Federal agency probing 'breakdowns' at JPMorgan

Last Updated: Wed, Jun 06, 2012 02:15 hrs

A top federal regulator says that starting late last year, JPMorgan Chase changed its strategy aimed at containing risk. His agency is examining whether the bank's policies were inadequate before it suffered a $2 billion-plus trading loss this spring.

The disclosure by Thomas Curry, the U.S. Comptroller of the Currency, comes in his testimony prepared for a hearing Wednesday by a Senate panel. Curry's agency, part of the Treasury Department, oversees about 2,000 national banks and has had about 65 examiners onsite at JPMorgan's offices.

Curry says the agency is conducting an extensive analysis of the JPMorgan loss that "will focus on where breakdowns or failures occurred."

JPMorgan spokesmen declined to comment Tuesday.

The disastrous loss has led to renewed calls for tougher bank regulation from lawmakers and Obama administration officials.

JPMorgan CEO Jamie Dimon acknowledged the loss May 10, weeks after dismissing concerns about the bank's trading as a "tempest in a teapot." He more recently called the loss "a black mark" for the bank.

Dimon has said the loss came from trading in credit derivatives that was designed to hedge against financial risk, not to make a profit for the bank.

Another federal agency, the Commodity Futures Trading Commission, is also investigating JPMorgan's ill-timed bet on complex financial instruments that led to the trading loss. And the Securities and Exchange Commission is reviewing what the bank told investors about its finances and the risks it took weeks before suffering the loss.

Regulators say the loss underscores the need to tighten rules mandated under the 2010 financial overhaul law.

Along with Curry, other regulators testifying at Wednesday's hearing by the Senate Banking Committee include Federal Reserve Gov. Daniel Tarullo, Deputy Treasury Secretary Neal Wolin and Martin Gruenberg, acting chairman of the Federal Deposit Insurance Corp.

Curry says in his prepared testimony that agency examiners met with JPMorgan management in April to discuss the trading, and asked for fuller details.

He says his agency is probing whether risk controls and procedures were properly established and carried out in the bank's execution of the altered strategy.

Managers at the bank changed the strategy and decided to reduce the amount of hedging against potential losses. When the new strategy was used in the first quarter, performance on trading "deviated from expectations, and resulted in substantial losses in the second quarter," he said.

The comptroller's office and the Federal Reserve are conducting reviews in the bank and are sharing information with other regulators, Curry said.

Sen. Sherrod Brown, D-Ohio, a member of the banking panel, is questioning whether the oversight of JPMorgan by the comptroller's office examiners was rigorous enough. He asked Curry in a letter last week how many of the examiners at JPMorgan were stationed in the bank's investment division where the trades took place.

The Fed also had oversight responsibilities for JPMorgan. Senators are expected to closely question the regulators on how closely they monitored the operations of the biggest U.S. bank by assets.

The misstep at JPMorgan has revived debate over the so-called Volcker Rule, which would prevent banks from trading for their own profit. The idea is to protect depositors' money, which is insured by the government. Regulators are finalizing the rule, which is scheduled to take effect in July. But banks will have until July 2014 to meet its requirements.

Dimon has been among the most vocal critics of the Volcker Rule. The big Wall Street banks won an exemption in the rule: It would let them make such trades to hedge not only the risks of individual investments but also the risks of a broader investment portfolio.

Dimon is scheduled to testify at a hearing of the banking committee next Wednesday.

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