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The Globe and Mail

JPMorgan's Dimon apologizes for hedging strategy that went off the rails

JP Morgan Chase and Company Chief Executive Officer Jamie Dimon testifies before the U.S. Senate Banking, Housing and Urban Affairs Committee hearing on "A Breakdown in Risk Management: What Went Wrong at JPMorgan Chase?" on Capitol Hill in Washington, June 13, 2012.


JPMorgan Chase & Co. chief executive officer Jamie Dimon told U.S. lawmakers that he could not defend how a hedging strategy in a London office morphed into a multibillion-dollar trading loss, but he still took swipes at regulatory reforms that he said fail to make sense.

The Senate Banking Committee was mostly gentle with the polished and relaxed banker at Wednesday's hearing, and did not force him to reveal whether the estimated $2-billion (U.S.) loss has significantly swelled.

Mr. Dimon apologized for the self-inflicted loss that he said started as a genuine hedge that would make the firm a lot of money if a credit crisis hit.

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Lawmakers have questioned whether the trades were truly a hedge or a speculative bet that was hidden from shareholders and regulators.

"This particular synthetic credit portfolio was intended to earn a lot of revenue if there was a crisis. I consider that a hedge," Mr. Dimon said. "What it morphed into, I will not try to defend."

But he was not so chastened that he backed off of his long-standing criticism of Washington reforms.

The 2010 Dodd-Frank financial oversight law, he said, has produced a swarm of unco-ordinated regulators, and he warned policy makers that they must smartly craft the Volcker rule that will ban banks from making speculative bets with their own money.

Mr. Dimon said Washington must not overreact to JPMorgan's trading loss and create such narrow exemptions that it hurts financial markets.

"We have the widest, deepest, and best capital markets in the world. It would be a shame to shed that out of anger."

Michael Robinson, executive vice-president at Levick Strategic Communications in Washington, said that Mr. Dimon was wisely apologetic about the trading loss and also held his ground during a few moments of tough questioning.

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"Jamie Dimon tip-toed through the minefield and came out the other side. That's a victory," Mr. Robinson said.

Shares of JPMorgan, the largest U.S. bank by assets, appeared to get a boost from Mr. Dimon's appearance. In afternoon trading the stock was up 2 per cent, outperforming the 0.3 per cent rise in the KBW Bank Index.

The hearing got off to a rocky start, however, when a handful of protesters yelled out "Jamie Dimon is a crook" and "stop foreclosures now" before being escorted out of the cavernous hearing room.

Mr. Dimon revealed during a surprise conference call last month that a hedging strategy in its London office had gone awry, producing at least $2- billion, and possibly $3-billion, in trading losses.

That was after Mr. Dimon in April dismissed as a "tempest in a teapot" news reports that Bruno Iksil, a trader dubbed the "London whale," had amassed an outsized position that prompted hedge funds to bet against it.

Mr. Dimon said he made that statement after senior executives and risk managers told him they thought any problems in the London chief investment office were an isolated, small issue.

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"When I made that statement, I was dead wrong," Mr. Dimon said.

The trading loss has renewed focus after the 2007-2009 financial crisis on whether big banks are too big to manage and has made some nostalgic for the repealed Glass-Steagall Act that separated commercial banking from more risky activities.

Mr. Dimon said the failed hedging strategy sprang from a firm-wide effort to reduce risky assets to prepare for the roll-out of new capital standards agreed to as part of the international Basel agreement.

Mr. Dimon said the bank could have simply reduced the amount of these risky assets on its books but the CIO office instead, starting in mid-January, "embarked on a complex strategy" that involved adding positions traders believed could offset the existing risky assets.

In hindsight, the strategy created even more hard-to-manage risks in the synthetic credit portfolio.

The situation was not detected sooner, in part, because the CIO unit, also in January, changed its risk model in a way that disguised that the risk-taking had roughly doubled.

The firm did not disclose the risk model change in a timely manner, which experts said could be a focus of the Securities and Exchange Commission's investigation into the trading losses.

The Commodity Futures Trading Commission and FBI have also said they are looking into the losses.

Mr. Dimon has said he was generally not aware of the CIO unit's activities, but revealed on Wednesday that he did receive a copy of a January memo that mentioned that the value-at-risk (VaR) model had changed.

"I was copied on a memo that said there was a change in the VaR model, so that is going to come out," Mr. Dimon said in a CNBC interview minutes after the hearing. "I paid virtually no attention to it."

He also said he did not learn before late April that the new model was badly flawed.

Mr. Dimon said repeatedly during the hearing that the bank's senior management failed by not detecting the London office's spike in risk, and said the bank will consider taking back pay from certain executives once the bank's board is done with their review. "I would say it's likely... there will be clawbacks," Mr. Dimon said.

He said the lesson he learned from the trading debacle is, "Never, ever get complacent with risk."

Senators asked about the state of the losses, but did not demand that Mr. Dimon give a detailed update on the portfolio, which JPMorgan is still unwinding. The bank is expected to provide more information to shareholders when it reports its second-quarter results in mid-July.

Mr. Dimon did say that the bank's "fortress balance sheet remains intact" and that he expects the second quarter to be solidly profitable.

Democratic Senator Robert Menendez seized upon Dimon's comments and reminded him that JPMorgan received $25-billion in federal support during the financial crisis.

"I think about the fortress balance sheet you talked about and I would like to remind you that the fortress balance sheet has a moat that was dug by taxpayers... So it seems to be that the American people are a big part of making your bank healthy," Mr. Menendez said.

Democratic Senator Jeff Merkley also pointedly reminded Mr. Dimon that JPMorgan, now the nation's largest bank by assets, received Troubled Asset Relief Program assistance during the financial crisis, which provoked a testy response from Mr. Dimon.

"I think you were misinformed. I think that misinformation is leading to a lot of the problems we are having today. JPMorgan took TARP because it was asked to by the Secretary of the Treasury of the United States of America," Mr. Dimon said.

He is scheduled to appear before the House Financial Services Committee, along with bank regulators, on June 19.

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