March 23, 2023

DealBook: Lawmakers Clash on Regulation at JPMorgan Hearing

Jamie Dimon and his regulators visited Capitol Hill on Tuesday for another round of scrutiny for a recent multibillion-dollar trading loss at JPMorgan Chase.

But before Mr. Dimon faced the firing line, lawmakers sparred with each other.

“I am a little surprised by all of the hemming and hawing by my colleagues on the other side of aisle over a private business losing private money when the federal government continues to lose billions of taxpayer dollars every day,” Representative Scott Garrett, Republican of New Jersey, said in an opening statement for the hearing before the House Financial Services Committee.

Michael Capuano, Democrat of Massachusetts, hurled blame at Republicans for introducing legislation to weaken new rules for Wall Street. In a tirade against Republican lawmakers, he argued that JPMorgan’s trading blowup raises broader questions about the safety of Wall Street.

“I’m not outraged by this particular loss,” he said, pushing regulators to say whether other big banks could take on similarly risky bets.

The hearing on Tuesday was the final in a string of inquiries planned for JPMorgan’s loss, which has grown to at least $3 billion. It was also the second opportunity for lawmakers to quiz Mr. Dimon on the losses, which were tied to a soured bet on credit derivatives.

A panel of regulators served as the opening act. In the opening panel, the House committee heard testimony from officials at five federal agencies, including the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and Commodity Futures Trading Commission.

But the comptroller of the currency, Thomas J. Curry, and the general counsel of the Federal Reserve, Scott Alvarez, faced the toughest inquiries. The regulators are under fire for failing to catch the risky trades.

Under questioning from Representative Randy Neugebauer, Republican of Texas, each of the five regulators acknowledged that their agencies were unaware of the losses until media reports emerged in early April.

“I’m wondering how this was missed,” said Representative Shelley Moore Capito, Republican of West Virginia. “Even with the matrix of communication, no one was catching it. Is the communication really working?”

In reply, Mr. Curry explained that “we were initially relying on the information available to the bank.”

Mr. Alzarez concurred. “We have to rely on information we get from the organization itself,” he said. “If that’s flawed,” he added, then regulators will have a problem.

In questioning, the House panel focused mainly a series of new rules that would rein in Wall Street risk-taking. The hearing often devolved into partisan squabbles over the rules, which stem from the Dodd-Frank financial regulatory law.

Democrats who support the overhaul highlighted how new oversight would rein in the risky derivatives trading that prompted the blowup at JPMorgan.

“The question is: Does this not argue against the proposal to deregulate derivatives?” said Representative Barney Frank, the Massachusetts Democrat who co-authored the law. “To me, this is not a hearing about JPMorgan Chase. They are an example of the larger issues.”

While Mr. Dimon has argued that the trading losses have only nicked the bank’s “fortress balance sheet,” Mr. Frank noted that other banks were not healthy. “Some have a picket fence balance sheet or a chain link balance sheet,” said Mr. Frank, the ranking Democrat on the committee.

Mr. Frank and Republicans traded barbs over Dodd-Frank throughout the hearing, with some Republicans blaming the law for allowing trading losses like that at JPMorgan.

“You can see we’re not ready to break into a ‘Kumbaya’,” Spencer Bachus, a Texas Republican and the committee’s chairman, told the regulators in a moment of levity. “Welcome to the serenity of the financial services committee.”

Article source:

Credit Agency Tells Congress a Default Is Unlikely

The official, Deven Sharma, president of Standard Poor’s, added that deficit-reduction plans currently being considered in Congress could be enough to allow the United States to keep its triple-A credit rating.

But Mr. Sharma declined to specify what level of cuts would be needed to maintain the top-level credit rating.

He said news articles last week “misquoted” a July 14 S. P. report as saying that Congress would need to achieve at least $4 trillion in spending cuts over 10 years to maintain the country’s triple-A rating.

A cut of $4 trillion, a number that is cited in the S. P. report and that has been the focus of concern on Wall Street over the last two weeks, was “within the threshold” of what S. P. thinks is necessary, Mr. Sharma said. But he declined to draw a bright line, saying only that “some of the plans” currently being considered on Capitol Hill “could bring the U.S. debt burden and the deficit level in the range of a threshold for a triple-A rating.”

The remarks came at a hearing by the Oversight and Investigations Subcommittee of the House Financial Services Committee. The hearing was scheduled to examine the performance of the major credit ratings agencies since changes in policies affecting the companies were instituted as part of the Dodd-Frank Act.

The credit ratings agencies were sharply criticized after the financial crisis for offering top-level ratings on billions of dollars of mortgage-backed securities that later lost substantial value when the housing market collapsed.

But the hearing quickly turned to the issue of what would happen if the nation were unable to meet its obligations because Congress did not raise the federal debt ceiling.

Pressed by Representative Scott Garrett, a New Jersey Republican, on whether the deficit-reduction plans put forth by the Obama administration or Senate Democrats would be sufficient to maintain the country’s credit rating, both Mr. Sharma and Michael Rowan, global managing director in the commercial group of Moody’s Investors Service, declined to comment.

Banking regulators who testified at the hearing were less hesitant to give their views about how a downgrade of the country’s credit rating would affect the financial markets and banks.

David K. Wilson, senior deputy comptroller and chief national bank examiner in the Office of the Comptroller of the Currency, said that members of Congress were “right to worry” about the possible unknown effects of a downgrade.

At the least, he said, borrowers would have to increase the amount of Treasury securities they offered as margin, or collateral for loans. A downgrade of the country’s credit rating would probably also be followed by lower ratings on state and local government debt, he said.

Any difficulties would be “manageable in the short term” because even a downgrade to AA from the current AAA rating would still mean that Treasuries were “very high-quality securities,” Mr. Wilson said. The long-term effects of a ratings downgrade, he added, were unknown.

Asked by Representative Brad Miller, a Democrat from North Carolina, if he were “right to worry that this could be real bad if our debt were downgraded,” Mr. Wilson replied, “You know, it’s hard to measure, but I think you’re right to worry. I mean, it could happen. It could be a big thing.”

Representatives from the Federal Reserve, the Securities and Exchange Commission and the comptroller’s office all said they believed that the credit rating agencies were doing a better job of accurately assessing risks in their credit ratings now than they were before the financial crisis.

However, Mark E. Van Der Weide, senior associate director in the division of banking supervision and regulation at the Federal Reserve, said “the crucial thing is that no matter how good we think they’re doing, we not over-rely on them — not the government, not the private sector.”

Republican members of the panel also asked Mr. Sharma whether Treasury Department officials had pressured the company not to downgrade the United States credit rating.

In an April 27 letter to the Treasury secretary, Timothy F. Geithner, Representative Randy Neugebauer, a Texas Republican who is chairman of the oversight subcommittee, questioned the appropriateness of the government protesting ratings changes “given its regulatory and oversight role over the agencies.”

In a June 13 response, Mr. Geithner said the department had “entirely appropriate” contacts during the ratings review process with Standard Poor’s, which, he noted, “we do not regulate or oversee.”

Mr. Sharma told the committee that its contacts with Treasury, which included the sharing with the department a draft news release about S. P.’s decision to put the United States’ credit ratings under review for a possible downgrade before the move was announced to the public, were “standard operating process.”

This article has been revised to reflect the following correction:

Correction: July 27, 2011

An earlier version of this article incorrectly said that officials from two credit rating agencies said the United States was unlikely to default.

Article source: