JPMorgan Chase & Co. Chief Executive Jamie Dimon told lawmakers that he could not defend how a hedging strategy in a London office morphed into a multibillion-dollar trading loss, but he still took swipes at regulatory reforms that he said fail to make sense.
Dimon, appearing before the Senate Banking Committee on Wednesday, apologized for the self-inflicted loss that he said started as a genuine hedge that would make the firm a lot of money if a credit crisis hit.
Lawmakers have questioned whether the trades, that have yielded more than $2 billion in losses so far, were truly a hedge or a speculative bet that was hidden from shareholders and regulators.
"This particular synthetic credit portfolio was intended to earn a lot of revenue if there was a crisis. I consider that a hedge," Dimon said. "What it morphed into, I will not try to defend."
Dimon also said regulators were not to blame for not detecting that the failed hedging strategy, that started in January, was blowing up. He said the bank's senior management missed it as well.
But he did say that the 2010 Dodd-Frank financial oversight law, put in place to rein in banks' risk-taking after the 2007-2009 financial crisis, created a bewildering new regulatory system.
"What we set up is a system with more and more regulators, we don't know actually know who has jurisdiction over many of the issues we are dealing with anymore," Dimon said. "I would prefer a simple, clean, strong regulatory system, with real intelligent design, but that's not what we did."
Dimon, known for smoothly navigating JPMorgan through the financial crisis, was largely treated cordially by the senators, who pressed him on why the losses occurred and what the bank is doing to make sure similar mistakes don't happen again.
He got less polite treatment from a handful of protesters who yelled out "Jamie Dimon is a crook" and "Stop foreclosures now" before being escorted out of the cavernous hearing room.
Senators did not immediately demand that Dimon give an update on the losses in the portfolio, which JPMorgan is still unwinding. The bank is expected to give an update to shareholders when it reports its second-quarter results in mid-July.
Dimon did say that the bank's "fortress balance sheet remains intact" and that he expects the second quarter to be solidly profitable.
Democratic Senator Robert Menendez seized upon Dimon's comments and reminded him that JPMorgan received $25 billion in federal support during the financial crisis.
"I think about the fortress balance sheet you talked about and I would like to remind you that the fortress balance sheet has a moat that was dug by taxpayers... So it seems to be that the American people are a big part of making your bank healthy," Menendez said.
Democratic Senator Jeff Merkley also pointedly reminded Dimon that JPMorgan, now the nation's largest bank by assets, received Troubled Asset Relief Program assistance during the financial crisis, which provoked a testy response from Dimon.
"I think you were misinformed. I think that misinformation is leading to a lot of the problems we are having today. JPMorgan took TARP because it was asked to by the Secretary of the Treasury of the United States of America," Dimon said.
Dimon revealed during a surprise conference call last month that a hedging strategy in its London office had gone awry, producing at least $2 billion, and possibly $3 billion, in trading losses.
That was after Dimon in April dismissed as a "tempest in a teapot" news reports that a trader dubbed the "London whale" in that office had amassed an outsized position that prompted hedge funds to bet against it.
Dimon said he made that statement after attorneys and others told him they thought any problems in the London Chief Investment Office were an isolated, small issue.
"When I made that statement, I was dead wrong," Dimon said.
He also addressed reports that JPMorgan changed its risk model in a way that disguised that the CIO had doubled its risk-taking.
Dimon said the new model that was put in place in January allowed the CIO unit to take more risk, and it contributed to the trading debacle. He said once the bank realized the new model did not more accurately reflect reality, it went back to the old model.
"We don't, as of today, believe it was done for nefarious purposes.
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