This second of three articles on the daylong hearing of the Senate Permanent Subcommittee on Investigations will review some of the major issues raised as the senators acted and interacted with members of the cast introduced in the first article.
Before the full extent of the roughly $6.2 billion in losses by JPMorgan’s London Whale was known, CEO Jamie Dimon dismissed the affair as a tempest in a teapot. Similarly, this hearing may be likened to a Shakespearean play that is “full of sound and fury, signifying nothing,” and it can remind readers of the scene from Casablanca where Capt. Reynaud is “shocked, shocked! to find that there is gambling going on in this establishment.”
Nevertheless, this scandal and the subsequent congressional inquiries take their place in the lore of the ongoing financial crisis that dates back more than 40 years and even Treasury Secretary Tim Geithner admitted to Congress is bound to flare up again.
In fact, my working hypothesis is that the country remains stuck in the 2008 episode and that the embedded losses have reached the neighborhood of $15 trillion, a figure that was confirmed for me by an official of Treasury’s Orwellian-named Office of Financial Stability and developed independently by the Federal Reserve Bank of Dallas.
The format Subcommittee Chairman Carl Levin, D-Mich., followed is one that he developed, not to say perfected, in previous hearings, such as the hearing on the mortgage trades by Goldman Sachs that gave rise to an amendment to the Dodd-Frank Act known as the Volcker rule, which is supposed to curb the ability of banks to conduct trading activities with insured deposits but has yet to be implemented, largely due to determined opposition by “too big to fail” banks such as JPMorgan Chase.
One of the recommendations Levin offered as part of the Subcommittee’s report on the Whale trade is that this rule finally be issued by the regulators, and he elicited a promise from Comptroller of the Currency Thomas Curry to move on it, but it will be very difficult, because the banking lobby succeeded in including in the rule language exceptions that permit hedging and market making. The industry complains that the proposed regulations are 300 pages long, but this is due largely to the very exceptions that threaten to render the rule ineffective.
Levin’s practice is to examine exhaustively a book full of exhibits of charts, emails and phone conversations to document the excesses of JPMorgan’s traders, along with the inadequate responses of the so-called “prudential regulator” of national banks, the Office of the Comptroller of the Currency (OCC), now run, as is often the case, by a former state banking superintendent, in this case Curry. Curry served for a time as a member of the board of the FDIC, and ironically, as Comptroller, he will continue to have a seat on that board. In fairness to Curry, he did not assume the OCC post until last spring, just as the JPMorgan scandal was breaking.
The documents show that as the scope of the Whale trade was building through the fall of 2011 and the spring of 2012, the bank’s London-based chief investment office breached risk controls, first a few times and later hundreds of times.
So they must not really be risk controls, right? JPMorgan’s managers changed the procedure for calculating the losses so as to understate them, and they lied to investors in an April 2012 earnings call by telling analysts that the activities of the CIO were fully transparent to regulators when in fact the reports had been cut off and the OCC wasn’t following the Whale anyway.
OCC witnesses admitted that they have no excuse for failing to monitor the breaches of risk controls and the mounting losses, but readers can hardly be reassured by the reasons they gave for this oversight. Scott Waterhouse, the OCC’s Examiner-in-Charge for JPMorgan, said the OCC missed the Whale because it was focusing on activities it considered riskier taking place elsewhere in the bank, especially in the investment bank of JPMorgan.
The final article in this series will look at the implications of the hearings for policy and why Levin, despite his diligence and good intentions, has once again missed the point of a scandal involving one of the “too big to fail” banks.
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