Gary Cameron/ReutersIna Drew and Peter Weiland swear in before testifying at a Senate inquiry on JPMorgan’s trading loss.
WASHINGTON — A top JPMorgan Chase executive struggled to defend his actions on Friday as lawmakers scrutinized the bank’s multibillion-dollar trading loss.
For nearly an hour, the executive, Douglas L. Braunstein, was berated for playing down JPMorgan’s risky bets to investors and regulators on a conference call in April, just weeks before the bank disclosed the costly blowup.
“You give this very glowing call,” said Senator Carl Levin, Democrat of Michigan, “instead of telling them what you knew” — that the portfolio “had been losing money and violating risk limits.”
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Mr. Braunstein defended his statements in the conference call, saying they were the most “accurate” depiction based on the information at the time.
“You thought that was a balanced presentation?” Mr. Levin asked incredulously, peering over his glasses.
The long, and often tense, Congressional hearing on Friday put JPMorgan in a tough position. While the investment bank has tried to distance itself from the trading debacle, the hearing, which follows a nine-month inquiry, is renewing the pressure on JPMorgan and its influential chief executive, Jamie Dimon.
During roughly four hours of testimony on Friday, Mr. Levin and a handful of colleagues questioned current and former executives about the bank’s risk management, oversight policies and pricing methods. The lawmakers took aim at JPMorgan for misleading investors and regulators about the disastrous bet, building off a scathing, 300-page Congressional report released on Thursday.
The executives floundered, at times, as they tried to counter the claims. They described efforts to reduce risk as the losses swelled, but indicated that such moves had been “undermined” by traders who deliberately undervalued bets to disguise the growing losses. Such testimony could provide fresh ammunition for the Securities and Exchange Commission, which is investigating the trading loss.
“We have made regrettable errors and overhauled our risk policies to correct these mistakes,” a bank spokeswoman said, “but senior JPMorgan executives always provided information to regulators and the public that they believed to be accurate.”
While Mr. Dimon was not present at the hearing, he was referred to repeatedly as lawmakers explored how JPMorgan had resisted regulators’ requests for information.
One episode emerged as emblematic: for a brief period in 2011, regulators stopped receiving profit and loss reports about the investment bank. Mr. Dimon, the executives explained, had ordered the information halted because of broad security concerns.
Senator John McCain, Republican of Arizona, challenged that decision. “Do we live in a world,” he asked, where “we just decide, well, because we’re concerned about something, we’re not going to comply with regulations?”
In an especially contentious exchange, Mr. Braunstein, a vice chairman of JPMorgan and its former chief financial officer, faced off with Mr. Levin over issues of disclosure. The senator questioned Mr. Braunstein’s statements on the April conference call, which indicated that the trading positions were made with the blessing of “risk management at the firmwide level” and were “transparent to regulators.” Those statements, Mr. Levin argued, painted an “inaccurate impression” about the nature of the trades and their risks.
Citing the bank’s internal testing of the portfolio at the time, Mr. Levin told Mr. Braunstein the characterization of the trades as a hedge was false. The testing, he said, had shown that the trades would not defray losses in the same manner as a hedge.
After unrelenting questioning, Mr. Braunstein conceded that, in contrast to his statements in April, regulators did not receive granular information about the trades “on a regular and recurring basis.” Even so, he maintained that his earlier statements were accurate based on the information at the time.
For Ina Drew, who resigned in May as the head of JPMorgan’s chief investment office, the group at the center of the problems, the hearing was the first opportunity to publicly defend her role in the troubled trades. While Ms. Drew acknowledged that “things went terribly wrong,” she directed virtually all of the blame at lower-level traders in London and other subordinates.
She returned to this defense throughout the hearing, deflecting culpability by faulting inaccurate information. In one bruising exchange, she was forced to explain why the bank stopped giving regulators profit and loss reports for the chief investment office during a critical period last year.
Ms. Drew responded that she had had no idea that the reports were not being provided to regulators. “If I had known,” she said, “I would have considered it the wrong thing to do.”
The senators also asked Ms. Drew why the bank had assured regulators in January 2012 that it was slashing the size of its positions when, in fact, it was expanding them. Ms. Drew maintained that there had been no deliberate duplicity. She said she had not been aware that the traders were increasing their bets.
The lawmakers pressed her similarly about why JPMorgan told regulators in April that the trading loss was roughly $580 million, when internal projections put the figure at more than $700 million. Ms. Drew reiterated that she had acted based on information that was correct to “the best of her knowledge.”
Such blame shifting prompted criticism by Mr. McCain, the subcommittee’s top Republican. “The traders seemed to have more responsibility and authority than the higher-up executives,” he said.
While Ms. Drew and Mr. Braunstein weathered the fiercest questioning, none of the executives were spared. Even Michael J. Cavanagh, co-head of the corporate and investment bank, who has emerged as a leading contender to succeed Mr. Dimon, came under fire.
Mr. Levin pushed Mr. Cavanagh to admit that the bank had altered its method for pricing trades to minimize losses. Mr. Cavanagh stood firm, arguing that the valuations were fair.
But Mr. Levin persisted, asking, “How do you possibly justify your process?” Was it a “coincidence,” he asked, that the models shifted just as losses on the trades were ballooning? At one point, he reminded Mr. Cavanagh that he was under oath.
He excoriated Peter Weiland, who used to be in charge of market risk for the chief investment unit, for censuring a JPMorgan analyst over an e-mail that outlined strategies for tweaking risk modeling. Mr. Levin pressed Mr. Weiland on his resistance to using e-mail, suggesting that the executive was trying to avoid creating a paper trail.
“Why hide it?” Mr. Levin asked. If JPMorgan’s dealings were appropriate, why shy away “from putting it in writing?”
Mr. Weiland responded that his objective was to prevent anyone from “misconstruing” the bank’s intentions.
Article source: http://dealbook.nytimes.com/2013/03/15/jpmorgan-executives-face-withering-questions-at-senate-hearing/?partner=rss&emc=rss
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