform, why it is so important to fully implement Wall Street reform," White House spokesman Jay Carney told reporters on Air Force One.

He said President Barack Obama "fought very hard against Republicans and Wall Street lobbyists" to increase oversight of U.S. banks and investment houses after the financial crisis and said it was critical to keep the laws from being watered down or rendered ineffective. "We can't prevent bad decisions from being made on Wall Street," Carney said.

Carney joined a growing chorus of liberal pundits and politicians pushing for more stringent financial regulations in the wake of the JPMorgan debacle. The calls occurred even as details were still emerging about the trade, or whether it seriously had damaged a bank that is in the business of taking risks to reward its shareholders.

On Monday, Massachusetts Senate candidate Elizabeth Warren repeated her call for the bank's chief executive, Jamie Dimon, to step down from his role as a top official at the New York Federal Reserve Bank, which oversees the nation's largest banks.

"We have to say as a country, no, the banks can not regulate themselves," Warren said in an interview with "CBS This Morning," adding "what has happened here is not just about JPMorgan Chase."

"They are financial institutions that run the risk of taking down everyone's job, run the risk of taking down everyone's pension, run the risk of taking down the entire economy and that means it is appropriate to have some government oversight," she said.

Rep. Barney Frank, D-Mass., said Sunday on ABC's “This Week” that he hopes the still-forming Volcker Rule would prevent the type of behavior that led to a $2 billion trading loss announced last week.

"I hope that the final rule will prevent this,” said Frank, an author of the Dodd-Frank financial reform bill. “The Volcker Rule is still being formulated.”

The Volcker Rule, as envisioned, would place limits on certain speculative proprietary trading.

New York Times columnist Paul Krugman, a frequent critic of the Obama administration from the left, also weighed in on Sunday.

"Just to be clear, businessmen are human — although the lords of finance have a tendency to forget that — and they make money-losing mistakes all the time," Krugman wrote. "That in itself is no reason for the government to get involved.

"But banks are special, because the risks they take are borne, in large part, by taxpayers and the economy as a whole. And what JPMorgan has just demonstrated is that even supposedly smart bankers must be sharply limited in the kinds of risk they’re allowed to take on."

The embattled banking giant sacrificed investment chief Ina Drew on Monday in response to trading losses that could reach $3 billion or more and which have tainted the reputation of the bank's high profile chief executive Jamie Dimon.

The biggest bank in the United States by assets said Drew, its New York-based chief investment officer and one of its highest-paid executives, would retire. The statement confirmed what sources close to the matter had previously told Reuters, that Drew would depart the firm.

It also said Matt Zames would take Drew's position, while Daniel Pinto, currently co-head of global fixed income with Zames, would become sole head of the group.

Mike Cavanagh, CEO of the Treasury & Securities Services (TSS) group, will lead a team of executives overseeing and co-ordinating the group's response to the recent losses.

The statement made no mention of two of Drew's subordinates who were involved with the costly derivatives trades, London-based Achilles Macris and Javier Martin-Artajo, who the sources had also said were expected to leave.

Neither could be reached for comment earlier on Monday. A woman who answered the door at Macris's London apartment in a grandiose 19th century mansion block overlooking Westminster Cathedral said he was at work.

JPMorgan said Cavanagh "will ensure that best practices and lessons learned are carried across the firm."

The departure of Drew after 30 years at JPMorgan comes after the unit she ran, known as the Chief Investment Office (CIO), mismanaged a portfolio of derivatives tied to the creditworthiness of bonds, according to bank executives.

The portfolio included layers of instruments used in hedging that became too complicated to work and too big to quickly unwind in the esoteric, thinly traded market.

One hedge fund manager who previously ran a proprietary (or prop) trading book at JPMorgan said the bank's public commitments to trim balance sheet risk were at odds with its network of trading silos, who were making bets independently with only a handful of the bank's most senior executives notified of their vast, complex exposures.

"This (CIO) group was completely separate, completely distinct from the prop trading unit. We had no clue about their prop book and they would have no clue about ours for that matter," the manager said.

"They were all totally independent. All the activities were reported to New York and they ran the allocation of capital to each and every strategy ... those decisions were definitely not taken in London. These things were very, very opaque. Every bank is, whether you're Goldman, Morgan (Stanley) or JP."

PAST PERFORMANCE

Drew had repeatedly offered to resign in recent weeks after the magnitude of the debacle became clear, according to one of the sources, but the resignation was not immediately accepted because of her past performance at the bank.

Until the loss was disclosed late on Thursday, Drew was considered by some market participants as one of the best managers of balance sheet risks. She earned more than $15 million in each of the last two years.

"Ina is an amazing investor," said a money manager who knows Drew, but who declined to be quoted by name. "She's done a really good job over a lot of years. But they only remember your last trade."

Departures had been on the cards in the wake of the trading losses, though in disclosing the losses on Thursday, CEO Jamie Dimon said only that the bank was continuing to investigate and would take disciplinary action with those involved.

Dimon said the bank's losses could reach $3 billion or more as it unwinds the positions in coming months.

The losses have marred JPMorgan's reputation for risk management, prompted a downgrade in its credit ratings and thrown an unflattering spotlight on Dimon, a critic of increased regulation who had become one of America's best-known bankers.

On Sunday, Dimon's reputation was tarnished when the New York Times reported remarks he made recently at a dinner party in Dallas. Dimon called arguments about too-big-to-fail banks - arguments made by former Federal Reserve chief Paul Volcker and Richard Fisher, president of the Federal Reserve Bank of Dallas - "infantile" and "nonfactual," according to the Times.

STOP THE CYCLE

Dimon is himself a board member of the Federal Reserve Bank of New York. Elizabeth Warren called for him to resign that post on Sunday. Warren, who chaired the congressional committee that oversaw the bank bailout program known as TARP and is running for the Senate, said he should not be on the panel advising the Fed on bank management and oversight.

"We need to stop the cycle of bankers taking on risky activities, getting bailed out by the taxpayers, then using their army of lobbyists to water down regulations," Warren said.

Dimon has struck a more contrite pose since revealing the losses. In an interview that aired on Sunday, he told NBC's "Meet the Press" the bank's handling and oversight of the derivative portfolio was "sloppy" and "stupid" and that executives had reacted badly to warnings last month that the bank had large losses in derivatives trading.

He said executives were "completely wrong" in public statements they made in April after being challenged over the trades in news reports. "We got very defensive. And people started justifying everything we did," Dimon said. "We told you something that was completely wrong a mere four weeks ago."

The loss, and Dimon's failure to heed the warnings, have become major embarrassments and have given regulators new arguments for tightening controls on big banks and requiring them to hold more capital to cushion possible losses.

Issues relating to the bank's internal controls were raised in 2010 when it was fined 33 million pounds by Britain's Financial Services Authority for failing to segregate client month from its own in the UK - an incident that also led to its auditor PwC being fined 1.4 mln by its professional body for failing to spot the transgression.



© 2014 Thomson/Reuters. All rights reserved.

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