March 23, 2023

DealBook: ‘Proud’ JPMorgan Chief Apologizes

Jamie Dimon, the chief executive of JPMorgan Chase, arrived to testify before a Senate committee.Daniel Rosenbaum for The New York TimesJamie Dimon, the chief executive of JPMorgan Chase, arrived to testify before a Senate committee.

WASHINGTON — Jamie Dimon, the outspoken chief executive of JPMorgan Chase under scrutiny for a multibillion-dollar trading loss at his firm, apologized for the mishap on Wednesday even as he mounted a fierce defense of his bank.

Testifying at a much-anticipated hearing before the Senate Banking Committee, Mr. Dimon said that he was “proud” of the bank, highlighting the firm’s “fortress” balance sheet and its performance during the financial crisis.

“We’re doing what a bank is supposed to do,” he told a panel of lawmakers, few of whom posed combative questions during the roughly two-hour hearing.

The hearing on Wednesday was the latest chapter of the trading debacle, which has stained the bank’s reputation and prompted wide-ranging inquiries from regulators and the Federal Bureau of Investigation. The concerns have centered on the bank’s chief investment office, which placed a big bet tied to credit derivatives that ultimately soured.

Despite the controversy plaguing the bank, Mr. Dimon on Wednesday seemed to solidify his status as Washington’s favorite banker. Clad in a dark suit and striped tie, he navigated the hearing with relative ease, deflecting tough questions and fielding softball inquiries.

He received a particularly warm welcome from Republican senators, who praised JPMorgan and allowed the chief executive to offer criticisms of forthcoming financial rules. Senator David Vitter, Republican of Louisiana, asked Mr. Dimon about the Volcker Rule, an element of the Dodd-Frank regulatory overhaul meant to clamp down on banks’ trading for their own account. Mr. Vitter asked if there was a version of the Volcker Rule that “makes sense.” Mr. Dimon, who is not a big fan of the extensive regulation, responded, “I thought it was unnecessary when it was added on top of other stuff.”

Some lawmakers used their five-minute question periods to compliment Mr. Dimon and ask his advice on fixing the economy. At one point, Senator Jim DeMint, Republican of South Carolina, said, “I think a lot of us are frustrated bank managers and want to manage your business for you,” before praising JPMorgan for being in better financial shape than the country as a whole.

The roughest greetings for Mr. Dimon came not from legislators but from a chorus of protesters in the chamber, who confronted the chief executive about JPMorgan’s foreclosure policies while having received taxpayer bailout money. The outburst, led by one man who yelled that Mr. Dimon was a “crook,” was quickly quelled.

The line of questioning speaks to Mr. Dimon’s still considerable sway among lawmakers.

In recent years, Mr. Dimon has been a frequent visitor to Washington, as he aims to influence the discussion, particularly around financial regulation. JPMorgan spent more than $7.41 million on lobbying in 2010, which topped the industry, according to the research firm

Several bank lobbyists also have close ties to the committee. Kate Childress, a lobbyist who joined the bank in 2008, was previously an aide to Charles E. Schumer, the Democratic senator from New York and a member of the banking committee. Steven Patterson, also a JPMorgan lobbyist, used to be a staff director for economic policy for the Senate Banking Committee.

Mr. Dimon “has always been well regarded and had considerable clout,” said Tom Block, a former head of government relations at JPMorgan who has prepped senior executives in the past for Congressional hearings.

On Wednesday, Mr. Dimon seemed to placate some lawmakers instantly with the disclosure that the bank would “likely” seek to recover compensation from executives responsible for the trading loss. Once the bank’s board completes an investigation into what went wrong in the chief investment office, he said, the bank will decide whose paychecks to pursue.

“When the board finishes the review, you can expect we’ll take proper corrective action,” Mr. Dimon said.

While he did not specify executives who could face clawbacks, one potential person is Ina R. Drew, the former head of the chief investment unit. Ms. Drew, who resigned from the bank last month, earned about $14 million last year, making her among the bank’s highest paid employees.

JPMorgan, Mr. Dimon said, has broad authority to recoup pay. The bank, he said, can claw back compensation for “bad judgment” and other missteps. He described the firm’s ability to reclaim such money as “pretty extensive.”

He also disclosed for the first time that the positions, which have since caused at least $3 billion in losses, set off the bank’s own internal risk alarms in March, weeks before Mr. Dimon publicly played down the threat on a conference call with analysts. The revelation raises new questions about Mr. Dimon’s now-infamous statements on the April 13 conference call, when he said that concerns about the trades were a “complete tempest in a teapot.”

“Why were you willing to be so definitive?” asked Senator Tim Johnson, the South Dakota Democrat who leads the banking committee.

Mr. Dimon, striking a brief note of contrition, conceded, “It was dead wrong.”

In his testimony, Mr. Dimon offered support for some elements of Dodd-Frank, saying that the wind-down process for failed firms should be called “bankruptcy for big dumb banks.” He added that the names of fallen institutions “should be buried in disgrace,” calling it “Old Testament justice.”

But the banking chief faced off with some Democratic lawmakers, who seized upon the trading losses to bolster calls for tougher regulation of Wall Street.

One of the sorest points for Mr. Dimon centered on the Volcker Rule. JPMorgan has said that the trades in question were initially meant to serve as a hedge against risk, rather than a source of profit that would arguably be banned by new regulations.

Senator Robert Menendez, Democrat of New Jersey, set off a testy exchange with the banking executive, beginning by asking whether the hedge changed into “Russian roulette.” He sought to use Mr. Dimon’s previous statements against him, saying, “Your bank has been lobbying against the very guarantees that will protect the taxpayer.”

Mr. Dimon responded that JPMorgan had supported some elements of the new regulations, including higher capital reserve requirements.

He challenged another Democratic lawmaker, Senator Jeff Merkley of Oregon, who argued that JPMorgan was saved by the government’s bailout programs in 2008. Mr. Dimon has long argued that his firm took taxpayer money only reluctantly and that the bank would have survived without it.

“I think you are misinformed,” Mr. Dimon told Mr. Merkley. “You’re factually wrong.”

The senator responded, “Let’s agree to disagree.”

Jessica Silver-Greenberg contributed reporting.

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Fair Game: 2nd Loans, 2nd Wave of Losses

HAVE you heard the good news? Big banks are making more money than we thought.

On Thursday, JPMorgan Chase said it earned $5.4 billion during the second quarter. On Friday, Citigroup said it earned $3.3 billion.

Despite such happy tidings, many banks face a daunting challenge, and one federal regulators want to know more about: the potential costs associated with home loans that banks made during the great credit mania.

Still to be dealt with are potentially large legal bills — and settlements — related to accusations that many banks acted improperly, first in bundling all those loans into mortgage securities, and later in foreclosing on homeowners.

Under pressure from the Securities and Exchange Commission, banks have been estimating the potential damage in their financial filings. Last October, the S.E.C. warned them to be scrupulous in detailing risks associated with demands that they buy back soured loans or securities, as well as about possible defects in securitizations and foreclosures.

But while the S.E.C. has been pressing banks to make comprehensive disclosures about these potential pitfalls, regulators have been quiet on another worry for investors: how banks are valuing their vast holdings of home equity lines of credit, also known as second liens.

Privately, however, the S.E.C. has been pushing banks hard on this issue, according to Meredith Cross, the director of the commission’s corporation finance unit. As regulators review banks’ annual reports, they are asking tough questions about how institutions are valuing their second liens. Ms. Cross expects banks to provide more details about these loans in quarterly reports due next month.

The numbers are significant. Banks held $624 billion of such loans in the first quarter, Federal Deposit Insurance Corporation data show. Millions of these loans are deeply troubled. According to CoreLogic, a real estate data concern, almost 11 million of the nation’s mortgaged properties — nearly 23 percent of the total — were underwater at the end of March. Some 4.5 million of those properties carried home equity loans, according to CoreLogic. The average amount of negative equity shouldered by borrowers across the nation was $65,000.

WHEN first mortgages run into trouble, second liens are at greater peril, even if homeowners manage to keep up with their payments. That is because in a foreclosure, first mortgages are supposed to be paid off before second mortgages.

It is not clear that is happening, however. Banks like the big four — JPMorgan, Citigroup, Bank of America and Wells Fargo — not only hold home equity lines but also service first mortgages held by others on the same properties. Some analysts worry that servicers are able to protect their own holdings of second-lien loans while foreclosing on the first liens.

“The big four are pretending that the second liens are still money good because many are still performing,” said Christopher Whalen, editor of the Institutional Risk Analyst, a research publication. By performing, he means that borrowers are still making payments, if only the minimum. Many home equity lines require only the payment of interest for the first 10 years.

Banks have written off about $500 billion in assets since 2008, Mr. Whalen said. Most of those assets were related to housing, but write-downs on second liens have been pretty sparse so far at the big banks. As of the first quarter of this year, Bank of America carried $136 billion of second liens on its books. During 2010, it wrote down $6.8 billion. Wells Fargo held $108 billion in such loans in the first quarter; it wrote down $4.7 billion last year.

JPMorgan Chase’s exposure to second liens stood at $60 billion at the end of the second quarter. The bank charged off $1.3 billion in the first half of 2011 and $3.44 billion in 2010, said Joseph M. Evangelisti, a spokesman for the bank. As for how Morgan values these assets, he said that since 2010 the bank has routinely reserved for the higher probability of defaults on them, assuming an average loss rate of 60 percent on high-risk second liens.

Citibank’s home equity lines of credit totaled $46 billion last March; $6.2 billion belonged to borrowers with credit scores below 660 — that is, risky — and consisted of loan amounts that were greater than the values of the underlying properties.

Spokeswomen for Wells Fargo and Citigroup declined to comment.

Jerry Dubrowski, a spokesman for Bank of America, says the bank considers whether first mortgages are distressed when valuing home equity loans. If the second liens are performing, the bank doesn’t book a full loss on them. But if foreclosure seems inevitable on a first mortgage, the bank books a 100 percent loss on the second lien, he said.

But Mr. Whalen suspects some values are too high. The trouble in the housing market does not appear to be reflected fully on bank balance sheets yet.


“If home prices do not stabilize, much less recover, then banks are likely to feel pressure to begin wholesale write-downs of first and second liens,” Mr. Whalen said. “There is probably as much loss prospectively facing the banking industry as a whole on residential real estate exposures as have already been charged off.”

DENIAL in the banking industry — known in the trade as “extend and pretend” — is a powerful thing. But it works for only so long.

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