JPMorgan Chase & Co.’s (JPM) wrong-way bets on derivatives are the focus of an escalating investigation by a U.S. Senate panel led by Carl Levin that has grilled executives from banks including Goldman Sachs Group Inc. and HSBC Holdings Plc, three people briefed on the inquiry said.
Levin’s Permanent Subcommittee on Investigations is seeking testimony from those who worked in or helped lead JPMorgan’s chief investment office, according to the people, who asked not to be identified because the inquiry isn’t public. The unit’s London staff lost at least $5.8 billion this year on the botched wagers, which were large enough to shift markets.
Tara Andringa, a spokeswoman for Levin, didn’t respond to a message seeking comment, and Joe Evangelisti at JPMorgan declined to discuss the panel’s inquiry. “As always, the company has fully cooperated with all regulatory and governmental requests around this matter,” Evangelisti said.
The bank, led by Chief Executive Officer Jamie Dimon, 56, faces a panel of lawmakers that in recent years brought executives from Goldman Sachs and London-based HSBC to Capitol Hill, barraging them with questions that challenged their version of events. JPMorgan said in July that its internal review found traders may have tried to obscure the full amount of losses they faced on their transactions.
The market value of JPMorgan, the nation’s largest bank by assets, has dropped more than $22 billion since Bloomberg News first reported on April 5 that the firm amassed a large and illiquid position in credit derivatives in the London office. The bank lost $5.8 billion on the trades during the first six months of this year and has said it could lose as much as $7.5 billion total while closing out the position.
Delany Appointed
Dimon, who dismissed initial press reports as a “tempest in a teapot,” retracted those words less than a month later when the firm reported a $2 billion loss on the position on May 10. Chief Investment Officer Ina Drew, 56, who ran the unit, resigned on May 14 and later offered to return a portion of her past compensation to the company.
Dimon has since overhauled the division, initially replacing Drew with his former co-head of fixed-income trading, Matthew Zames, along with several other executives. Yesterday, the bank said it appointed Craig Delany, 41, as the new chief investment officer reporting to Zames, who is now co-chief operating officer, according to an internal memo obtained by Bloomberg News. Delany will manage the firm’s mortgage-servicing rights as part of his “broad role,” according to the memo.
The three London traders and managers whom the bank deemed directly responsible for the trades are no longer with the firm, which has said it will seek to claw back their pay.
Political Restraints
The Senate panel is unencumbered by many of the political restraints faced by other congressional committees. As a permanent fixture in a chamber whose members only have to run for office every six years, the panel has the resources and the appetite for spending months or years issuing subpoenas, interviewing witnesses and poring over documents.
The subcommittee’s work also stands out in a town where investigations and white papers often dissolve into partisan strife. By a tradition unique in Congress, the minority party’s staff is involved throughout the inquiry. Members from both parties tend to stick together when presenting conclusions.
Levin’s panel probed Wall Street for two years following the 2008 financial crisis. The resulting 640-page report –which came a year after the Michigan Democrat paraded Goldman Sachs executives in front of TV cameras and his committee –pinned much of the blame for the crisis on the largest banks.
Justice Department
Levin and Senator Tom Coburn of Oklahoma, the top Republican on the committee, concluded in April 2011 that Goldman Sachs had peddled the securities to its clients while failing to disclose that the firm had bet that those instruments would lose value.
Levin and Coburn referred the report to the Justice Department and Securities and Exchange Commission to examine whether Goldman Sachs broke the law. The Justice Department announced last month it was dropping its probe into the bank.
While the panel levied its harshest criticism at Goldman Sachs, it also accused Deutsche Bank AG of selling collateralized debt obligations backed by risky loans that the bank’s own traders believed were likely to lose value and probed the regulatory and management failures that led to the failure of Washington Mutual Inc.
Proprietary Trading
Levin seized on JPMorgan’s trading losses in May as a way to bolster another priority: the Volcker rule. He, along with Oregon Democrat Jeff Merkley, crafted the ban included in the Dodd-Frank Act on proprietary trading and limitations on bank investment in hedge and private-equity funds.
While Levin declined to commit to an investigation of the bank at the time, he did say that the losses were “a textbook illustration” regulators needed to tighten the restrictions in the Volcker rule before the proposal becomes final.
JPMorgan liquidated most of the position by the end of the second quarter and transferred the rest to the investment bank, Dimon said July 13. Delany will be in charge of the CIO’s $360 billion portfolio, about $325 billion of which he said is invested in highly rated and liquid securities.
“The objective of this portfolio is to have very high quality assets that have little or no risk of losing principle,” he said in an interview yesterday.
Eliminating the credit derivatives portfolio will have little impact on the division’s earnings, he said.
“The synthetic credit portfolio was actually a very small piece of the CIO, it turned out to be a very bad small piece of the CIO,” he said. “The vast majority of the portfolio has an extremely steady, boring earnings stream that’s very conservatively invested. I don’t expect a material change.”
Delany said the company is committed to keeping its London office open and doesn’t plan to reduce the CIO’s workforce of about 500 employees. He oversaw 35,000 in the mortgage division.
Bloomberg
