March 31, 2023

DealBook Column: Questions to Ask Mr. Dimon

Jamie Dimon, chief of JPMorgan Chase.Mario Tama/Getty ImagesJamie Dimon, chief of JPMorgan Chase.

Jamie Dimon’s trip to Capitol Hill next week to explain his bank’s multibillion-dollar trading debacle could quickly devolve into Washington Gotcha Theater.

But it shouldn’t. It should be used to draw out some real answers that will help inform the public and lawmakers about the risks of our banking system.

Mr. Dimon, the chief executive of JPMorgan Chase, has been pretty blunt about the trading losses, calling them sloppy, stupid and bad judgment. But, so far at least, he has sidestepped explaining in any detail how they happened and what actions the firm has since taken.

DealBook Column
View all posts

Related Links

Given Mr. Dimon’s voluble views on regulations — he has long suggested the industry is overregulated, criticizing the former Federal Reserve Chairman Paul Volcker personally and publicly questioning the current Fed chairman, Ben S. Bernanke — his testimony on June 13 before the Senate Banking Committee is particularly important to the debate over banking reform.

Here are some questions the lawmakers might consider asking Mr. Dimon in an effort to elicit illuminating and thoughtful answers:

¶ On April 13, about a month before you disclosed the $2 billion trading loss, you called speculation about outsize risks in your chief investment office “a tempest in a teapot.” What, if any, analysis had you personally conducted before making that statement? Do you believe you had all of the appropriate information at the time? If not, why not? Do you believe that you were provided with misinformation or were otherwise purposely misled?

¶ The firm’s chief investment office recently changed the way it calculated how much money the unit could lose in a given day. That appears to be one of the reasons so much could be lost so quickly. What were you told about the rationale for making the change? How involved were you in the decision? And were regulators briefed before the change?

¶ Your chief investment office valued or marked certain securities at higher values than other divisions within the bank valued them, according to people briefed on the group’s valuations. Is that true? If so, how is it possible that one division could value the exact same asset differently from a different division? Are there other divisions of the bank that value assets differently? What steps have you taken to synchronize the monitoring and valuing of securities and other assets across the bank’s divisions?

¶ In a letter to the Securities and Exchange Commission commenting on the Volcker Rule, your firm took great pains to advocate for broad macroeconomic portfolio hedging, the same kind of hedging that took place in your chief investment office. You made the case that your firm successfully put hedges in place ahead of the financial crisis that were instrumental to the firm’s success.

However, you now point out that under the Volcker Rule, some of those trades would not have been permitted because “(1) the actions taken were forward looking and anticipatory; (2) the firm’s purchases of the credit derivatives may not have been deemed ‘reasonably correlated’ with the underlying risk, as different instruments were used to effect the hedging strategy than the assets giving rise to the risk; and (3) the gains realized upon the unwind of the hedges could have been determined to be larger than the countervailing risks.” While the firm should be commended for its success in navigating the financial crisis, why should the trades referred to in your letter be considered hedges and not speculative bets?

¶ If portfolio hedging were banned by the Volcker Rule or other legislation, what would be the impact on JPMorgan’s customers? Would you make fewer loans? Would prices go up?

¶ Your chief investment office has put money in corporate bonds as opposed to less risky Treasury bonds, then used derivatives to bet on directions of the market. That indicates that the purpose of the unit, unlike at some of your competitors, is to generate profit rather than protect the bank from losses. Should the investment office be a profit center? What was your role in the unit taking on more risk?

¶ More than 100 regulators work inside your headquarters to monitor and regulate your firm. Why did they miss this? When did they first raise questions about the London trades? Were they provided with all of the information requested? Were they ever misled? Did anyone at the firm ever push back on concerns that the Fed or regulators from any other agency raised? Most important: Do you believe that the regulators should have been able to spot these trades? And if not, what could, or should, be done to help them identify such a risky trade?

¶ Ina Drew, the chief investment officer in charge of the London group that made the bad trades, retired within days of your disclosure of the losses. Ms. Drew was paid $14.1 million in 2011, one of the highest at your firm and in the industry. You have said you would consider clawbacks for people involved in the losses. Your proxy statement says that an employee’s pay will be clawed back if he or she “engages in conduct that causes material financial or reputational harm.” Have you clawed back any of her previous income or that of others in the group? If yes, how much? If not, why not? Also, did you strike any financial arrangement with Ms. Drew as part of her agreement to retire? Have you struck financial deals with any of the other executives who are expected to leave the firm by the end of the year? If so, please provide the details and the business decision to do so.

¶ Bruno Iksil, your trader nicknamed the London Whale, had made a $100 billion derivatives bet to create what your chief investment office considered a hedge. However, such a large trade made JPMorgan virtually the entire market for a certain kind of derivative, which makes it particularly difficult to unwind. Given JPMorgan’s size, is it too big to hedge?

Article source: