April 17, 2024

DealBook: JPMorgan Regulators in Spotlight After Firm’s Huge Loss

Jamie Dimon, chief of JPMorgan Chase.Randy L. Rasmussen/The Oregonian, via Associated PressJamie Dimon, chief of JPMorgan Chase.

WASHINGTON — JPMorgan Chase’s regulators will be in the spotlight here on Wednesday, when they testify before Congress on the bank’s multibillion-dollar trading blunder and its implications for the future of Wall Street regulation.

One of the bank’s primary regulators, the Office of the Comptroller of the Currency, will face particular scrutiny for its oversight of the JPMorgan unit responsible for a trading loss of more than $2 billion.

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JPMorgan disclosed the loss from its chief investment office last month. Just months earlier, top executives from the chief investment office had traveled to Washington to persuade the comptroller that new trading restrictions threatened the future of the bank. The executives argued that the so-called Volcker Rule could prevent the powerful unit from hedging risk throughout the bank.

“This is important to maintaining the safety and soundness of JPMorgan,” Ina R. Drew, then the head of the chief investment office, told comptroller officials, recalled one person who attended the meeting.

Ms. Drew was joined by five other JPMorgan executives who echoed her concerns about the Volcker Rule, saying the regulatory crackdown “could restrict or cast in doubt strategies” that the bank “successfully employed during the financial crisis,” according to a memo summarizing the meeting.

The trading blowup that followed has now become a flash point in the fierce debate over the Volcker Rule, which would ban banks from trading with their own money in an effort to prevent them from placing risky wagers while enjoying government backing.

In their testimony before the Senate Banking Committee, regulators are expected to defend their oversight of JPMorgan, which had significant sway with policy makers after emerging from the 2008 financial crisis relatively unscathed. None of the more than 100 regulators embedded in JPMorgan’s Manhattan headquarters kept daily watch over the chief investment office, people briefed on the matter have said, raising questions about gaps in oversight.

In testimony prepared for Wednesday’s hearing, the comptroller of the currency, Thomas J. Curry, said that his office “has been meeting daily with bank management” on its response to the trading loss and its risk management. As part of its review, he said, the comptroller’s office will examine how employees in the chief investment office were paid and whether JPMorgan will try to claw back some of their compensation. He added that the agency was reviewing how to “improve O.C.C. supervisory approaches.”

The committee will also hear from officials of the Federal Reserve, the Treasury and the Federal Deposit Insurance Corporation. Senator Tim Johnson, the South Dakota Democrat who leads the banking committee, said in a statement that he hoped to hear from regulators “on potential implications of the loss for supervision and Wall Street reform rule-making going forward.”

The testimony from regulators, while significant, is only the opening act for a hotly anticipated hearing next week with JPMorgan’s chief executive, Jamie Dimon. Once considered Washington’s favorite banker, Mr. Dimon is also expected to testify before the House Financial Services Committee.

Federal investigators, meanwhile, are taking a closer look at JPMorgan’s trades. In the wake of announcing that it lost at least $2 billion on positions tied to complex credit derivatives, JPMorgan has received requests for documents and information from an array of federal investigators, including the Commodity Futures Trading Commission and federal prosecutors in Manhattan, according to people briefed on the matter. Federal authorities are examining, among other matters, JPMorgan’s accounting practices and whether the bank’s public disclosures played down the dire state of the trades.

The trades also hit at the heart of the controversy surrounding the Volcker Rule, named after Paul A. Volcker, a former chairman of the Federal Reserve. Under the rule, which regulators expect to complete in coming months, banks may still hedge their risk.

A difficult question remains for regulators: What amounts to hedging? JPMorgan officials say the chief investment office initially hedged the bank’s broad exposure to the markets, until the positions morphed into a proprietary bet.

But some Democratic lawmakers have seized on the loss to illustrate the case for the Volcker Rule, saying that tough rules are needed to rein in the risk-taking on Wall Street.

“The growing losses from JPMorgan’s fiasco underscore the urgent need for a strong Volcker Rule firewall that lays out bright, clear lines between banks and hedge funds,” said Senator Jeff Merkley, an Oregon Democrat and a member of the Senate Banking Committee who has championed the rule. “I’m hopeful that the O.C.C. and others will listen to the warning sirens JPMorgan has sounded and implement a loophole-free Volcker Rule without delay.”

Amid the scrutiny from Washington, other big banks are moving to stem the fallout from JPMorgan’s mistake. In a recent meeting with regulators, one Wall Street official was told it was too soon to tell whether JPMorgan’s trading would affect the outcome of the Volcker Rule. The regulators acknowledged, however, that the episode could ultimately “reset the table” for the rule-writing process.

JPMorgan has not let up, either. One day after the bank disclosed its losses, a team of JPMorgan officials met with a member of the Commodity Futures Trading Commission to discuss the Volcker Rule and whether other new rules would apply to American banks operating overseas. The meeting, which was scheduled before the announcement of the trading loss and was held at the bank’s New York offices, began with a description of what went wrong in the chief investment office, a person who attended the meeting said.

The bank, which runs one of the best-financed lobbying operations within the commercial banking industry, second this year only to Wells Fargo, noted that it supported many new rules in the Dodd-Frank financial overhaul law. In the company’s annual report, Mr. Dimon wrote: “If the intent of the Volcker Rule was to eliminate pure proprietary trading and to ensure that market making is done in a way that won’t jeopardize a financial institution, we agree.”

The bank has been concerned about the scope of the hedging exemptions. Through hedging, the chief investment office deftly steered the bank through the 2008 financial crisis. JPMorgan did not record a losing quarter at a time when the rest of Wall Street nearly collapsed, a fact that gave the investment unit credibility on Wall Street and in Washington.

When Ms. Drew and other executives met with the comptroller officials in February, they pointed to the unit’s success during the crisis. The executives arrived at the comptroller’s Washington offices after eating lunch at a local Italian restaurant — and attending another Volcker-related meeting at the Federal Reserve.

At the end of the trip, some JPMorgan officials remarked that the comptroller officials were particularly familiar with the issues facing the investment unit.

“They get it,” one person remarked.

Article source: http://dealbook.nytimes.com/2012/06/05/jpmorgan-regulators-in-spotlight-after-firms-huge-loss/?partner=rss&emc=rss

Economix: When Regulators Side With the Industries They Regulate

Today's Economist

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

The Office of the Comptroller of the Currency is one the most important bank regulators in the United States — an independent agency within the Treasury Department that is responsible for “national banks” (for more on who regulates what in the United States, see this primer).

Over the last decade, the Office of the Comptroller of the Currency repeatedly demonstrated that it was very much on the side of banks, for example with regard to fending off attempts to impose more consumer protection. (James Kwak and I covered this in “13 Bankers,” and those details have not been disputed by the agency or anyone taking its side.)

After suffering some serious and well-deserved loss of prestige during the financial crisis of 2007-9, the comptroller’s office survived the Dodd-Frank reform legislation and is now back to pushing the same agenda as before. In its view and that of its senior staff — including key people who remain from before the crisis — the “safety and soundness” of banks requires, above all, not a lot of protection for consumers.

This is a mistaken, anachronistic and dangerous belief.

Probably the most egregious mistake made by the Office of the Comptroller of the Currency during the subprime boom was to push back against state officials who wanted to curtail malpractice in housing loans, including predatory lending.

The comptroller’s office ultimately lost that case before the Supreme Court, but its delaying action meant that an important potential brake on abuse and excess was not available — which contributed to the worst business practices that took hold in 2006 and 2007 (see this nice summary or Eliot Spitzer’s account).

Naturally, post-debacle the Office of the Comptroller of the Currency talks an ostensibly better game but, as Joe Nocera put it, “it sure looks as though the country’s top bank regulator is back to its old tricks.” In discussions regarding a potential settlement on mortgage foreclosures — and how they have been handled — the comptroller’s office has supported an outcome that is more favorable to the banks (see the Nocera column for more details).

Now it is again insisting that federal regulation pre-empts the ability of states to regulate in a way that would protect consumers.

In a letter on May 12 to Senator Thomas Carper, Democrat of Delaware, the agency asserted that its pre-emption regulations are consistent with the Dodd-Frank Act (see this interpretation by Sidley Austin, a law firm, which I draw on). There is a lot of legalese in the letter but the basic issue is simple — are states allowed to protect their consumers vis-à-vis national banks, or do they have to rely on the Office of the Comptroller of the Currency, despite its weak track record?

The comptroller’s office is clear — the states are pre-empted, meaning that national comptroller regulations will always overrule them on the issues that matter. (As a technical matter, the issue comes down to what is known as visitation: whether state-level authorities can gain access to bank documents if the bank or the comptroller’s office has not already determined that there is a problem.)

The American Bankers Association was, not surprisingly, delighted: “The O.C.C.’s action helps clarify the rules of the road for national banks and how they serve their customers.”

Richard K. Davis
, chief executive of U.S. Bancorp and then chairman of the Financial Services Roundtable, a powerful lobbying group, emphasized the importance of the pre-emption issue to national banks in March 2010, during the Dodd-Frank financial reform debate in the Senate: “If we had one thing to fight for, it would be to protect pre-emption.”

It is hard to know which would seem more incredible to a second grader: that we left in place the same agency that was responsible for a significant part of past misbehavior, or that this agency seems determined to continue with the same philosophy and policies.

The problem is not that the Office of the Comptroller of the Currency sees its primary duty as the “safety and soundness” of the financial system. Rather, the danger to the public arises because it has consistently taken the view that the best way to protect banks — and keep them out of financial trouble — is to allow them to be harsh with consumers.

This is worse than short-sighted — it completely ignores all externalities, such as how business practices and ethics evolve, and it pays no attention to even the most basic macroeconomic dynamics, such as the fact that we have a credit cycle during which we should expect lenders to “race to the bottom” in terms of standards.

The Office of the Comptroller of the Currency should have been abolished by Dodd-Frank. Unfortunately, it is too late for Congress to revisit this issue. President Obama should at the very least nominate a new head of the Office of the Comptroller of the Currency — the job has been open since August of last year — and a serious reformer could make a great deal of difference.

Under its current leadership and with its current approach, the Office of the Comptroller of the Currency is putting our financial system into harm’s way. The lessons of 2007-9 have been completely lost on it. As Talleyrand said of the Bourbons, “They have learned nothing and forgotten nothing.”

Article source: http://feeds.nytimes.com/click.phdo?i=63ce5295d71fcdae7b30ca2e7d8b8e40