[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]



 
                     EXAMINING BANK SUPERVISION AND


                      RISK MANAGEMENT IN LIGHT OF


                     JPMORGAN CHASE'S TRADING LOSS

=======================================================================


                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 19, 2012

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 112-136



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20402-0001



                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                   SPENCER BACHUS, Alabama, Chairman

JEB HENSARLING, Texas, Vice          BARNEY FRANK, Massachusetts, 
    Chairman                             Ranking Member
PETER T. KING, New York              MAXINE WATERS, California
EDWARD R. ROYCE, California          CAROLYN B. MALONEY, New York
FRANK D. LUCAS, Oklahoma             LUIS V. GUTIERREZ, Illinois
RON PAUL, Texas                      NYDIA M. VELAZQUEZ, New York
DONALD A. MANZULLO, Illinois         MELVIN L. WATT, North Carolina
WALTER B. JONES, North Carolina      GARY L. ACKERMAN, New York
JUDY BIGGERT, Illinois               BRAD SHERMAN, California
GARY G. MILLER, California           GREGORY W. MEEKS, New York
SHELLEY MOORE CAPITO, West Virginia  MICHAEL E. CAPUANO, Massachusetts
SCOTT GARRETT, New Jersey            RUBEN HINOJOSA, Texas
RANDY NEUGEBAUER, Texas              WM. LACY CLAY, Missouri
PATRICK T. McHENRY, North Carolina   CAROLYN McCARTHY, New York
JOHN CAMPBELL, California            JOE BACA, California
MICHELE BACHMANN, Minnesota          STEPHEN F. LYNCH, Massachusetts
THADDEUS G. McCOTTER, Michigan       BRAD MILLER, North Carolina
KEVIN McCARTHY, California           DAVID SCOTT, Georgia
STEVAN PEARCE, New Mexico            AL GREEN, Texas
BILL POSEY, Florida                  EMANUEL CLEAVER, Missouri
MICHAEL G. FITZPATRICK,              GWEN MOORE, Wisconsin
    Pennsylvania                     KEITH ELLISON, Minnesota
LYNN A. WESTMORELAND, Georgia        ED PERLMUTTER, Colorado
BLAINE LUETKEMEYER, Missouri         JOE DONNELLY, Indiana
BILL HUIZENGA, Michigan              ANDRE CARSON, Indiana
SEAN P. DUFFY, Wisconsin             JAMES A. HIMES, Connecticut
NAN A. S. HAYWORTH, New York         GARY C. PETERS, Michigan
JAMES B. RENACCI, Ohio               JOHN C. CARNEY, Jr., Delaware
ROBERT HURT, Virginia
ROBERT J. DOLD, Illinois
DAVID SCHWEIKERT, Arizona
MICHAEL G. GRIMM, New York
FRANCISCO ``QUICO'' CANSECO, Texas
STEVE STIVERS, Ohio
STEPHEN LEE FINCHER, Tennessee

           James H. Clinger, Staff Director and Chief Counsel


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    June 19, 2012................................................     1
Appendix:
    June 19, 2012................................................    83

                               WITNESSES
                         Tuesday, June 19, 2012

Alvarez, Scott G., General Counsel, Board of Governors of the 
  Federal Reserve System (Fed)...................................    16
Curry, Hon. Thomas J., Comptroller of the Currency, Office of the 
  Comptroller of the Currency (OCC)..............................     9
Dimon, Jamie, Chairman and Chief Executive Officer, JPMorgan 
  Chase & Co.....................................................    40
Gensler, Hon. Gary F., Chairman, Commodity Futures Trading 
  Commission (CFTC)..............................................    12
Gruenberg, Hon. Martin J., Acting Chairman, Federal Deposit 
  Insurance Corporation (FDIC)...................................    14
Schapiro, Hon. Mary L., Chairman, U.S. Securities and Exchange 
  Commission (SEC)...............................................    11

                                APPENDIX

Prepared statements:
    Baca, Hon. Joe...............................................    84
    Fitzpatrick, Hon. Michael....................................    85
    Alvarez, Scott G.............................................    86
    Curry, Hon. Thomas J.........................................    94
    Dimon, Jamie.................................................   110
    Gensler, Hon. Gary F.........................................   114
    Gruenberg, Hon. Martin J.....................................   129
    Schapiro, Hon. Mary L........................................   133

              Additional Material Submitted for the Record

Bachus, Hon. Spencer:
    Text of Title III of H.R. 3310, the Consumer Protection and 
      Regulatory Enhancement Act.................................   139
Sherman, Hon. Brad:
    Bloomberg editorial entitled, ``Dear Mr. Dimon, Is Your Bank 
      Getting Corporate Welfare?''...............................   160
Alvarez, Scott:
    Written responses to questions submitted by Chairman Bachus..   163
    Written responses to questions submitted by Representative 
      Luetkemeyer................................................   171
Curry, Hon. Thomas J.:
    Written responses to questions submitted by Chairman Bachus..   172
    Written responses to questions submitted by Representative 
      Luetkemeyer................................................   177
Dimon, Jamie:
    Written responses to questions submitted by Chairman Bachus..   178
Gruenberg, Hon. Martin J.:
    Written responses to questions submitted by Chairman Bachus..   181
    Written responses to questions submitted by Representative 
      Luetkemeyer................................................   185
Schapiro, Hon. Mary L.:
    Written responses to questions submitted by Chairman Bachus..   186
    Written responses to questions submitted by Representative 
      Luetkemeyer................................................   188


                     EXAMINING BANK SUPERVISION AND


                      RISK MANAGEMENT IN LIGHT OF


                     JPMORGAN CHASE'S TRADING LOSS

                              ----------                              


                         Tuesday, June 19, 2012

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 9:30 a.m., in 
room 2128, Rayburn House Office Building, Hon. Spencer Bachus 
[chairman of the committee] presiding.
    Members present: Representatives Bachus, Hensarling, Royce, 
Lucas, Manzullo, Jones, Biggert, Capito, Garrett, Neugebauer, 
McHenry, Pearce, Posey, Fitzpatrick, Westmoreland, Luetkemeyer, 
Huizenga, Duffy, Hayworth, Renacci, Hurt, Dold, Schweikert, 
Grimm, Canseco, Stivers, Fincher; Frank, Waters, Maloney, 
Gutierrez, Velazquez, Watt, Ackerman, Sherman, Meeks, Capuano, 
Hinojosa, Clay, Baca, Lynch, Miller of North Carolina, Scott, 
Green, Cleaver, Moore, Ellison, Perlmutter, Donnelly, Carson, 
Himes, Peters, and Carney.
    Chairman Bachus. The committee is called to order. This 
hearing will come to order.
    Opening statements will be limited to 10 minutes on each 
side as previously agreed with the ranking minority member.
    Today, the committee meets to examine bank supervision and 
risk management in light of the recent trading loss at JPMorgan 
Chase (JPMC). When America's largest bank reveals it has 
suffered an unexpected loss of more than $2 billion, that 
understandably generates concern and raises questions not only 
about the bank's risk management controls and corporate 
governance but also the action or inaction, as the case may be, 
of the regulators.
    While the size of the reported loss is a small fraction, 
just one one-thousandth of JPMorgan's total assets, this 
episode serves as a reminder that no institution, no matter how 
well-managed, is immune from mistakes that are, to use Mr. 
Dimon's words, ``stupid, sloppy, and the result of bad 
judgment.'' But, even more importantly, this should remind all 
of us about the importance of making sure it is the bank and 
the shareholders, not the taxpayers, who pay for such mistakes.
    Fortunately, these losses are not being borne by the 
taxpayers or customers or clients of the bank, but by JPMorgan 
and the shareholders.
    Since the losses were disclosed, the company has lost $23 
billion in market capitalization and suffered reputational harm 
in the marketplace; and employees involved in the problematic 
trades have lost their jobs, at least some of them.
    This is how the system is supposed to work: Those who take 
the risk are the ones who suffer the loss or realize the gain. 
It stands in sharp contrast to the regime of taxpayer-funded 
bailouts with privatized profits and socialized losses we have 
experienced in the cases of AIG, GM, Fannie Mae, Freddie Mac, 
and Solyndra--could we have order among some of the staff and 
the audience? Thank you.
    Because the bank has more than sufficient capital, 
taxpayers are protected from a bailout, and the overall 
financial system is protected from being brought down by the 
mistakes of an institution that is deemed too-big-to-fail. That 
is why the most important lesson to be learned from this 
incident has nothing to do with any the 400-plus rules found in 
the 2,300 page Dodd-Frank Act. The most important lesson is how 
central capital is to the safety and soundness of individual 
banks and our overall financial system. There is no capital or 
liquidity problem at JPMorgan, and I think that is a primary 
concern of the regulators. You are to be complimented that you 
have ensured that there is sufficient capital at that 
institution.
    A bank with sufficient capital is able to absorb losses, 
whether the losses are caused by external factors beyond the 
institution's control or internal problems caused by poor risk 
management. A bank with sufficient capital is not a threat to 
the financial system even if regulators fail to do their jobs. 
And a bank with sufficient capital can take risks without 
putting taxpayers in jeopardy.
    Just as JPMorgan should be and is being held accountable 
for its risk management failures, accountability must also be 
demanded of the Federal regulators who oversee the bank's 
activities. Unfortunately, because Dodd-Frank failed to 
consolidate and streamline the current convoluted and chaotic 
regulatory structure as House Republicans proposed, achieving 
regulator accountability is every bit as important now as 
during the height of the financial crisis.
    How inefficient and fragmented is the current regulatory 
framework? Sitting before us today are five different 
regulators, all of whom have some supervisory responsibility 
over these trades and several of whom have examiners embedded 
in JPMorgan but none of whom, apparently, was either aware of 
the bank's hedging strategy or raised concerns.
    Perhaps complexity of the trades of the regulatory 
structure and of the rules itself makes it impossible for any 
individual regulator to adequately do their job. After all, the 
Volcker Rule proposal is by itself staggering in its length and 
complexity. And more than a month after the loss was disclosed, 
the regulators cannot say whether the Volcker Rule would have 
prevented JPMorgan from making these trades.
    Contrast this complexity with the simplicity of capital. 
Capital is our greatest protection against the systemic risk 
posed by institutions that are too-big-to-fail.
    I'm pleased we will have the opportunity to discuss this 
today with our witnesses, and I thank each of them for being 
here.
    Before closing, once again I want to emphasize the point 
that JPMorgan and its shareholders--not the bank's clients, not 
the depositors, and more importantly, not the taxpayers--are 
the ones paying for the bank's mistakes. This is how the system 
is supposed to work, and it has.
    I now recognize the ranking member for his opening 
statement.
    Mr. Frank. I will begin by confessing that my memory 
appears to have failed me with regard to the proposals from my 
Republican colleagues to supervisory consolidation. I do know 
that the structure we inherited when we took over in 2007 was a 
little bit more complex than the current one. We did in our 
legislation abolish the OTS--or, rather, merge it with the OCC. 
But I do not remember during the 12 years of Republican rule 
that any such consolidation proposal came forward. I apologize 
for the lapse in memory. I am sure they will remind me of it if 
one existed.
    Nor do I remember a significant proposal to consolidate 
during the consideration of the bill.
    I acknowledge there was a major problem here. The biggest 
problem is that we have a separate SEC and CFTC sharing 
jurisdiction over derivatives. I would like to have been able 
to get rid of that. I do not think it has ever been politically 
possible, given the cultural differences within our country 
that it reflects.
    Now on to more serious subjects. To me, this is not a 
hearing about JPMorgan Chase. They are an example of the larger 
issue, which is the effort by my Republican colleagues, with 
help from some in the industry, to re-deregulate derivatives. 
That has been a drive that they have made.
    Now they haven't done it head on, because they do believe 
there is some popularity in the country for the notion that 
there should be some regulation, that we should undo the error 
of 2000, when Senator Gramm led the charge for a total de-
regulation.
    But here is where we are today. As we sit here now, the 
Appropriations Committee will be voting shortly on the budget 
proposed for next year for the Commodities Futures Trading 
Commission (CFTC) which will, incredibly to me, reduce the 
amount they have from this year to next year. So while there 
was going to be criticism of the CFTC for not doing rules 
quickly enough, for not doing enough at MF Global, for not 
washing the windows of people's cars, and all other things, 
this Republican Majority is prepared to reduce their funding. 
They will be given by the Republicans $180 million--I stress 
``million'' because with regard to derivatives, that is the 
only time it is ``million'' and not ``billion.'' The Senate 
fortunately has acted to do the full funding, and that is one 
of the issues.
    Secondly, as Mr. Gensler addresses in his testimony, this 
committee, over my objection and the objections of many of us, 
voted to exempt from regulation the derivatives transactions 
conducted by the foreign subsidiary and American institution, 
i.e., JPMorgan Chase's London operation, AIG, and others. So 
there were other bills that they have been trying to put 
forward, too. Some take small pieces and make some sense. Some 
try to lock in what could be done better, more flexibly 
administratively.
    But let's be clear: This is the issue. And the relevance of 
JPMorgan Chase is that it shows this. JPMorgan Chase is 
considered to be a very well-run bank. If in a very well-run 
bank, you can get this loss of several billion dollars--$3 
billion and counting, we are told--in a fairly short period of 
time, it is an indication of the problem with derivatives.
    JPMorgan Chase, Mr. Dimon tells us, has a fortress balance 
sheet. But not every institution has a fortress balance sheet. 
Some institutions may have a picket fence balance sheet or a 
chain link balance sheet. And, yes, we would like all of them 
to get up there, but we are not all there yet.
    So the notion that we should underfund the main regulator 
on derivatives, that we should exempt foreign subsidiaries from 
it, as Mr. Gensler has pointed out incentive for American 
institutions to move overseas, these are very grave errors. And 
that is the question.
    And the very fact that JPMorgan Chase and Mr. Dimon, a very 
well-regarded chief executive, was taken by surprise on this, 
it got out of his control, I believe that if you look at the 
various lines of business of JPMorgan Chase and other banks, 
you would find it would be unlikely that this could happen in 
any other line of business, that derivatives are particularly 
complex, highly leveraged, and--until our legislation is fully 
implemented, if the CFTC is ever given the ability financially 
to do it--obscure.
    And that is the point. This is an example and, yes, we are 
not micromanaging JPMorgan Chase. What we are saying is the 
fact that Mr. Dimon and this bank were taken by surprise and 
were not able--lost so much money so quickly in derivatives, 
didn't fully understand what they were doing--and I think it is 
relevant--and then made the choice when they were confronted 
with a problem not to try to wind the position down but in fact 
to expand the use of derivatives so that good derivatives would 
come to the aid of bad derivatives, multiplying the error, 
these are arguments for the kind of regulation we need.
    As I said, it did not cause a systemic problem here, but 
waiting until it happens in an institution or in a pattern that 
causes systemic problems would be a very grave error. So I 
intend to focus on this, and I believe many on our side will.
    The question is, does this not argue against the proposal 
to deregulate derivatives? And what we see on the part of our 
Republican colleagues is a systemic, piece-by-piece, bite-by-
bite effort to render us unable to regulate derivatives, to go 
right back to where we were before the terrible crisis of 2008.
    Chairman Bachus. I thank the ranking member.
    The chairwoman of the Subcommittee on Financial 
Institutions, Mrs. Capito is recognized for 1 minute.
    Mrs. Capito. Thank you, Mr. Chairman.
    We are here today to learn about how the risk management 
lapses at JPMorgan led to over $2 billion in losses. Normally, 
the losses of a private company would not be something that 
would come before congressional hearings. However, we know that 
Dodd-Frank failed to end too-big-to-fail and in fact codified 
it into law. Therefore, institutions like JPMorgan are still 
viewed by market participants as being systemically important 
firms that may be bailed out by taxpayers in times of extreme 
distress.
    Although no taxpayer dollars were at risk in this case, as 
long as too-big-to-fail exists in our markets, this committee 
should be vigilant in oversight to ensure regulators and 
private firms are employing sufficient risk management models.
    We know the $2 billion loss did not pose a threat to the 
system or the firm because as of March 31, 2012, they were 
holding $128 billion of Tier 1 Capital. The questions I have: A 
less-well-capitalized firm, could they survive the loss? Is 
there transparency in the system? As far as the regulators go, 
there are five regulators here to talk about this, but why was 
this not seen by all five? Why was it not shared if it was 
seen?
    I yield back.
    Chairman Bachus. Thank you.
    Ms. Waters, the ranking member of the Capital Markets 
Subcommittee.
    Ms. Waters. Thank you very much, Mr. Chairman. I thank you 
for this hearing.
    I think that Mr. Frank has set the tone and direction for 
this hearing, and I would like to continue in that vein.
    Before we get into the specifics of the circumstances 
surrounding JPMorgan Chase's trading loss, I think it is 
important to remember the context underlying this hearing. We 
are approaching the 4-year anniversary of the most significant 
financial crisis since the Great Depression. Millions of 
American families have lost their homes to foreclosures, many 
of which were completed with robo-signed or otherwise 
fraudulent paperwork. For those who remain in their homes, 
individuals have lost trillions of dollars in housing wealth, 
as well as losses to their retirement accounts and college 
funds. So it is within this context that we hold this hearing 
today.
    Let's make no mistake. This is not just about a $2 billion 
or $3 billion dollar trading loss at JPMorgan Chase. It is 
about the $10 billion or the $15 billion or the $50 billion 
loss that could come next, either at JPMorgan or any other bank 
that is backed by the U.S. taxpayer, if we don't stand up for 
financial reform.
    Fortunately, we passed Dodd-Frank to respond to this 
crisis. But, admittedly, nearly 2 years since the passage of 
the Act, we are still waiting for many of its provisions to be 
finalized.
    Industry complains about all the lingering uncertainty over 
Dodd-Frank, but the truth is that the industry lobbying is a 
central reason for these delays. As I have said before, there 
is a death-by-a-thousand-cuts approach to undermining financial 
reform, which includes pushing bills to undermine Dodd-Frank 
right here in Congress, lobbying our agencies to weaken the 
rules, and suing our regulators when they don't like the rules 
they eventually do put forward.
    Many of my Republican colleagues here at the House are 
complicit in this effort by failing to give the regulators the 
funding they need do their jobs. So I want to implore the 
regulators here today to resist the pressure they face to 
weaken the rules and get their work done and finish their 
rulemaking. Otherwise, we may sit here a year from now wishing 
that we would have acted just a bit faster to prevent the next 
financial blowup.
    I yield back the balance of my time.
    Chairman Bachus. Thank you.
    Next, the chairman of the Subcommittee on Capital Markets, 
Mr. Garrett, for 1 minute.
    Mr. Garrett. I thank the Chair.
    The recent trading loss at JPMorgan is obviously 
regrettable, and our banking supervisors in charge should be 
examined themselves and asked what exactly happened. But, I am 
a little surprised still about the hemming and hawing that we 
have heard by my colleagues on the other side of the aisle. 
When a private business loses money, when the institution that 
we are all in right here is losing billions of dollars 
literally every day--there was no shortage of outrage from my 
friends on the other side of the aisle when the private sector 
loses money.
    So it makes you wonder, where was the outrage when Bear 
Stearns was bailed out with billions of dollars, and 
Republicans asked the former chairman for a committee hearing 
to hold a discussion to look into it, and we never had the 
hearing.
    Where is the outrage when Fannie Mae and Freddie Mac lose a 
billion dollars every quarter now, and there is still no 
outrage.
    Where was the outrage from the other side of the aisle when 
over half a billion dollars of loss to the President's green 
energy tax policy like Solyndra, where is the outrage?
    A $2 billion loss is certainly significant, but in a 
capital society, that sometimes happens. Unfortunately, my 
colleagues on the other side of the aisle continue to demonize 
losses in the private sector but fail to take a look inwardly 
at the losses sustained to the taxpayers every day here in 
Congress.
    I yield back.
    Chairman Bachus. Thank you.
    Mr. Frank, for 30 seconds.
    Mr. Frank. Yes. It is interesting that the previous speaker 
talked about Fannie and Freddie and started to say--I would 
like to listen to the tape; he didn't finish the sentence--we 
are no further then we were before. The gentleman is the 
chairman of the subcommittee that has jurisdiction over Fannie 
Mae and Freddie Mac and has been since January of last year, 
and nothing has come to the full committee to change that. So 
when the gentleman laments the problems in Fannie Mae and 
Freddie Mac as continuing, he is, I guess, confessing his 
inability to do anything about it.
    In fact, when we were in power, we did accede to the wishes 
of the Bush Administration that put Fannie and Freddie in a 
conservatorship. That is as far as it went. And since January 
of last year, under the gentleman's chairmanship of the 
subcommittee, nothing has happened.
    I yield back.
    Chairman Bachus. Mr. Neugebauer, for 1 minute.
    Mr. Neugebauer. I thank the chairman.
    I think the point has been made that taxpayers didn't lose 
any money. The shareholders lost $23 billion in market value. A 
colleague from New Jersey pointed out that today, local 
taxpayers will go $3.6 billion in the hole.
    I think the two items that I want to focus on during this 
hearing are, one, the regulatory issue, where we had embedded 
regulators in these entities and we didn't seem to catch this 
issue. And it is a point that I have been trying to make in a 
number of hearings we have had in my committee is that, when we 
have regulatory failure, it brings to question--a lot of people 
call for more regulations and more regulators. The question is, 
don't we just need the regulators to do their job?
    And I think the other issue that is concerning is the 
disclosure and transparency of some of these trades and what 
members of the executive management of these companies are 
saying. We had, just a few days before this problem became a 
real issue, the CEO saying this is like a tempest in a teapot. 
We also had the CFO of MF Global saying, just a few days before 
that company went bankrupt, that they have never been in better 
shape.
    So I think these kind of issues are important issues that 
we need to discuss today.
    Chairman Bachus. Mrs. Maloney for 1 minute.
    Mrs. Maloney. Thank you, and welcome to the regulators.
    Since the financial crisis, we have worked to improve 
regulation of the financial industry. The basic questions today 
are: Are we on the right track to prevent another 2008 from 
happening? Do regulators now have the tools to prevent another 
crisis? And are CEOs managing their institutions with the 
lessons they learned from 2008? Why were the losses incurred in 
the London unit? Could they have been incurred in New York as 
easily? By every indication, JPMorgan Chase is a well-managed 
firm. So if this trading loss could happen there, it could 
happen at another large financial institution.
    Mr. Dimon testified last week that there were parts of 
Dodd-Frank he supported and parts that needed to be clarified, 
not overturned. I think the industry, regulators, and 
policymakers can agree that the Volcker Rule, including the 
market-making provision, needs to be as clear and 
straightforward as possible; and I believe it should be put in 
place as soon as possible.
    Thank you.
    Chairman Bachus. Thank you.
    Mr. Hensarling, vice chairman of the committee, for 2 
minutes.
    Mr. Hensarling. Thank you, Mr. Chairman; and thank you for 
holding a very important hearing.
    I would like to associate first my comments with that of 
the gentleman of New Jersey. I do find it somewhat interesting, 
in an institution that unfortunately now witnesses serial 
trillion dollar annual deficits, as an order of magnitude of $2 
billion, although certainly a significant sum, seems to pale in 
comparison; and so I am somewhat curious about certain Members' 
levels of outrage.
    When the news broke about the $2 billion trading loss at 
JPMorgan, many said, ``I told you so. We needed the Volcker 
Rule.'' Some of us also may reflect, ``I told you so.'' Maybe 
we don't need institutions in America that are too-big-to-fail.
    But, unfortunately, Mr. Chairman, as you well know, Dodd-
Frank has codified too-big-to-fail. With the ability to 
designate systemically important financial institutions, we 
codify too-big-to-fail into Federal law. Empowering the FDIC to 
wind down these institutions and allowing them to borrow the 
FDIC up to the book value of the institution from taxpayers, an 
amount that could be outstanding, in the trillions of dollars 
again, we have codified too-big-to-fail. And, Mr. Chairman, 
before we get too far down the Dodd-Frank road, it is time for 
this Nation to reexamine this.
    In addition, I think we should be very careful about 
outlawing risk. Without risk, we do not have a rate of return. 
Without a rate of return, we do not have investment and we do 
not have jobs in an economy that 3\1/2\ years after the 
President has taken office still suffers and our constituents 
are still in search of jobs.
    So I thank you for calling the hearing. I look forward to 
hearing the testimony of the witnesses. Thank you.
    Chairman Bachus. Thank you.
    Mr. Frank. How much time do we have remaining?
    Chairman Bachus. One minute.
    Mr. Frank. Mr. Capuano.
    Mr. Capuano. Thank you, Mr. Chairman.
    Mr. Chairman, I had a wonderful opening statement, but I 
guess I have been thrown off it.
    If you keep saying the same thing over and over and over, 
regardless of whether it is true or not, apparently it will 
become fact. I want the Red Sox to win, so the Red Sox are 
going to win. But they are still in last place.
    You can say it all day long, but Dodd-Frank did not codify 
too-big-to-fail. Just the opposite. It prevented it from 
happening in the future.
    And it is amazing. Where was the outrage? You must have 
missed the hearings we had. It made me a movie star, Mr. 
Garrett. ``Inside Job'' made me a movie star by expressing the 
outrage of the American people when we were on that side of the 
aisle in the Majority passing the most important bill in a 
lifetime in the Dodd-Frank bill to express outrage the way we 
are supposed to through legislation. The legislation that you 
and your friends have decided to vote against, to try to kill 
at every opportunity, to underfund, to make sure that the 
regulators cannot do their job, and you won't even give them 
the time to put the regulations in place to see if they happen.
    The truth is I am not outraged by this particular loss, 
because the numbers are relatively small in comparison to other 
things. However, I do think it is important to ask thoughtful, 
insightful questions about what happened--
    Chairman Bachus. Thank you.
    Mr. Capuano. --why they happened, and how we can prevent 
them from happening in a bigger way in the future. That is the 
outrage.
    Chairman Bachus. Thank you.
    I can see we are not quite ready to break into a 
``Kumbaya'' moment. Welcome to the serenity of the Financial 
Services Committee.
    This concludes our opening statements, and without 
objection, all Members' written statements will be made a part 
of the record.
    The Chair wishes to remind our guests that the 
manifestation of approval or disapproval, including the use of 
signs and placards, is a violation of the rules which govern 
the committee; and the Chair wishes to thank our guests in 
advance for their cooperation in maintaining order and decorum.
    Let me say that there is agreement, I think, among all the 
panel that your agencies are all functioning under an increased 
workload, a greatly increased workload, and that you are facing 
many challenges with not only the economy but with adopting new 
rules and increased supervision, and that you are functioning 
under budgetary restraints. Particularly, I think the SEC and 
the CFTC, your workload has greatly increased, and your budget 
doesn't reflect it.
    Mr. Frank. Mr. Chairman, parliamentary inquiry? Are we 
going to hear the opening statements?
    Chairman Bachus. Yes, we will do that right now.
    Mr. Frank. Is there time for opening statements?
    Chairman Bachus. Oh, right now would be great.
    Mr. Frank. Okay. I thought you seemed to be--
    Chairman Bachus. Oh, no, not at all. I was just introducing 
the first panel, thanking them for their attendance, and 
acknowledging that they--
    Mr. Frank. Yes, but that shows preferences.
    Chairman Bachus. Well, it is the prerogative of the Chair.
    Mr. Frank. Hold on, Mr. Chairman. The Chair is under the 
same time limits as any other Member.
    Chairman Bachus. I am saying if you introduce the panel--
you wish to protest.
    All right. We will go forward and remind the witnesses 
that, without objection, your written statements will be made a 
part of the record, and you will each be recognized for a 5-
minute summary of your testimony.
    Our first panelist is Thomas Curry, Comptroller of the 
Currency. This is your first appearance before our committee 
since you were sworn in as Comptroller in April, and we look 
forward to a productive working relationship with you, as we 
did at the FDIC, and we welcome your attendance.
    Thank you, Mr. Curry.

STATEMENT OF THE HONORABLE THOMAS J. CURRY, COMPTROLLER OF THE 
   CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY (OCC)

    Mr. Curry. Thank you, Chairman Bachus, Ranking Member 
Frank, and committee members. I appreciate this opportunity to 
discuss the OCC's perspectives on JPMorgan Chase's losses. My 
written testimony also includes background on our approach to 
supervising large banks and our efforts to raise supervisory 
expectations on these institutions. This material provides 
important context for understanding how we are increasing our 
awareness of risks facing banks and the banking system, 
ensuring these risks are understood and well-managed, and 
raising our expectations for governance and oversight, capital, 
reserves, and liquidity.
    It will take some time to achieve these objectives, and we 
must be vigilant in maintaining our course. That course leads 
towards strong, effective supervision and towards improved 
soundness of our banking system so that it can fairly and 
effectively serve its customers and communities.
    The OCC is the primary regulator of JPMC's national bank 
where the transactions leading to its losses occurred, and we 
are responsible for the prudential supervision of the bank. In 
early April, information became available indicating risks in 
certain activities conducted within its Chief Investment 
Office. In response, OCC examiners met with bank management to 
discuss the bank's transactions and the current state of the 
position. OCC examiners directed the bank to provide additional 
details regarding the transactions, their scope, and risk.
    Our examiners were in the process of evaluating the bank's 
current position and strategy for risk reduction when, at the 
end of April and during the first days of May, the value of the 
position deteriorated rapidly. As the positions deteriorated, 
discussions turned to corrective actions and steps necessary to 
mitigate and reduce the bank's position.
    In response to these events, we have undertaken a two-
pronged review of our supervisory activities. The first 
component focuses on evaluating the adequacy of current risk 
controls at the bank informed by their application to the 
positions at issue. We are actively assessing the quality of 
management and risk management, board oversight, the types and 
reasonableness of risk measurement metrics and limits, the 
model governance review process, and the quality of work by the 
independent risk management team and internal auditors.
    We are also assessing the adequacy of the information and 
reporting provided to bank management and to the OCC. Quality 
supervision is dependent on the quality of information 
available to examiners. The second component evaluates the 
lessons learned from this episode that could enhance risk 
management processes at this and other banks. Consistent with 
our supervisory policy of heightened expectations for large 
banks, we are demanding that the bank adhere to the highest 
risk management standards.
    We are not limiting our inquiry to the particular 
transactions at issue. We are assessing the adequacy of risk 
management throughout the bank. We are using these events to 
broadly evaluate the effectiveness of the bank's risk 
management within its CIO function and to identify ways to 
improve our supervision. If corrective action is warranted, we 
will pursue appropriate informal or formal remedial action.
    While the losses raise serious questions and may affect the 
bank's earnings, these losses do not present a solvency issue. 
JPMC's national bank has approximately $1.8 trillion in assets 
and $101 billion in Tier 1 common capital. It has improved its 
capital reserves and liquidity since the financial crisis, and 
those levels are sufficient to absorb this loss.
    It is also worth noting that this loss does not threaten 
the broader financial system.
    There has been much discussion about whether these JPMC 
activities would be permissible under the proposed Volcker 
Rule. While it is premature to reach any conclusion before our 
review is complete, this episode will certainly help focus our 
thinking on these issues and help regulators ask fresh 
questions.
    Before closing, I want to stress my commitment to strong 
supervision and to taking every opportunity to improve how we 
accomplish our mission. This commitment will be a theme that 
runs throughout my tenure as Comptroller of the Currency, and I 
look forward to answering your questions.
    Thank you.
    [The prepared statement of Comptroller Curry can be found 
on page 94 of the appendix.]
    Chairman Bachus. Thank you, Comptroller, for that excellent 
statement.
    SEC Chairman Schapiro, you are recognized for your 5-minute 
statement. And happy birthday.
    Ms. Schapiro. Thank you.
    Mr. Frank. Mr. Chairman, I ask unanimous consent that we 
silently insert ``Happy Birthday'' into the record.

  STATEMENT OF THE HONORABLE MARY L. SCHAPIRO, CHAIRMAN, U.S. 
            SECURITIES AND EXCHANGE COMMISSION (SEC)

    Ms. Schapiro. Thank you very much.
    Chairman Bachus, Ranking Member Frank, and members of the 
committee, I appreciate the opportunity to testify on behalf of 
the Securities and Exchange Commission regarding the 
significant trading losses announced last month by JPMorgan 
Chase.
    On May 10, 2012, JPMorgan Chase, a bank holding company 
with $2.3 trillion in consolidated assets, announced it had 
incurred a $2 billion loss stemming from trades executed by its 
Chief Investment Office. The company also stated that it could 
face additional losses.
    The losses reported by JPMorgan appear to have occurred in 
the bank's London branch and perhaps in other affiliates, but 
not in the broker-dealer subsidiary that is directly supervised 
by the SEC. Nevertheless, as a publicly held company, JPMorgan 
is subject to SEC reporting requirements and must disclose 
certain market risks in its annual and quarterly reports. This 
report includes line-item requirements for disclosure of 
specific information about risk as well as principles-based 
disclosure about the risks and uncertainty companies face.
    Although the Commission does not discuss investigations 
publicly, I can say that in cases of this nature, the SEC's 
primary authority relates to the appropriateness and 
completeness of the entity's financial reporting and other 
public disclosures and its financial accounting and internal 
controls over financial reporting.
    Under an SEC rule that requires quantitative market risk 
disclosure, companies are permitted to use one of three 
alternatives to disclose these risks. One of those options is 
Value at Risk, or VaR, disclosure that expresses the potential 
loss in future earnings, fair values or cash flows of market-
sensitive instruments over a selected period of time and the 
likelihood of losses resulting from changes in market factors.
    Market risk must be disclosed annually as of the end of the 
company's fiscal year. In addition, on a quarterly basis, the 
company is required to provide discussion and analysis of the 
sources and effects of any material changes in the market risk 
reported at the close of the previous year.
    If a company chooses to use VaR to comply with its market 
risk exposure requirement, it must also disclose any changes to 
key model characteristics and to the assumptions and parameters 
used as well as reasons for the change. Changes to the scope of 
the instruments included within the model and the reasons for 
those changes must be disclosed as well.
    The company also must provide qualitative disclosure of 
primary market risk exposures and how it manages such risks. 
Like the quantitative disclosure, qualitative disclosures are 
required annually, with material changes reported quarterly.
    Generally Accepted Accounting Principles (GAAP) also 
necessitate detailed information about derivative instruments 
in the notes to the financial statements. The mandated 
disclosures include aggregating information regarding volume, 
fair value, maturity and credit risk, qualitative information 
about the entity's objective in holding the instruments, and a 
discussion of risk management.
    If there are compensation policies and practices that 
create risk and are reasonably likely to have a material 
adverse affect on the company, the SEC's rules also call for 
disclosure of the policies or practices as they relate to risk 
management and risk-taking incentives in the company's annual 
proxy statement.
    Our rules also require that the proxy statement contains 
specific disclosure of the board's role in risk oversight.
    In addition, certain principles-based rules require 
disclosure of a broad range of risks, including a discussion of 
known trends, events, demands, commitments, and uncertainty 
that are reasonably likely to have a material effect on 
financial condition or operating performance.
    This provision would mandate disclosure, for example, if a 
company was experiencing trading losses that are different from 
past experience and, as a result, its current year results are 
likely to be materially different from the past.
    Similarly, SEC rules require companies to describe the 
material risks they face and how particular risks affect the 
company. All disclosures must be complete and not misleading.
    In conclusion, although the trading losses of JPMorgan do 
not appear to have occurred in an entity directly supervised by 
the SEC, the examination and review of the causes and 
implications of the trading losses are ongoing. Once we have a 
fuller understanding of these issues, we will be in a better 
position to determine whether additional regulatory or 
legislative action is appropriate.
    And I am, of course, pleased to answer your questions.
    [The prepared statement of Chairman Schapiro can be found 
on page 133 of the appendix.]
    Chairman Bachus. Thank you, Chairman Schapiro, for that 
thoughtful and informative opening statement.
    At this time, I recognize CFTC Chairman Gary Gensler, who 
has been before our committee many, many times, and we welcome 
you back.
    Mr. Gensler. I think it is my 8th time in this job, and 
maybe a half dozen times in my earlier job.

   STATEMENT OF THE THE HONORABLE GARY F. GENSLER, CHAIRMAN, 
          COMMODITY FUTURES TRADING COMMISSION (CFTC)

    Mr. Gensler. Thank you, Chairman Bachus, Ranking Member 
Frank, and members of the committee.
    When I hand one of my three daughters the car keys, I sleep 
better knowing that there are common-sense rules of the road. 
There are stop signs, traffic lights, and speed limits. There 
are prohibitions against drunk driving, and there are cops on 
the street to enforce all of these rules and keep my daughters 
safe.
    Similarly, when my mom and dad, neither of whom worked in 
finance or even completed college, invested their savings, our 
family benefited from the securities markets common-sense rules 
of the road.
    It was during the Great Depression that President Roosevelt 
asked Congress to put in place rules to bring transparency to 
the securities markets as well as the futures markets and 
protect investors against fraud, manipulation, and other 
abuses. I believe these critical reforms of the 1930s are at 
the foundation of our strong capital markets and many decades 
of economic growth.
    Swaps subsequently emerged in the 1980s. They provide 
producers and merchants a means to lock in a price of a 
commodity, an interest rate, or a currency rate; and our 
economy benefits from a well-functioning swaps market, as it is 
essential that companies have the ability to manage their risk.
    The swaps marketplace, however, lacked necessary street 
lamps to bring it out of the shadows or traffic signals to 
protect the public from a financial crash. In 2008, swaps, in a 
particular credit default, concentrated risk in the financial 
institutions and contributed to the financial crisis and the 
worst economic crisis Americans have experienced since the 
Great Depression.
    Congress responded with the Dodd-Frank Act, bringing 
common-sense rules of the roads to the swaps marketplace.
    With regard to the credit default swaps index products 
traded by JPMorgan Chase, the CFTC is currently midstream in 
standing up reforms that promote transparency and lower risk in 
this marketplace. The CFTC has made significant progress in 
implementing the law's historic reforms, completing 33 key 
roles. But 4 years after the financial crisis, and yes, 2 years 
since the passage of Dodd-Frank, I think it is time that we 
finish the job and complete the nearly 20 remaining rules.
    And we must not forget the lessons of the 2008 crisis and 
earlier. Swaps executed offshore by U.S. financial institutions 
can send risk straight back to our shores. It was true with the 
London and Cayman Island affiliates of AIG, of Lehman Brothers, 
of Citigroup, and of Bear Stearns. Yes, they all were in London 
and the Cayman Islands. And, yes, a decade earlier, Long-Term 
Capital Management, which this committee had hearings on, that, 
too, was booking its $1.2 trillion in derivatives where? The 
Cayman Islands, offshore.
    The recent events of JPMorgan Chase, where it executed 
swaps through its London branch, are a stark reminder of this 
reality of modern finance. For the public to be protected, 
swaps market reform should cover transactions with these 
overseas branches, overseas affiliates guaranteed here in the 
United States, or even something called a conduit affiliate.
    I think failing to do so would mean American jobs and 
markets would likely move offshore. They would. They would go 
where there is lower cost, and lower regulation.
    But, particularly in the crisis, where would the risk come? 
Right back to our shores. Right back to the American taxpayers.
    Dodd-Frank was successful in closing one London loophole 
for exchanges. Why would we leave another loophole for the 
dealers behind?
    Some in the financial community have suggested we retreat. 
Some in Congress even suggested cutting the funding of market 
oversight. But the ever-growing financial storm clouds hanging 
over Europe and lessons from the crisis should guide us. Now is 
the time to bring common-sense rules of the road to the swap 
market.
    Eight million Americans lost their jobs, millions of 
families lost their homes, and small businesses across the 
country folded when financial institutions were permitted to 
drive on dimly-lit swaps roads which had no rules, no cops. I 
think we would all sleep better if the complex roads of the 
swaps market were well-lit with transparency, had rules to 
lower risk to the bystanders, the American public, and that the 
agency tasked with overseeing them had enough funding to police 
them. Otherwise, I would say, hold onto your car keys.
    [The prepared statement of Chairman Gensler can be found on 
page 114 of the appendix.]
    Chairman Bachus. Thank you, Chairman Gensler.
    At this time, I recognize Acting Chairman Martin Gruenberg, 
who most of us know did an excellent job as Chief Counsel for 
Senator Sarbanes and did excellent work on Sarbanes-Oxley. I 
think you have been with the FDIC for about 7 years, and 
Chairman since last year. So we welcome you back before the 
committee, and we always welcome your testimony.

  STATEMENT OF THE THE HONORABLE MARTIN J. GRUENBERG, ACTING 
     CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC)

    Mr. Gruenberg. Thank you very much, Mr. Chairman.
    Chairman Bachus, Ranking Member Frank, and members of the 
committee, thank you for the opportunity to testify this 
morning on behalf of the Federal Deposit Insurance Corporation 
on bank supervision and risk management as it concerns recent 
trading losses at JPMorgan Chase.
    The recent losses at JPMorgan Chase revealed certain risks 
that reside within Large Complex Financial Institutions. They 
also highlighted the significance of effective risk controls 
and governance at these institutions.
    The four FDIC-insured subsidiaries of the JPMorgan Chase 
firm have nearly $2 trillion in assets and $842 billion in 
domestic deposits. As the deposit insurer and backup supervisor 
of JPMorgan Chase, the FDIC staff works through the primary 
Federal regulators--the Comptroller of the Currency and the 
Federal Reserve System--to obtain information necessary to 
monitor the risk within the institution.
    The FDIC maintains an on-site presence at the firm, which 
currently consists of a permanent staff of four professionals. 
The FDIC staff engages in risk monitoring of the firm through 
cooperation with the primary Federal regulators. Following the 
disclosure of JPMorgan Chase's losses, the FDIC has added 
temporary staff to assist in our current review. The team is 
working with the institution's primary Federal regulators to 
investigate both the circumstances that led to the losses and 
the institution's ongoing efforts to manage the risks at the 
firm. The agencies are conducting an in-depth review of both 
the risk measurement tools used by the firm and the governance 
and limit structures in place within the Chief Investment 
Office unit where the losses occurred. Following this review, 
we will work with the primary regulators to address any 
inadequate risk management practices that are identified.
    Following the announcement of these losses in May, the FDIC 
joined the OCC and the New York Federal Reserve Bank in daily 
meetings with the firm. Initially, these meetings focused on 
getting an understanding of the events leading up to the 
escalating losses in the CIO synthetic credit portfolio. The 
FDIC has continued to participate in these daily meetings 
between the firm and its primary regulators. We are looking at 
the strength of the CIO's risk management, governance, and 
control frameworks, including the setting and monitoring of 
risk limits. The FDIC is also reviewing the quality of CIO risk 
reporting that has historically been made available to firm 
management and the regulators.
    Our discussions have also focused on the quality and 
consistency of the models used in the CIO as well as the 
approval and validation processes surrounding them. Although 
the focus of this review is on the circumstances that led to 
the losses, the FDIC is also working with JPMorgan Chase's 
primary Federal regulators to assess any other potential gaps 
within the firm's overall risk management practices.
    As a general matter, and apart from the specifics of this 
situation, evaluating the quality of financial institutions' 
risk management practices, internal controls, and governance is 
an important focus of safety and soundness examinations 
conducted by the Federal banking agencies. On-site examinations 
provide an opportunity for supervisors to evaluate the quality 
of the loan and securities portfolios, underwriting practices, 
credit review and administration, establishment of and 
adherence to risk limits, and other matters pertinent to the 
risk profile of an institution.
    One important element of risk management is that senior 
management and the Board receives accurate and timely 
information about the risks to which a firm is exposed. Timely 
risk-related information is needed by institution management to 
support decision making and to satisfy the disclosure 
requirements and is an important element to supervisory review.
    Without speaking to the specifics of the case for which a 
review is currently under way, the recent losses attest to the 
speed with which risks can materialize in a large complex 
derivative portfolio. The recent losses also highlight that it 
is important for financial regulatory agencies to have access 
to timely risk-related information about derivatives and other 
market-sensitive exposures, to analyze the data effectively, 
and to regularly share findings and observations.
    Thank you, and I would be pleased to respond to your 
questions.
    [The prepared statement of Acting Chairman Gruenberg can be 
found on page 129 of the appendix.]
    Chairman Bachus. Thank you, Chairman Gruenberg.
    And, as he said, these are ongoing examinations and 
investigations, and there is some restraint on their part from 
giving conclusions.
    Our next witness is Federal Reserve General Counsel 
Alvarez.
    Before you begin, Mr. Alvarez, I want to thank you for 
being with us today. As many of the panel and our members know, 
the Federal Open Market Committee is meeting this morning. 
Normally, representatives of the Fed do not testify while the 
FOMC is meeting to discuss monetary policy. And we very much 
appreciate the Fed's willingness to accommodate the committee 
by making its General Counsel available to testify this 
morning.
    But the Chair reminds Members that Mr. Alvarez is here to 
testify about the Fed's supervision of JPMorgan Chase, and he 
will not entertain questions on the monetary policy issues on 
which the FOMC is meeting today. Members will have a chance in 
the next few weeks to question Chairman Bernanke about monetary 
policy during our semiannual Humphrey Hawkins hearing.
    Mr. Frank. Mr. Chairman, let me just thank you for making 
that statement, and I would like to reinforce that and ask all 
the Members to please respect that.
    Chairman Bachus. Thank you. I thank the ranking member.
    General Counsel Alvarez, you are now recognized.

   STATEMENT OF SCOTT G. ALVAREZ, GENERAL COUNSEL, BOARD OF 
         GOVERNORS OF THE FEDERAL RESERVE SYSTEM (FED)

    Mr. Alvarez. Chairman Bachus, Ranking Member Frank, and 
members of the committee, thank you for the opportunity to 
testify this morning.
    Last month, JPMorgan Chase announced significant trading 
losses on credit derivative positions in its Chief Investment 
Office. These trading losses arose out of a complex synthetic 
credit portfolio that was primarily composed of long and short 
credit default swap positions on a number of different credit 
assets and indices. JPMC has stated that a combination of risk 
management failures and execution errors and the complexity and 
illiquidity of the positions led to the losses.
    In response to these significant trading losses, the 
Federal Reserve has been assisting the OCC in the oversight of 
JPMC's efforts to manage and de-risk the CIO portfolio. We are 
also working closely with the OCC and the FDIC to help ensure 
that any risk management failures, governance weaknesses, or 
other potential problems that may have given rise to the CIO 
losses are promptly and appropriately addressed.
    In addition, the Federal Reserve continues to evaluate 
whether any weaknesses exposed by this incident may be present 
in other parts of the firm engaged in similar activities. While 
we have to date found no evidence that they are, this work is 
not yet complete.
    This incident is a strong remainder of the fundamental 
importance of capital requirements, especially for the largest 
banking firms. The purpose of capital is to absorb 
unanticipated as well as anticipated losses. With strong 
capital, business losses are borne by the firm's shareholders 
and not by depositors, customers, or taxpayers; and the large 
and absolute dollar terms need not threaten the safety and 
soundness of the firm.
    For precisely this reason, over the past several weeks the 
Federal Reserve, the Comptroller of the Currency, and the FDIC 
have jointly finalized reforms that will materially strengthen 
the market risk capital requirements applicable to the largest, 
most complicated banking firms.
    We have also proposed changes to implement the Basel III 
capital reforms and the new capital requirements in the Dodd-
Frank Act. Importantly, many of these reforms specifically 
address and strengthen the capital requirements applicable to 
trading activities and positions, including complex 
derivatives.
    The stress tests are supervisory complements to these 
improvements to the regulatory capital framework. The most 
recent stress test conducted by the Federal Reserve 
demonstrated that 15 of the 19 largest banking firms in the 
United States would maintain capital above prescribed 
standards, even in a very stressed economic scenario. The Tier 
1 common ratio for these firms, which compares high-quality 
capital to risk-weighted assets, has doubled during the past 3 
years to a weighted average of 10.9 percent at the end of the 
first quarter of 2012, from 5.4 percent at the end of the first 
quarter of 2009.
    The trading losses announced by JPMC have also focused 
attention on the Volcker Rule provision of the Dodd-Frank Act, 
which contains an exemption from the ban on proprietary trading 
to allow risk-mitigating hedging activities. The agencies have 
jointly proposed rules that would incorporate the terms of the 
statutory exemption.
    Importantly, the agencies have also proposed to add 
requirements designed to enhance the risk management of hedging 
activities. Among these added restrictions are a requirement 
for formal policies and procedures governing hedging 
activities, hedging instruments, and hedging strategies, a 
formal governance process, documentation requirements, internal 
audits, and requirements that incentive compensation paid to 
traders engaged in hedging not reward proprietary trading.
    The Federal Reserve has received many comments on this 
proposal, including comments informed by the trading losses 
occurring within JPMC's CIO. We will consider all of these 
comments carefully as we work with the other agencies to 
finalize the regulations implementing the Volcker Rule.
    Thank you very much, and I would be pleased to answer your 
questions.
    [The prepared statement of General Counsel Alvarez can be 
found on page 86 of the appendix.]
    Chairman Bachus. Thank you, Counsel.
    Before I begin my 5 minutes, let me say to all Members, if 
you don't get your question completed before the 5 minutes is 
over, you will be stopped right there. Only if you have your 
question out and the witness is responding, will you be allowed 
to have an answer to that question.
    Comptroller Curry, you testified before the Senate Banking 
Committee 2 weeks ago about the risk management deficiencies at 
JPMorgan Chase and your agency supervision of the institution. 
As your review of this matter has continued, have you learned 
anything new over the last 2 weeks about what led to these 
losses? And, in your view, were there appropriate risk controls 
in place at the Chief Investment Office where the relevant 
trades took place?
    Mr. Curry. Thank you, Mr. Chairman.
    We are continuing our review of the facts surrounding the 
trading loss at JPMC. However, we do believe as a preliminary 
matter that there are apparent serious risk-management 
weaknesses or failures at the bank. We are attempting, as I 
mentioned, to continue to examine the root causes for those 
failures and to determine whether or not there are other 
weaknesses elsewhere in the bank besides the Chief Investment 
Office.
    Ultimately, we are looking to ensure that we also learn how 
to improve our supervisory processes and examination practices 
to make sure that we have a better handle on emerging or 
similar risks in the institutions that we supervise, 
particularly our large bank area of supervision.
    Chairman Bachus. Thank you.
    During the April 13, 2012, analyst call during which 
JPMorgan Chase officials initially dismissed the significance 
of the London Whale trade, the firm's chief financial officer, 
Douglas Braunstein, stated, ``We are very comfortable with our 
positions as they are held today, and I would add all of those 
positions are fully transparent to the regulators. They review 
them, have access to them at any point in time, and get the 
information on those positions on a regular and recurring basis 
as part of our normalized reporting.''
    Is Mr. Braunstein's description of the regulators' access 
to information about the positions being taken by the firm at 
any given time accurate?
    Mr. Curry. Generally, we have wide access to the management 
reports that the bank itself has given for a variety of its 
activities, including the activities of the CIO office. What we 
are looking at presently is whether or not that reporting was 
sufficiently granular or not to disclose both to us and to the 
bank itself the size and the complexity and the potential risk 
of the positions that they took with their synthetic credit 
book.
    Chairman Bachus. All right. So the OCC failed to identify 
the risk inherent in these positions until after the fact, 
although you did have access to the information, because the 
descriptions were not transparent?
    Mr. Curry. In hindsight, if the reporting were more robust 
or granular, we believe we may have had an inkling of the size 
and potential complexity and risk of the position. What we are 
looking at on a prospective basis is to ensure that there is a 
robustness to the risk management reporting within the CIO's 
office and throughout the bank. And that is one of the lessons 
learned here.
    Chairman Bachus. Thank you.
    I guess if there is proprietary information, you have to 
guard that and make sure that there is no disclosure.
    Mr. Curry. Absolutely.
    Chairman Bachus. Counsel Alvarez, one of the things about 
the JPMorgan Chase loss that I am having difficulty with is 
which regulators are responsible for what. I know the OCC 
regulates the national bank where the chief investment officer 
is located, but the Federal Reserve regulates the holding 
company. What specifically did the Federal Reserve do in 
supervising the holding company that could have prevented a 
sudden loss like this from happening? And particularly, what 
responsibility does the New York Fed have for supervising 
JPMorgan?
    Mr. Alvarez. Mr. Chairman, it is true that the setup for 
regulation of these institutions is divided among different 
institutions and the Federal Reserve is the holding company 
supervisor. But I don't think that it was a result of--that the 
difference in point of views or the division of responsibility 
played a role in this particular case.
    We have been working very closely with the other regulators 
to understand the risks here. I think what has happened here is 
actually more a breakdown in the risk management of the 
organization itself. The firm has acknowledged that. We are 
working with the firm and the other regulators to make sure 
they repair those risk-management problems.
    As I mentioned before, one of the things the Federal 
Reserve has focused on a lot as the consolidated supervisor is 
making sure these institutions have adequate capital. That is 
the best backstop here to any supervisory or management 
failure, for that matter; and there is adequate capital in this 
case to absorb the losses and make sure the shareholders and 
not the taxpayers absorb those losses.
    Chairman Bachus. Thank you.
    Mr. Frank, for 5 minutes.
    Mr. Frank. I will pick up on that point about the divided 
authority. Because I want to stress again, despite the opening 
statement comment by my colleague, the chairman, I am aware of 
no proposal that came from either side for a consolidation 
beyond where we already were.
    We did put the OCC and the OTS together. But to go further 
would require--to take the example just given, you either take 
holding company supervision away from the Federal Reserve or 
put the Federal Reserve in charge of what the OCC now does. I 
don't remember anyone proposing that.
    One of the things people need to remember is that we have a 
more complex structure in the banking area in part because you 
have the dual banking system, and we had State-chartered banks 
resistant to being regulated by the regulator of the Federal 
banks.
    As to the SEC and the CFTC, I agree. It is because the 
Midwest hates the coast and the coast thinks they can put 
something over on the Midwest, and that is why we have two 
agencies where we ought to have one. And anybody who wants to 
propose to merge them, I am with you. Because I am leaving and 
don't have to deal with the flak.
    And I appreciate what Mr. Alvarez said, that you have been 
able to work together. One of the things I know from Mr. 
Alvarez is, when he talks on page six about what they are doing 
in the Volcker Rule, in addition to is it in or out, one of the 
things that seems to be very useful are the rules you are 
proposing for hedging.
    Because one of the debates here is, as I read some of what 
Mr. Dimon says, it seems to me he can be interpreted as saying 
that if the bank is afraid of losing money from a certain set 
of events in the world, anything they do to make money 
somewhere else counts as a hedge because it would be an offset 
against that loss. And you talk in your testimony here about 
requiring more specific hedging activities that meet a more 
traditional definition of a hedge, and I think that would be 
useful.
    But let me now just go to Mr. Gensler. If the legislation 
that passed this committee on extraterritoriality were to 
become law, and it went to the Agriculture Committee and they 
pulled it from the agenda, if that had become law, what would 
the effect have been on the transactions of JPMorgan Chase?
    Mr. Gensler. I think it would be a major retreat from 
reform. And, as I understand it, these trades were executed in 
London in a branch, and they would not be covered.
    Mr. Frank. So that if that bill became law, those trades in 
London would be totally outside the supervision insofar as 
derivatives? They presumably would be subject to some bank 
supervision, but they would be not subject to anything about 
derivatives?
    Mr. Gensler. I believe so. It depends on how one provision 
in that statute is interpreted. But, yes, I believe so.
    Mr. Frank. And if the provisions of the Reform Act were 
fully implemented--and they have been held up in part because 
you had that three-to-two situation, and that is what is there. 
You have comments. You have been sued a couple of times. People 
flood you with comments, threaten to sue you if you don't edit 
them carefully, and then don't give you enough people to read 
them. So it is a little hard for me to be upset at you.
    Mr. Gensler. Thank you.
    Mr. Frank. But if the provisions of the bill had been fully 
implemented, what would the impact of that have been on the 
trades? Leaving aside the Volcker Rule, and I want to stress 
the Volcker Rule is only a part of this. If all we did was 
enforce a tough Volcker Rule and drove derivatives out of banks 
in an unregulated fashion, that wouldn't make anybody any 
better off either.
    So take the non-Volcker Rule derivative provisions of the 
bill. If they had been fully implemented, if you had been given 
the staff, or when they are fully implemented, would that have 
had any impact on these trades?
    Mr. Gensler. I think there would still be risk in the bank, 
but they would be more transparent to their managers up the 
stream.
    The trades themselves, because they were largely in credit 
default swap indices, would be in central clearing, not only 
for the bank but for the hedge funds that were on the other 
side, and they would have transparent pricing out to the 
public.
    So risk tends to be better managed when you have public 
market transparency. I think Chairman Neugebauer said that 
earlier, too. I think transparency helps a great deal.
    Mr. Frank. I am glad you mentioned that. Because it 
stresses that much of what we tried to do in the derivative 
field outside of the Volcker Rule was to bring more market 
activity there.
    And I must say I have found that some of my friends in the 
financial community regard competition and openness as a great 
spectator sport; they like to see other people engage in it, 
but they often have reasons why their own business is too 
delicate and too complex and too obscure to survive it.
    It does seem to me that if this was in effect, Mr. Dimon 
and his people might have learned about some of this earlier. 
Is that possible?
    Mr. Gensler. I think that is right, even because of an 
internal business conduct rule, risk management rule we passed 
earlier this year. It has to go up the chain, and they have to 
manage these. But I do think transparency would have lowered 
the risk and also central clearing for the hedge funds as well 
as the bank.
    Mr. Frank. Let me ask, finally, on the Volcker Rule, and I 
know it is still being considered, one of the things that I 
think Mr. Dimon acknowledges led to a problem here, when it 
turned out that some of the transactions in the hedge were 
going bad, rather than try to withdraw from them and diminish 
them to cut the losses, they expanded them and got themselves 
into more difficulty. To the extent that the Volcker Rule 
defines hedges more narrowly and more specifically and it 
doesn't become a license to just do all kinds of things because 
if they make money they have offset losses, I think we will be 
much better off.
    But, Mr. Chairman, my time has expired; and I appreciate 
that.
    Chairman Bachus. Thank you.
    I would like to ask unanimous consent to correct the record 
by submitting H.R. 3311, which House Republicans on the 
Financial Services Committee sponsored, which would have 
consolidated the bank supervisory responsibilities of the OTS, 
the Office of the Comptroller of the Currency, the Federal 
Deposit Insurance Corporation, and the Federal Reserve into a 
new agency, and also would have established a new Office of 
Consumer Protection within that agency.
    Mr. Frank. Reserving the right to object, Mr. Chairman, 
when was that introduced?
    Chairman Bachus. In March of 2009.
    Mr. Frank. Further inquiry: now that you are in the 
Majority, have we had a hearing on that? Are we moving on that?
    Chairman Bachus. Well, you were the chairman.
    Mr. Frank. No. But now, you are the chairman, and you have 
been for a year-and-a-half. Have we taken any action on that 
bill? Have you reintroduced it in this Congress?
    Chairman Bachus. No. We are having trouble enough dealing 
with Dodd-Frank.
    Mr. Frank. Well, but that deals with it. So you have not 
reintroduced it in this Congress.
    Chairman Bachus. Thank you.
    Mr. Hensarling for 5 minutes.
    Mr. Hensarling. Thank you, Mr. Chairman; and I appreciate 
your comments on Dodd-Frank. During its passage, many of us 
were told it would end the specter of too-big-to-fail. Many of 
us thought, frankly, the opposite might be true, that the big 
would get bigger, the small would become fewer, and the 
taxpayer would get poorer.
    Chairman Gruenberg, I have looked at the FDIC's Q-1 banking 
profile--not that I expect you to memorize this--and if I have 
my citation right, page 7, table 3(a) says that the cost of 
funding earning assets for institutions greater than $10 
billion is 22 basis points less than institutions with between 
$1 billion and $10 billion in assets. Are you familiar with 
this data? Does this sound about right to you?
    Mr. Gruenberg. In general, yes, sir.
    Mr. Hensarling. If I recall from memory--and I don't have 
the data at my fingertips--Fannie and Freddie, given their 
implicit government guarantee, enjoyed roughly a similar 
funding advantage. Maybe it was 30 basis points. So here we are 
almost 2 years after the passage of Dodd-Frank, and yet we see 
these larger banks still enjoying a funding differential 
advantage over their smaller competitors. If the legislation 
had ended the specter of too-big-to-fail, wouldn't we have 
expected this funding difference to narrow?
    Mr. Gruenberg. I think that is clearly an objective, 
Congressman. And we are seeing among some of the rating 
agencies downgrades of some of the large institutions because 
of the reduced expectation of public support in the event of 
failure, and actually we view that as a positive development 
and a core objective of the legislation.
    Mr. Hensarling. Isn't it true that since the passage of 
Dodd-Frank, the five largest banks have indeed grown larger? In 
fact, Mr. Alvarez, I am not sure you are familiar with the 
report, but the Dallas Fed in its recent annual report said, 
``For all its bluster, Dodd-Frank leaves too-big-to-fail 
entrenched.''
    I believe this is Federal Reserve data, and I will quote 
from a Bloomberg report quoting the data: ``Two years after 
President Barack Obama vowed to eliminate the danger of 
financial institutions that are too-big-to-fail, the nation's 
largest banks are bigger than they were before the financial 
meltdown.'' It goes on to list them--JPMorgan, Bank of 
America--and says, ``They held more than $8.5 trillion in 
assets at the end of 2011, equal to 56 percent of the U.S. 
economy, according to the Federal Reserve.''
    Mr. Alvarez, does that sound accurate to you?
    Mr. Alvarez. Recall, Congressman, that during the financial 
crisis there were some mergers of troubled institutions. So 
JPMorgan, for example--
    Mr. Hensarling. Let's start out with the basic question. Is 
the data accurate or is it not accurate?
    Mr. Alvarez. I don't know the data that you have. The 
general idea sounds right, but I am pointing out the reason I 
think that it sounds right is because there were some 
acquisitions of troubled firms. JPMorgan bought WaMu. Bank of 
America bought Merrill Lynch. And there were various mergers 
during the crisis to shore-up troubled firms.
    Mr. Hensarling. Back to you, Mr. Gruenberg, and my fear of 
the taxpayer potentially getting poorer. The Congressional 
Budget Office (CBO) has estimated that the Orderly Liquidation 
Authority contained within Dodd-Frank could weigh in at roughly 
$22 billion of taxpayer money. That is how they have scored it. 
Have you read CBO's report in this regard? Do you have a 
comment?
    Mr. Gruenberg. I am aware of it, Congressman. I guess the 
point I would make is that the assumption behind that report is 
that there would be large up-front borrowing in the event of 
the failure of a systemic institution borrowing from the 
Treasury.
    I guess two points to make: One, the Dodd-Frank Act, as you 
know, prohibits the use of any taxpayer money in the event of a 
failure of a systemic institution. Any use of Treasury funds 
would have to be paid for out of the assets of the failed 
company.
    Mr. Hensarling. I see I am out of time, but I believe that 
by definition, Treasury funds are taxpayer funds, and if you 
don't have a bailout, I don't think you need the taxpayer 
funds. Thank you.
    Chairman Bachus. Ms. Waters for 5 minutes.
    Ms. Waters. Thank you very much.
    Continuing with questions about the foreign branches and 
the affiliates of U.S. banks and this attempt to basically 
exclude them from Dodd-Frank, when risk is taken in a London 
branch of a bank, does that risk stay in London, Mr. Gensler?
    Mr. Gensler. No, generally, it doesn't. It can in calm 
waters, but in crisis--AIG was in London. Citigroup set up 
their special purpose vehicles, called SPVs, in London. So, 
often, it comes right back here crashing to our shores.
    And to Vice Chairman Hensarling, if the American taxpayer 
bails out JPMorgan, they would be bailing out that London 
entity as well. Let's hope that doesn't happen, but it would be 
London as well.
    Ms. Waters. This risk that was taken by the Whale in 
London, a $100 billion trade, could it effectively have the 
same kind of impact in the United States?
    Mr. Gensler. If it were so large to bring down that 
institution, yes. In a crisis, generally there is a run on the 
whole institution, and it is hard, it is almost impossible to 
sever off a limb--if I can use that expression--even if it is 
overseas.
    Ms. Waters. Chairman Schapiro, we have heard Chairman 
Gensler outline his approach to extraterritoriality. What can 
we expect from the SEC on this issue? Do you basically agree 
with him? And when can we expect it?
    Ms. Schapiro. Congresswoman, I do agree with respect to the 
potential reach of the rules to the London branch of a U.S. 
bank in this instance. I think he is right about that.
    With respect to the extraterritoriality more broadly, the 
SEC has been working very closely with the CFTC staff, but our 
Commission has not yet approved anything, so I can't speak 
definitively about what we will do. But our plan is to issue a 
release that holistically looks at the extraterritorial 
application of each and every Dodd-Frank rule and allow 
commentors the opportunity to give us their views on the entire 
approach when all the rules have been proposed for comment. So 
we hope this will occur sometime later this summer.
    Ms. Waters. Additionally, how did JPMorgan Chase's 
compensation structure figure in this trading loss? Were 
traders incented to take inappropriate risk? Dodd-Frank Section 
956 empowers the regulators to review compensation structures 
that encourage inappropriate risk-taking at financial 
institutions. This rule is currently a year overdue. When can 
we expect the SEC and other regulators to act on it?
    Ms. Schapiro. That is a joint rule among seven different 
agencies. And you are right. It has two general prohibitions: 
one is against excessive compensation; and the other is against 
compensation arrangements that incent employees to take risks 
that could present material financial loss to the company. And, 
for companies over $50 billion in total consolidated assets, 
there is a proposed requirement for a deferral for 3 years of 
50 percent of an executive officer's compensation and a 
requirement for the board's direct engagement in approving the 
compensation, policies, and plans with respect to risk-takers 
within the firm.
    I would say we are working very closely together to try to 
finalize the rule among the seven agencies. We have received a 
lot of comment letters. I don't have for you a specific date 
when it will be done.
    But I will also say that since I arrived, the SEC has put 
into place a set of rules that require disclosure about 
compensation plans that can expose a company to material 
adverse financial consequences by employees who are taking 
outsized risk, and that disclosure is already happening.
    Ms. Waters. So I guess I need to ask everyone, how long do 
we have to wait for the rule on this?
    Mr. Curry. I would hope, from the OCC's perspective, that 
we could accomplish a final rule as quickly as possible, 
Congresswoman.
    Mr. Gruenberg. Congresswoman, we strongly agree this rule 
should have a high priority, and we should try to move on it as 
quickly as we can.
    Mr. Alvarez. We, too, are working on it, but the Federal 
Reserve also put in place guidance that was very much along the 
lines of this rule before the Dodd-Frank Act was passed, so we 
are working hard with the other agencies to turn it into a rule 
for all.
    Ms. Waters. Thank you very much, Mr. Chairman. I yield 
back.
    Chairman Bachus. Thank you.
    Mr. Royce for 5 minutes.
    Mr. Royce. Thank you.
    Mr. Curry, as you know, my view in terms of the meltdown is 
that a big part of it was caused by the overleveraging of the 
GSEs, Fannie Mae and Freddie Mac, that was 100 to 1. When the 
housing market turned, that destroyed the GSEs. The investment 
banks being allowed to leverage at 30 to 1, they were doomed 
once the market turned. AIG was 170 to 1.
    I think that this incident of the JPMorgan Chase trading 
losses really brings front and center this issue again that 
capital is king. Capital is the ultimate buffer to protect 
against those unforeseen losses. It protects against the flawed 
risk models that the bank might have. It also protects against 
the mistakes the regulatory community might make. It protects 
against the asset bubbles that might have been caused by the 
regulatory community setting--the Fed setting the interest rate 
too low for too long and helping to cause that bubble.
    But the bottom line is, if you have the ratios right, you 
can survive the storm. And now that, in the view of a number of 
economists, we have institutionalized this too-big-to-fail 
problem with Dodd-Frank, the reality is that the only thing 
standing between the taxpayer and the failure of these 
institutions and the massive amounts of additional capital that 
would be required is the enforcement on these capital ratios.
    And that is what I wanted to go to, because investors are 
losing confidence in major banks' risk-weighted asset models, 
if we believe the financial press on this. There is a recent 
study of 130 institutional investors that found that 63 percent 
have less faith in bank models than they did 1 year ago; 83 
percent want to get rid of what they call ``model discretion.'' 
That is what I want to go to here.
    Because, as we move forward, the Basel Committee, prior to 
Basel III, made this observation that capital levels in 
American banks employing their own internal ratings approach 
would experience a capital reduction of 7 to 27 percent, while 
those adhering to the standardized approach would actually 
experience a 2 percent increase in capital demands.
    So my question to you is, what is the benefit of continuing 
to rely on this internal approach as opposed to the 
standardized approach?
    Mr. Curry. To answer your question, Congressman, I agree 
with you wholeheartedly that the importance of capital--it is 
the cushion that protects against errors of risk management, 
which is the primary bulwark against loss, or of risk of 
insolvency with an institution.
    In terms of--you have cited two issues: one issue with 
respect to the risk-weighting of assets; and one with respect 
to the use of models in setting capital levels.
    The issue of models and their use in capital is a key 
component of the capital regulations, and it is also a focus of 
the OCC in terms of its review and approval of banks' internal 
models for capital purposes. We have formal guidance that we 
issued a year ago emphasizing the importance of making sure the 
models are appropriately designed, monitored, and updated; and 
that is essential if we are going to continue to rely on models 
as a key component of the capital ratios.
    Mr. Royce. Here is my point: If institutional investors are 
demanding a move away from model discretion, and especially 
when you consider that the banks likely to use this less 
standardized model are the biggest banks, thus compounding 
their advantage out in the marketplace, it seems to me that 
during the crisis, we have seen where these models have failed, 
and it seems to me that it is pretty clear going forward that 
you have the discretion now to solve that problem, and while we 
are talking about the benefits of capital, the conversation 
shouldn't end there.
    I would hope that this incident at JPMorgan reinforces the 
notion that internal risk models often fail, and that when it 
comes to mandating capital levels, we would be well-served to 
focus our efforts on a simpler metric like minimum leverage 
ratios. Think about that going forward, if you would, minimum 
leverage ratios as an answer to this problem.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you.
    Mrs. Maloney?
    Mrs. Maloney. Thank you very much, Mr. Chairman.
    Some financial institutions have told me that they have 
terminated their proprietary trading desks. I would like to ask 
Mr. Curry, to what extent have financial institutions already 
begun to spin-off their proprietary trading desks in advance of 
the Volcker Rule becoming effective? How many have taken those 
steps and terminated it? And can you list those financial 
institutions?
    Mr. Curry. Thank you, Congresswoman.
    I believe that is the practice among many banks, but the 
actual activities of engaging in the prohibited proprietary 
trading and private equity investments or investments in hedge 
funds are also done at the holding company, which we don't 
supervise at the OCC. So I believe that is the trend within the 
industry, to move away in advance of the effective date of the 
Volcker Rule.
    Mrs. Maloney. Is there added benefit to doing this because 
they are legally required to? What role is the OCC playing in 
this process?
    Mr. Curry. We are not directing institutions to take 
specific actions with respect to those activities. The Federal 
Reserve, I believe, has issued some guidance that we signed 
onto in terms of the conformance period in which they should 
take appropriate steps to conform with the Volcker Rule.
    Mrs. Maloney. Can you list those financial institutions 
that have terminated these activities?
    Mr. Curry. I would have to get back to you, Congresswoman.
    Mrs. Maloney. Okay, thank you.
    I would like to ask the regulators about a disturbing 
pattern in the last few years of London literally becoming the 
center of financial trading disasters: AIG was bailed out, 
their financial products division, to the tune of $184 billion; 
the trade losses in Lehman are historical; the losses in UBS 
trading. It seems to be that every big trading disaster happens 
in London, and I would like to know why? Why is it happening in 
London and not the United States?
    Mr. Gensler, and then Mr. Curry and Mr. Alvarez, if you 
could give us some insights. It is a pattern that is happening.
    Mr. Gensler. I think that, with all respect, because I 
worked in New York, in your great City, they do have some time 
zone advantages, that they are between Asia and the United 
States, that we can't repeal the globe.
    But I also think that large financial institutions--and I 
used to do a little of this as a business matter--set up legal 
entities wherever they can. They set up hundreds if not 
thousands of legal entities to find the lower regulatory 
regimes or tax regimes to set up. And it is a disturbing 
pattern, but it is a very real pattern.
    Mrs. Maloney. So is there a lower regulatory regime? Is 
there a lower tax structure? I have asked others, and they have 
said there is not. So I would like to know, is there a lower 
standard for non-U.S. trading activities?
    Mr. Gensler. I would say, just in terms of the derivatives 
regime, that Europe has done an excellent job and just passed 
legislation similar to Dodd-Frank. But it is not up and running 
yet, and it does not yet have the pieces of transparency, 
public market transparency, that this Congress adopted. So 
there is still quite a debate.
    And I think if we were to leave the London branches of the 
U.S. banks or even the guaranteed affiliates out, it would be, 
so to speak, another loophole and a retreat from reform, where 
risk would come crashing back to our taxpayers and our Federal 
Reserve.
    This was a bank that has Federal Reserve discount window 
access and the FDIC insures its deposits. Why would we leave 
the branches out? I just don't understand why we would do that.
    Mrs. Maloney. Mr. Curry, how will Dodd-Frank allocate 
examiner resources? I read or heard in the last hearing with 
the Senate there were only five examiners from the OCC in 
London but hundreds in JPMorgan and other facilities. 
Basically, will this impact what happened and what is happening 
with other challenges? Will this impact how you allocate your 
examiner resources? And your comments on why London?
    Mr. Curry. In terms of our London presence of the OCC, we 
will use our experience here and our review of JPMorgan Chase 
to reevaluate the numbers and strength of the personnel in our 
London office. Our focus is really the London office is a 
branch of the bank, so that is our jurisdictional hook for the 
activity over there.
    We do have 65 individuals in the headquarters of JPMorgan 
Chase to supervise that entity. We also bring to bear in our 
targeted examinations and overall supervision of the bank the 
entire strength of the OCC in terms of expertise and numbers of 
examiners, which is close to 2,500 individuals. Those are 
brought in as needed into any particular area. So the number 
five may be misleading as to our ability to leverage our 
activities.
    We would also look to coordinate with the market regulators 
in terms of any issues that would affect both the branch and 
their jurisdiction.
    Chairman Bachus. Thank you, Comptroller.
    Mrs. Capito for 5 minutes.
    Mrs. Capito. Thank you, Mr. Chairman.
    I would like to talk a little bit about the issue of 
transparency. We have just heard Comptroller Curry say that 
there are over 65 Federal examiners at JPMorgan. The Federal 
Reserve has examiners. Mr. Gruenberg has some folks there as 
well. With all these people there, I am wondering, how was this 
missed?
    In the April 13, 2012, analyst call, the chief financial 
officer at JPMorgan said, ``We are very comfortable with our 
positions. They are healthy. I would add all these positions 
are fully transparent to the regulators. They review them, have 
access to them at any point in time, can get information on 
these positions on a regular and recurring basis.'' Is that a 
true statement?
    Mr. Curry. We are in the process of reviewing what exactly 
happened. That is one of the prongs of our review, how that 
position within the Chief Investment Office developed and 
whether or not there were appropriate controls in place. Our 
understanding is that neither the management or the bank was 
fully aware of the scope of that investment and that we were 
initially relying upon the information that was available to 
the bank.
    Mrs. Capito. Right. You are relying on the information 
available to the bank.
    Mr. Curry. Which is a critical component of risk management 
and the supervision of these institutions. There needs to be a 
strong architecture that has controls in place and vigorous and 
granular reporting, and that is really an area that we are 
looking into, is whether the reporting structure that was 
present in the CIO office met the standards that we expect and 
that JPMorgan would have in other aspects or areas of its 
business.
    Mrs. Capito. We would know that--the CIO, the office there, 
obviously has additional offices all throughout the country and 
the world who have additional offices all throughout the 
country and the world; and is the expectation that all the 
information is going to bleed up to--I suppose that is the 
system, but I think we see that is not exactly what was 
happening here.
    Mr. Curry. By way of background, the CIO office is 
centrally located within the New York headquarters of the bank.
    Mrs. Capito. Right.
    Mr. Curry. There were trading activities that were 
conducted in other locations--a handful of locations, including 
London. But in terms of the management controls, recordkeeping, 
key personnel; they were predominantly within the New York 
office, and that is where our focus has been.
    Mrs. Capito. Let me talk about communications between the 
five examiners in cases of these very large, and I am going to 
call them too-big-to-fail institutions. What kind of controls 
do you have for your communications? Do you regularly use the 
FSOC for communication? What are your protocols that you have 
put in place, since we know that was one of the major failures 
in 2008?
    I will ask Mr. Alvarez if he has a comment on that.
    Mr. Alvarez. Sure. We have set up a variety of ways of 
communicating with the other agencies. The FSOC is certainly 
one of the mechanisms.
    But for large institutions, we have supervisory colleges 
that include all the relevant supervisors. We meet regularly to 
talk about issues of concern. The examiners in the field also 
talk with each other. We talk with the OCC examiners at the 
national bank, we talk with the FDIC, with the SEC when there 
is a broker-dealer involved in the organization. So, we have 
actually quite a matrix of communication.
    Mrs. Capito. You have described a matrix of communication, 
but then I think it has come to light that, even with the 
matrix of communication, nobody was catching it. Nobody was 
seeing it. We know the hedge funders saw it eventually, because 
that is--at least the periphery that I read--that is the 
indicator. But, is the communication really working and are you 
communicating--is the information not as robust and as granular 
as it needs to be?
    Mr. Alvarez. So to keep this a little bit in context, there 
were significant changes in the portfolio, the CIO portfolio, 
in the first quarter of 2012, and those changes were very 
significant contributors to this loss.
    As the company itself has mentioned, the reports that the 
company generated, the kind of review and risk management it 
had in place had serious flaws to it. We had access to that 
information, but to the extent it was flawed and its own 
management didn't have a good handle on the information and 
understanding the risk, that would make it more difficult for 
us as well. So we have to rely on information that we get from 
the organization itself. If that is flawed, it is going to be a 
problem for us.
    Mrs. Capito. So that is Mr. Gensler's three daughters with 
the keys to the car. Thank you.
    Chairman Bachus. Thank you.
    Let me say this: Regular order will return when the second 
panel comes on. But in fairness to the Members who have been 
here the whole time, at least on the Republican side--I have no 
control over the Minority--we are going to continue down the 
row. We are not going to come back up, in fairness to all our 
members. So we will continue down the row.
    Ms. Velazquez, I want to acknowledge the loss of your 
mother.
    Ms. Velazquez. Thank you.
    Chairman Bachus. The members of the committee express our 
sympathy, and I recognize you for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Schapiro, it has come to light that JPMorgan Chase 
changed its value-to-risk model a number of times over the past 
6 months which led to its investments appearing less risky than 
they really were. Are there penalties for failing to disclose 
these changes to investors and the SEC?
    Ms. Schapiro. Thank you.
    I think Mr. Dimon actually testified in the Senate that 
they change their Value at Risk models all the time. The area 
we are focused on and concerned about is a change with respect 
to the VaR model they used for their earnings release on April 
13th that had the effect, yes, of understating the Value at 
Risk.
    Our rules do require that changes to the Value at Risk 
model, the assumptions and parameters, have to be disclosed. So 
part of what we are investigating is the extent of that 
disclosure, whether it was adequate, among other things.
    Ms. Velazquez. And if you conclude that basically the rules 
were broken--
    Ms. Schapiro. There could be, yes.
    Ms. Velazquez. Okay. So let me ask you, these penalties 
apparently were not enough to prevent JPMorgan from such 
activities. So I just would like for you to explain to us how 
should these penalties be structured to deter such behavior 
going forward, if that was the case?
    Ms. Schapiro. I think first, we really need to finish the 
investigation and see the full scope of conduct, if any, that 
potentially violates the Federal securities laws; and then the 
Commission would make a determination about what the 
appropriate sanction is to deter such conduct in the future and 
to remediate the violations.
    It is hard to say what that number would be as a penalty, 
whether there would be potentially a requirement that they 
bring in a special consultant to help them rework their 
financial reporting controls and whether there could be other 
sanctions. We have a pretty wide panoply of sanctions that are 
available to us, but until we have completed an investigation 
and understand whether we have simply a VaR model change that 
is not disclosed or we have risk-management issues or other 
disclosure shortcomings or failures, it is hard for me to guess 
where we might land.
    Ms. Velazquez. Okay, thank you.
    Chairman Gruenberg, proprietary trading was just one among 
many factors that contributed to the financial crisis in 2008, 
and opponents of the proposed Volcker Rule have argued that it 
will do more harm than good. In light of JPMorgan's loss, if 
the proposed rule were delayed or otherwise scaled back, will 
other measures in Dodd-Frank such as increased capital 
requirements and new controls on derivatives be sufficient in 
themselves to mitigate the risks posed by proprietary trading?
    Mr. Gruenberg. In the first instance, Congresswoman, that 
is not a choice for us to make. The law is the law, and we have 
an obligation to implement it, both in regard to the capital 
requirements and in regard to the Volcker Rule. We certainly 
agree that capital requirements are very important, but the 
provisions of the Volcker Rule are also the law of the land, 
and we have an obligation to implement those as well.
    Ms. Velazquez. So you believe that increased capital 
requirements and new controls on derivatives will be 
sufficient?
    Mr. Gruenberg. I think the provisions of the Volcker Rule, 
particularly requiring the reporting, the recordkeeping, the 
governance provisions relating to proprietary trading are 
really quite important in order to focus the attention of both 
management and the regulators on this activity; and I think 
that would be actually a valuable complement to the capital and 
other prudential requirements of Dodd-Frank.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Bachus. Thank you.
    Mr. Neugebauer for 5 minutes.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Mr. Curry, the Bloomberg article came out on April 6th. 
When did you have knowledge that there was a problem with this 
portfolio?
    Mr. Curry. The size and complexity of the portfolio at 
JPMorgan Chase became clearer to us at that point in time. 
After that, we began to ramp up our discussions with bank 
management and our presence--
    Mr. Neugebauer. What day would that have been?
    Mr. Curry. I believe it was around the 9th, when I assumed 
office.
    Mr. Neugebauer. So April 9th you were having pretty 
extensive conversations with management about this position?
    Mr. Curry. That is when we became aware of the potential 
significance of the situation.
    Mr. Neugebauer. Ms. Schapiro, do you have any recollection 
of when your agency began to have some concern about this 
issue?
    Ms. Schapiro. It would have been around that same time when 
the articles began to appear.
    But, again, because this was not in the broker-dealer, we 
wouldn't have had people focused particularly on that.
    Mr. Neugebauer. Mr. Gensler?
    Mr. Gensler. Again, when the articles about the London 
Whale started to run, as we are just midstream standing up our 
reforms for credit derivatives. But we do oversee and see daily 
the risk in the clearinghouse. ICE Clear Credit and ICE Clear 
Europe have some of these indices in there. Even this IG-9 one 
is in there.
    Mr. Neugebauer. Mr. Gruenberg?
    Mr. Gruenberg. In that same time period.
    Mr. Neugebauer. And Mr. Alvarez?
    Mr. Alvarez. We were informed by the firm at the same time 
as they informed the OCC.
    Mr. Neugebauer. So, I want to fast-forward then to April 
13th when Mr. Dimon said that, ``This has been blown way out of 
proportion. This is a tempest in a teapot.'' Did you find that 
comment a little interesting, the fact that you were--I guess 
all of these regulators were activating some action that was 
stimulated--did you think that was an interesting--
    Mr. Curry. At that point in time, we were still trying to 
determine the underlying strategy and its ramifications to the 
bank's financial position.
    Mr. Neugebauer. But would you have called that a tempest in 
a teapot?
    Mr. Curry. I would not have had information at the time to 
make a conclusion one way or the other.
    Mr. Neugebauer. Ms. Schapiro, do you have a comment on 
that?
    Ms. Schapiro. It is part of the context, I think, for the 
review. If you look at the fact that the VaR number really 
didn't change for the earnings release--and, by the way, VaR is 
not required to be disclosed in the earnings release, but if 
you choose to speak to it you must speak truthfully and 
completely. The fact that the VaR number didn't change much at 
all from year end to the earnings release is part of the 
context of whether it truly was a tempest in a teapot or there 
was more there.
    When the Q-1 statements came out on May 10th, we saw that 
VaR doubled because they reverted back to the old VaR model. 
Again, it is part of the context of how you view those 
statements.
    Mr. Neugebauer. I think particularly in your area of 
oversight, the statements CEOs make are relevant. Is that--
    Ms. Schapiro. They are always part of what we look at when 
we are looking at issues exactly like this, yes.
    Mr. Neugebauer. And so when--I can understand, if you are a 
CEO of a company and you have some bad news out there, you are 
trying to tamp that down. But there is also a fiduciary 
responsibility, I guess--if we are going to talk about 
disclosure and transparency--for whatever information and 
statements are coming out of that organization to be accurate 
or a fair reflection. Would you agree with that?
    Ms. Schapiro. That is right. If you choose to speak, you 
absolutely must speak truthfully and completely and not allow 
yourself to leave any kind of misleading impression from the 
information that you are putting out.
    Mr. Neugebauer. And is there a certain amount of duty, 
whoever the spokesman is, whether it is Mr. Dimon or the CFO, 
whoever is making the speech, to make sure that the team thinks 
this is an accurate statement?
    Ms. Schapiro. I don't know about their internal processes 
for preparing--
    Mr. Neugebauer. I am not asking about that. But if you are 
going to make a statement, say on behalf of the SEC, don't you 
ask your people, is this a fair representation?
    Ms. Schapiro. Yes, I do.
    Mr. Neugebauer. So there is a certain amount of duty to do 
that?
    Ms. Schapiro. Again, the duty under the Federal securities 
laws is to speak completely and truthfully. How people arrive 
at what they decide is a truthful and complete statement is a 
matter of their internal deliberations and discussions, I 
think.
    Chairman Bachus. Thank you.
    Mr. Capuano for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman.
    Mr. Chairman, first, I would like to just point out that 
anybody who is interested in breaking up some of these large 
institutions should sign on to H.R. 1489, which would 
reinstitute the Glass-Steagall Act, which I voted against 
repealing in the first place. It was repealed by a bill called 
the Gramm-Leach-Bliley Act, and I recall there were three 
Republicans who sponsored that Act to repeal Glass-Steagall 
that allowed the beasts of Wall Street to come into existence. 
So anybody who has another idea on how to limit the size, I 
totally agree with that concern.
    To the panel, I would just like to say the comments on 
transparency are appropriate, but in preparing for this 
hearing, this is very complicated stuff, very difficult stuff, 
and I try to read as much as I can. The problem is on this 
particular hearing, all I could get was news reports, and the 
only news reports I could get were all based on assumptions and 
educated guesses. Even the Congressional Research Service, 
which is very good on these things, had to piece it together. 
There is just not enough transparency from your agencies to 
allow outside people to make a comment on what might have 
happened.
    I would encourage you to, if you can't come to 
conclusions--I am not suggesting you should do that rapidly--
but at least whatever facts you unveil to yourself, make them 
public as soon as you can so that the greater public can engage 
in a discussion which will enlighten our thought as to what 
might happen.
    I have so many questions in 5 minutes. I guess, Mr. Curry, 
I will start with you.
    This is only a $2 billion item. Is there anything that you 
have learned thus far that would have limited it just to $2 
billion? Could it not have been a $20 billion loss?
    Mr. Curry. Part of our review process now is to look at the 
unwinding of their position and our review process, along with 
the other Federal bank agencies--
    Mr. Capuano. But could it have been $20 billion? Not 
necessarily this one, but is there anything that would have 
prevented it?
    Mr. Curry. No. That is the concern from a supervisory 
standpoint, is that this is the result of an apparent lapse in 
vigorous risk management.
    Mr. Capuano. So it could have been $20 billion?
    Mr. Curry. And that is really the regulatory concern--
    Mr. Capuano. And it could have been $200 billion.
    Mr. Curry. In another institution and under other 
circumstances, possibly.
    Mr. Capuano. Is there anything in any of the regulations, 
anything you found thus far, that would limit this loss only to 
JPMorgan?
    Mr. Curry. We have surveyed the other large banks that we 
supervise, and we do not believe that any of those banks--
    Mr. Capuano. But they could have?
    Mr. Curry. They do not--we believe they do not engage in 
similar--
    Mr. Capuano. But they could have--
    Mr. Curry. That is really why--
    Mr. Capuano. I don't know why you are being so resistant. I 
am not after you. You would know it if I were.
    Mr. Curry. We view that as being a very serious issue, and 
that is why it is the focus of our--
    Mr. Capuano. So it could have been a $20 billion item, it 
could have been a $200 billion item, it could have been every 
other major large bank, and it could have been other 
counterparties, which is my concern.
    I guess what I would like to find out--I read your 
testimony, and you did say that thus far you have found no one 
else engaging in this activity. But, again, for me, the biggest 
question here is not necessarily what happened in this 
instance, other than the way it might enlighten us or educate 
us as to what could happen.
    And I guess what I am asking is to be sure that when 
everything is said and done, it is not just focused--and this 
is not just for you, Mr. Curry, I intend to ask the rest of the 
panel--on one instance, one event, that lost $2 billion for a 
bank that apparently could handle it. It is whether it could 
have shaken the system again.
    Are you confident yet that what you have found, what your 
reaction might be, would be to tell us that the system is now 
sound?
    Mr. Curry. We do not believe that the system is at risk 
from this situation, and that is why, again, we are focusing on 
making sure that all of the institutions we supervise have 
rigorous--
    Mr. Capuano. Thank you.
    Ms. Schapiro, do you feel the same way? Is the system 
sound, based on what you have found thus far?
    Ms. Schapiro. I think the system is sounder than it was, 
but I think we really have to get the Title VII regulatory 
regime in place that will give us access to the kind of 
information we need and the public needs to impart some 
greater--
    Mr. Capuano. Thank you.
    Mr. Gensler?
    Mr. Gensler. I think the American public still isn't safe 
on these roads until we get the transparency and get the rules 
of the road in place, and that is why I made the analogy to my 
daughters and the keys to the car. I think the American public 
were bystanders to some taking on excess of risk in 2008, and 
we still haven't--
    Mr. Capuano. But based on what you found in this instance, 
I understand, but in this instance, is there any indication 
that what happened here might expose--not necessarily by 
JPMorgan but by anybody else--a risk to the system?
    Mr. Gensler. I think it still exposes risks broadly in our 
regulatory system that we are not covering London and also in 
credit derivative products, that we have not yet finished the 
tasking.
    Mr. Capuano. I actually want to jump to London, because I 
think your testimony was very important. On page 9, if I 
recall, I want to read back to you what you said, which I think 
is very good, because I want to follow up Mrs. Maloney. The 
whole London thing has been bothering me. With Mr. Neugebauer, 
we have been chasing a lot of the MF Global stuff. It seems all 
about London, AIG--
    Chairman Bachus. Your time has expired, but you go ahead 
and read his statement.
    Mr. Capuano. The statement was very simply that Section 
722(d) of the Dodd-Frank says that if it has a direct and 
significant connection with activities in or an effect on the 
commerce of the United States that you do have oversight.
    Would you agree that statement allows you to regulate some 
of the things that go on overseas?
    Chairman Bachus. Thank you.
    Mr. Luetkemeyer for 5 minutes.
    Mr. Luetkemeyer. Thank you, Mr. Chairman.
    It is an interesting debate we are having here, the 
discussion this morning, from the standpoint that over the last 
4 or 5 years, the American public has finally found out what 
actually goes on in banking and financial service institutions. 
They manage risk, and that is how the whole system works. A lot 
of folks just didn't know what went on behind the doors and in 
boardrooms and offices of banks and financial institutions, but 
now they do. Every day, they manage risk. They take risks. 
Sometimes, they win. Sometimes, they lose.
    So today, we are discussing an entity that took a risk and 
lost, and I think that the things we are working on, and you, 
ladies and gentlemen of the panel here, have to find a way to 
walk that fine line to keep from taking all the risk away--the 
ability to take risk from these institutions--otherwise, 
perhaps they won't do any investing and, therefore, the whole 
system collapses and stops--or find a way to pass that risk on 
to other entities, in other words, the taxpayers, which is what 
the too-big-to-fail doctrine does, which is not the way to go 
either.
    So it is interesting, the fine line you are trying to walk. 
I appreciate that, and I thank you for your service and for 
trying to do that.
    Mr. Curry, to follow up on the gentleman from California's 
remarks earlier with regards to capital, you made some comments 
in your testimony here that the Tier I common capital of the 
larger banks has gone from 5.2 percent to 7 percent now; and in 
some rough figures that I got from, I think, your testimony or 
Mr. Alvarez here, it looks like Tier I capital for--in fact, it 
was your testimony--Tier I capital for JPMorgan is 5.7 percent. 
Is that probably accurate?
    Mr. Curry. Yes.
    Mr. Luetkemeyer. So, therefore, they are below average. Is 
that what you are saying?
    Mr. Curry. No. No, I am sorry. They meet existing minimum 
capital requirements for banks.
    Mr. Luetkemeyer. You said the Tier I capital average now is 
7 percent for the same size, and they are only at--
    Mr. Curry. I think my testimony refers to bank level of 
capital and bank holding company capital, and that may be part 
of the confusion.
    Mr. Leutkemeyer. Okay. All right.
    Are they well-capitalized, in your judgment?
    Mr. Curry. Yes, they are.
    Mr. Leutkemeyer. Okay. What was their capital account prior 
to--well, back in 2008?
    Mr. Curry. I can't recall offhand, but it has increased 
since then. That has been the overall objective of our 
heightened supervision program, is to increase the level of 
capital and put it in reserves.
    Mr. Leutkemeyer. Okay. So by increasing their capital, they 
have made more money. Could they have done that by taking 
extraordinary risks or could they do that through the normal 
management practices of running their operation, in your 
judgment?
    Mr. Curry. No. We expect banks to be in the business of 
taking manageable risks and having effective internal controls 
over those material risks within their organization, and then 
ultimately we look to capital as being the cushion for those 
risks that occur.
    Mr. Leutkemeyer. Okay. Mr. Gruenberg, right now, the 
investment banking portion of JPMorgan is underneath their main 
bank which would be covered by FDIC insurance, is that correct? 
Are they an FDIC-insured bank? First question.
    Mr. Gruenberg. JPMorgan is an FDIC-insured bank.
    Mr. Leutkemeyer. Is their investment bank under their main 
bank umbrella so they would be part of--
    Mr. Gruenberg. They are a separate affiliate.
    Mr. Luetkemeyer. They are a separate affiliate. Their 
investment bank is separate, so therefore there are no FDIC 
insurance dollars at risk with this particular activity that 
took place?
    Mr. Gruenberg. I believe the activity in this case, 
Congressman, was in a branch of the bank itself, not in the 
affiliated investment company.
    Mr. Leutkemeyer. A lot of banks have a lot of branches, and 
some of those branches are covered, and some of them aren't, 
based on their activities. And my question is, were the 
activities that were taking place in this situation part of the 
umbrella that was underneath the main bank and therefore 
deposit insurance exposed?
    Mr. Gruenberg. Yes.
    Mr. Leutkemeyer. They were.
    Mr. Gruenberg. Yes, sir.
    Mr. Leutkemeyer. So, in other words, the deposit insurance, 
if this had gone bad and caused a major problem with the bank, 
deposit insurance would have to kick in and take care of this?
    Mr. Gruenberg. If this activity did occur in the bank, yes.
    Mr. Leutkemeyer. What is your opinion of that?
    Mr. Gruenberg. That is the issue, frankly, that is raised 
here.
    Mr. Luetkemeyer. Is that a grave concern to you?
    Mr. Gruenberg. I think it is a serious question that is 
raised. It is why this inquiry is going forward. I think we 
need to understand--
    Mr. Luetkemeyer. We have a situation with the banking 
structure that we have right now that is to me a real problem 
from the standpoint that you have these big entities that have 
this enormous exposure. Do you feel that they are paying their 
fair share based on the risks that they are taking and the 
exposure to the fund, compared to the rest of the banks which 
don't do this?
    Mr. Gruenberg. In terms of deposit insurance premiums? Is 
that the issue?
    Mr. Luetkemeyer. Right.
    Mr. Gruenberg. For these large institutions, we do have a 
risk-based deposit insurance system specifically targeted for 
the large institutions. It is true that the kind of trading 
activity that occurred here is taken into consideration in 
setting the deposit insurance premiums for these large 
institutions.
    Mr. Luetkemeyer. Okay, I see my time has expired. Thank 
you.
    Chairman Bachus. Thank you.
    Mr. Lynch is recognized for 5 minutes.
    Mr. Lynch. Thank you, Mr. Chairman.
    Also, I want to thank the witnesses for attending and 
helping the committee with its work.
    If not for the exposure to the taxpayer, we probably 
wouldn't be here, but I do want to note that, starting back in 
the fall of 2008, JPMorgan and a bunch of other Wall Street 
banks received about $700 billion from the American taxpayer. 
JPMorgan Chase itself received $25 billion in those TARP loans. 
All told, the amount of emergency Federal Reserve lending 
support to JPMorgan exceeded $456 billion, and I note that a 
November of 2011 Bloomberg article estimates that the bank made 
nearly $458 million in profit from those emergency loans from 
the Fed.
    In addition, JPMorgan Chase has access to the Fed discount 
window and its depository base, some of which funded these 
proprietary trades, which are FDIC- and taxpayer-insured.
    So there is a lot of exposure here for the taxpayer, and 
that is why it defies logic that we would allow an institution 
with that type of support from the taxpayer to act in this way.
    Mr. Gensler, I enjoyed your opening remarks. I thought your 
testimony was great. I have two girls myself, so I have empathy 
for you in giving your car keys out.
    But I do note that in Mr. Dimon's testimony earlier in the 
previous hearings on the Senate side, he basically confirmed 
those reports that these trades, while they were managed I 
guess in the New York office, they were actually executed in 
JPMorgan's London office, and I guess you are saying some of 
these were executed in the Cayman Islands as well, is that 
correct?
    Mr. Gensler. I don't know about the Cayman Islands, except 
I know in other circumstances Bear Stearns was in the Cayman 
Islands, and Long-Term Capital Management was in the Cayman 
Islands. So there were other circumstances.
    But the JPMorgan Chase Chief Investment Office trades, as I 
understand, executed or entered into out of London was in the 
branch. And to Representative Luetkemeyer's question, the 
deposit insurance fund, as we heard from Mr. Gruenberg, was at 
risk.
    Mr. Lynch. We also heard prior testimony that--and, 
actually, this was in discussions of legislation that would 
limit margin and clearing requirements for overseas derivatives 
trading--that a substantial percentage of JPMorgan Chase's 
derivatives business has moved to London or is in the process 
of moving to London. Is that correct?
    Mr. Gruenberg. They are a very significant operation out of 
London, and they operate as a branch in many countries, and 
they have advocated to this Commission that it not be covered 
by Dodd-Frank reforms. I have a different view, and I hope that 
the Commission will vote to get public comment this Thursday, 
that we don't, in essence, create another London loophole.
    Mr. Lynch. Right. That is what I want to ask you about. How 
does your oversight toolbox differ when trades are executed 
through London, in this instance, as opposed to in the United 
States? What are those London loopholes that you have 
described?
    Mr. Gensler. Congress has given us some discretion to 
interpret a provision of the Act, Section 722(d), as to where 
is the reach of the Act. And if it has a direct and significant 
effect on the commerce or activities here in the United States, 
then it is covered. So that is the debate that is going on, is 
an interpretation of a very critical part of Dodd-Frank. I 
believe that, to answer the question, these would be under part 
of the direct and significant effect on U.S. commerce or 
activities.
    Mr. Lynch. One last question, I have about a minute left. 
On May 18, 2012, Morgan Stanley issued a research note 
estimating the JPMorgan Chase losses could reach as high as 
$5.2 billion, and the report also contains some analysis of how 
such trading losses might have occurred. This is assuming that 
they were right and there is a limited amount of information on 
this, but this is assuming that was a CDX IG 9 that you 
mentioned before, which is a more standardized derivative that 
is approved for clearing both in the United States and Europe.
    There are estimates that the losses could reach as high as 
$5.2 billion. Do you think that is somewhat accurate or not?
    Mr. Curry. We are still reviewing with our examinations 
with the bank the scope of the potential losses, but our focus 
is to monitor the de-risking of their precision.
    Chairman Bachus. Thank you. Mr. Lynch?
    Mr. Lynch. I am just trying to get an estimate here whether 
$5.2 billion is accurate or not accurate. A simple yes or no?
    Chairman Bachus. Mr. Lynch, let me say this, no one knows.
    Mr. Lynch. That is why we have the witnesses, so they can 
testify, not so you can answer for them.
    Chairman Bachus. But your time is up.
    Mr. Curry? If you know how much the loss will be?
    Mr. Curry. That is a matter we are still reviewing in our 
examination activity.
    Chairman Bachus. Thank you. Mr. Pearce?
    Mr. Pearce. Thank you, Mr. Chairman. Mr. Alvarez, if we are 
going to look at derivatives trading and especially overseas 
derivatives trading, and we are going to prioritize the risk 
that these major firms face, would that particular activity be 
in the middle or at the top? Is that a scary, risky thing or is 
it kind of not very risky? What priority should we be looking 
at when we consider derivatives trades?
    Mr. Alvarez. I am not sure what priority Congress wants 
to--
    Mr. Pearce. No, I am saying, you are in charge of risk, 
that is what you say.
    Mr. Alvarez. I think from the other perspective, we are 
taking two high-priority approaches. One is, we think it is 
important for firms to have good risk management around--
    Mr. Pearce. My question is not that. My question is, 
derivative trading itself, is it very high risk?
    Mr. Alvarez. It can be if--
    Mr. Pearce. It can be a very high-risk item, that is all I 
am trying to establish.
    Chairman Bachus. Allow the witness to answer the question. 
You are sort of stepping on his answer.
    Mr. Pearce. Mr. Chairman, I have 5 minutes, if he is going 
to skew off to the side.
    Chairman Bachus. He is trying to answer your question.
    Mr. Pearce. My question wasn't what they are doing and what 
they are doing with risk relation, it was the priority-based, 
it is the difficulty of regulating derivatives, that was my 
question. What I am going to go to next is you guys are the 
supervisors in charge, that is, the consolidated supervisor in 
charge of all of the people who are regulating the activities. 
And so I see, Mr. Curry said that he has people, 65 people on 
location, these are not just regular people, these are people 
with 20 more years of experience, skills in key risk areas, 
teams of Ph.D. economists from the OCC.
    He then identifies in the next paragraph that the 
examination teams have three objectives, one of which is the 
key risks. Derivatives would be a key risk; they are very 
problematic. So my question is, with the 65 regulators onsite, 
would you know the name of the one who monitors the trading of 
derivatives? You are the guy in charge, you, the Federal 
Reserve, you say so in your testimony.
    Mr. Alvarez. No, we are not the ones in charge of the OCC, 
we are the consolidated supervisor--we supervise the 
unregulated portions of the holding company and its 
consolidated activities. But the specific activities in the 
national bank, those 65 examiners you are talking about, I am 
afraid--
    Mr. Pearce. Mr. Curry, would you have a name of whomever is 
in charge of the derivatives?
    Mr. Curry. We operate supervision policy where we have a 
resident examiner in charge of the institution. That individual 
allocates responsibility for individuals to examine into 
particular areas of the bank. That can change over time, it can 
also be the result of someone being brought in--
    Mr. Pearce. Do you have a name of who was in charge during 
that time in early April?
    Mr. Curry. Not at the moment of looking at the derivatives 
portfolio.
    Mr. Pearce. Mr. Chairman, my point is that we have 65 gee-
whiz people, these are top-notch people according to your 
testimony. We have this stuff going on, they are onsite in 
order to pay attention, and yet I hear from Mr. Alvarez that we 
are concerned with the changes and the portfolio during that 
period of time.
    What are they doing? Are they sitting there watching? That 
is what they were doing, the SEC and the CFTC were sitting with 
MF Global while they were taking money out of customer 
accounts. They weren't watching, they weren't saying a word, 
they weren't raising an alarm. And here you all are saying you 
are starting an investigation, I thought that was the reason 
you had people on location in order to watch what is going on.
    You have 65 people. You say in your testimony the key risks 
are what you are monitoring, and yet, Mr. Alvarez finds out, 
whew, you all didn't call him and tell him. He is alarmed with 
the changes. And I am just thinking, what are we doing here? 
Why do you have these people on location? Mr. Gruenberg, he at 
least admits that at least we are finally worried about--we are 
seeing recent losses that reveal certain risks. The entire 
Nation is aware of those risks. I am sitting here saying, what 
were we doing if you are supposed to be regulating? We are all 
supposed to be out there. You have on-site teams and now we are 
starting investigations, the investigation should be that you 
are talking to your people who are on location and finding out 
if they are doing their job, or they are sitting there with 
their feet on the desk drinking coffee.
    From this side of the table, we ask you all to do this, and 
yet I come here and read all this testimony and it is all kind 
of angling toward the same thing: Nobody is really in charge, 
nobody is really supervising. We are finding out after the fact 
through press releases or whatever. This gets very frustrating 
from our point of view.
    Mr. Curry. I understand that, Congressman. That is part of 
our review process is to do a postmortem to see what went wrong 
in this particular case and how the OCC can better perform its 
duties as a supervisor.
    Mr. Pearce. Thank you, Mr. Chairman. I yield back.
    Chairman Bachus. I thank you. The Chair thanks the panel 
for their testimony. The Chair notes that some Members may have 
additional questions for this panel, which they may wish to 
submit in writing. Without objection, the hearing record will 
remain open for 30 days for Members to submit written questions 
to these witnesses and to place their responses in the record.
    And as a witness noted, this is an ongoing investigation 
and that was one reason that we delayed our hearing until more 
information could be gathered. I think, as Mr. Curry has said, 
some of the reporting was granular, and it was not appreciated 
within the firm, and it would be pretty difficult to determine 
some of these things. The panel is dismissed.
    And the first panel, if you wish to go out this way, you 
are welcome to go out through the side door.
    Mr. Frank. Mr. Chairman, could we ask people who are not 
needed to move? We are going to lose somebody getting a chance 
to question. If people would get outside the door, they are 
blocking the door. We have to get Mr. Dimon. Would the people 
at the door, the Treasury Department officials, please move 
outside?
    Chairman Bachus. Would you let Mr. Andrews maybe find a 
place to sit?
    The Chair wishes to remind all our guests that the 
manifestation of approval or disapproval, including the use of 
signs and placards, is a violation of the rules which govern 
this committee. The Chair wishes to thank our guests in advance 
for their cooperation in maintaining order and decorum.
    Our second panel is made up of one witness, Mr. Jamie 
Dimon, the CEO of JPMorgan Chase. And Mr. Dimon, you are 
recognized for 5 minutes. Maybe if the cameras will take a 
picture and then sort of exit?
    Mr. Dimon, you are recognized for 5 minutes, and we welcome 
you to the committee.

STATEMENT OF JAMIE DIMON, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, 
                      JPMORGAN CHASE & CO.

    Mr. Dimon. Thank you, Mr. Chairman. Chairman Bachus, 
Ranking Member Frank, and members of the committee, I am 
appearing today to discuss recent losses in a portfolio held by 
JPMorgan Chase's Chief Investment Office. These losses have 
generated considerable attention, and while we are still 
reviewing the facts, I will explain everything I can to the 
extent possible.
    JPMorgan Chase's six lines of business provide a broad 
array of financial products and services to individuals, small 
and large businesses, governments, and not-for-profits. These 
include deposit accounts, loans, credit cards, mortgages, 
capital markets advice, mutual funds, and other investments.
    Let me start by explaining what the Chief Investment Office 
does. Like many banks, we have more deposits than loans. At 
quarter end, we hold approximately $1.1 trillion in deposits 
and $700 billion in loans. CIO, along with our Treasury unit, 
invests excess cash in a portfolio that includes Treasuries, 
agencies, mortgage-backed securities, high-quality securities, 
corporate debt, and other domestic and overseas assets. It also 
serves as an important vehicle for managing assets and 
liabilities of the consolidated company.
    In short, the bulk of CIO's responsibilities is to manage 
an approximately $350 billion portfolio in a conservative 
manner.
    While their primary purpose is to invest excess liabilities 
and manage long-term interest rate and currency exposure, it 
also maintains a smaller synthetic credit portfolio whose 
original intent was to protect or hedge the company against a 
systemic event like the financial crisis or the current 
Eurozone situation.
    So what happened? In December 2011, as part of a firmwide 
effort, and in anticipation of new Basel capital requirements, 
we instructed the CIO to reduce risk rate assets and associated 
risk.
    To achieve this in the synthetic credit portfolio, the CIO 
could simply have reduced its existing positions. Instead, 
starting in mid-January, it embarked on a complex strategy that 
entailed adding positions that it believed would offset the 
existing ones. This strategy, however, ended up creating a 
portfolio that was larger, and ultimately resulted in even more 
complex and hard-to-manage risk. This portfolio morphed into 
something that rather than protect the firm, created new and 
potentially larger risks. As a result, we let a lot of people 
down, and we are sorry for it.
    Now, let me turn to what went wrong. We believe a series of 
events led to the difficulties in the synthetic credit 
portfolio. These are detailed in my written testimony, but I 
will highlight the following: The CIO's strategy for reducing 
the synthetic credit portfolio was poorly conceived and poorly 
vetted. In hindsight, the traders did not have the requisite 
understanding of the risk they took.
    The risk limits for the synthetic credit portfolio should 
have been specific to the portfolio and much more granular, 
i.e., only allowing lower limits on each specific risk being 
taken. The CIO, particularly the synthetic credit portfolio 
should have gotten more scrutiny from both senior management 
and the firmwide risk control function.
    In response to this incident, we have already taken a 
number of important actions to guard against a recurrence. We 
have appointed an entirely new leadership for the CIO. 
Importantly, our team has made real progress in aggressively 
analyzing, managing, and significantly reducing our risk going 
forward. Although this does not reduce the losses already 
incurred, and it does not preclude future losses, it does 
reduce the probability and magnitude of future losses.
    We are also conducting an extensive review of this incident 
which our board of directors is independently overseeing. When 
we make mistakes, we take them seriously, and often we are our 
own toughest critic. In the normal course of business, we apply 
lessons learned to the entire firm. So while we can never say 
we won't make mistakes--in fact, we know we will make 
mistakes--we do believe this to be an isolated event. We will 
not make light of these losses but they should be put into 
perspective. We will lose some of our shareholders' money, and 
for that we feel terrible, but no client, customer or taxpayer 
money was affected by the incident.
    Our fortress balance sheet remains intact. As of quarter 
end, we held $190 billion in equity and well over $30 billion 
in loan loss reserves. We maintain extremely strong capital 
ratios far in excess of regulatory capital standards. As of 
March 31st, our Basel I, Tier 1 common ratio was 10.4 percent, 
and our estimated Basel III Tier 1 common ratio was 8.2 
percent, both among the highest in the banking sector. We 
expect both of these numbers to be higher by the end of year.
    All of our lines of businesses remain profitable and 
continue to serve consumers and businesses. And while there are 
still 2 weeks left in our second quarter, we expect our quarter 
to be solidly profitable. In short, our strong capital position 
and diversified business model did what they were supposed to 
do, cushion us against unexpected loss in one area of our 
business.
    While this incident is embarrassing, it should not and will 
not detract our employees from our main mission: to serve 
clients, consumers, and companies and their communities around 
the globe.
    During 2011, JPMorgan raised capital and provided credit of 
over $1.8 trillion for consumer and commercial clients, up 18 
percent from the prior year. We provided more than $17 billion 
of credit to U.S. small businesses, up 52 percent over the 
prior year. And over the past 3 years, in the face of 
significant economic headwinds, we made the decision not to 
retrench but to step up as we did with markets in turmoil when 
we were only bank willing to commit to lend billions to the 
States of California, New Jersey, and Illinois.
    All of these activities come with risk. And just as we 
remain focused on serving our clients, we also remain focused 
on managing the risk of our businesses, particularly given 
today's considerable global economic and financial volatility.
    Finally, I would like to say that in the face of these 
recent losses, we have come together as a firm, acknowledged 
our mistakes, and committed ourselves to fixing them. We will 
learn from this incident, and my conviction is we will emerge 
from this moment a stronger, smarter, better company.
    I also would like to speak directly for a moment to our 
260,000 employees, many of whom are watching this hearing 
today. I want all of you to know how proud I am of JPMorgan 
Chase, the company, and how proud I am of what you do every day 
for your clients and communities around the world. Thank you. I 
welcome any questions you may have.
    [The prepared statement of Mr. Dimon can be found on page 
110 of the appendix.]
    Chairman Bachus. Thank you, Mr. Dimon.
    And let me say that the first panel unanimously said that 
JPMorgan had sufficient capital, and that there were no 
liquidity problems, and that depositors' money, clients' money 
was certainly not at risk.
    Mr. Lynch. Mr. Chairman, a point of order, are we going to 
ask the witness to take an oath, to speak under oath or has 
that process been waived here?
    Chairman Bachus. We have never done that. I see no reason 
at this hearing to do what we have not done in several years.
    Mr. Lynch. I object to that, sir.
    Chairman Bachus. I see no reason to place this witness 
under--this is not a criminal proceeding, or even a civil 
proceeding, and he has voluntarily come before us.
    At this time, Mr. Manzullo, for 5 minutes.
    Mr. Manzullo. Thank you, Mr. Chairman, for calling this 
hearing.
    Mr. Dimon, on the third to last paragraph of your written 
testimony, you have written ``all these activities come with a 
risk. Just as we have remained focused on serving our clients, 
we have also remained focused on managing the risk of our 
business, particularly given today's considerable global 
economic and financial volatility.''
    I just returned from a conference in Copenhagen with 
members of the EU Parliament discussing the tremendous crisis 
going on with the Eurozone countries. The IMF has estimated 
that the average debt of the 17 Eurozone countries is about 80 
percent of GDP. But in the United States, the debt of this 
country, which includes State, local, and Federal, is 107 
percent of GDP. And my question to you is, what do you think is 
going to be the bigger story 2 years from now in terms of the 
health and strength of the financial industry, trading losses 
at JPMorgan or the Eurozone?
    Mr. Dimon. The Eurozone--I am sorry I take up so many 
people's time on this loss, because it is rather insignificant 
in the global scheme of things, and things that you ought to 
worry about as legislators, and what we need to worry about in 
Europe. Europe is a significant event. I am far more worried 
about Europe than I am about this trading position. And I hope 
the legislators over there can overcome their complications and 
keep the Eurozone alive.
    Mr. Manzullo. Can you give us a reading, in your opinion, 
as to the impact, for example, on the U.S. economy, should the 
Greeks decide to get out of the Eurozone, go back to the 
drachma, or should the entire Eurozone itself collapse?
    Mr. Dimon. Unfortunately, as a bank, we have to prepare for 
all eventualities, so we are not guessing what might happen. I 
want to make sure we come forward to our shareholders and 
communities and say, whatever happens we can survive and thrive 
going forward.
    Greece defaulting alone is not the issue; it is Greece 
leaving the Euro and the fallout effect of that might be a bank 
run in Italy and Spain. We see that they are trying to put 
firewalls in place to stop that from happening. If I had to 
guess at the outcome, I think that might work. I think it is 
important they do that, and hold back a crisis, and then they 
have to go about having a real fiscal treaty among the 17 
nations of the Euro. So short-term solutions may stop a crisis, 
but it won't stop--they have to really fix the underlying 
problems.
    Mr. Manzullo. Italy has an economy that is 2\1/2\ times 
that of Ireland, Portugal, and Greece combined. The Italian 
banks don't have a liquidity problem, they have a big problem 
with debt. Could you address the impact of debt on nations as 
it relates to the ability--it as relates to liquidity but more 
importantly, the overall economy?
    Mr. Dimon. The banking--Italy, surprisingly, is actually a 
very wealthy nation and they have the wherewithal to meet their 
debt, but they are having a crisis of confidence, which is 
damaging that. The banks there own a lot of sovereign debt. 
Banking systems don't function very well if the sovereign 
system is not functioning; they actually go hand-in-hand. You 
need to fix both to make the whole financial system strong 
there.
    Mr. Manzullo. The reason I ask that is that, as you know, 
the EU is our largest trading partner, and your bank is 
obviously involved in international finance, and it is always 
important for members to be able to glean from people who are 
on the inside seeing that happen. Can you give--I am not 
looking for a forecast, but how do you see the Eurozone issue 
as being resolved?
    Mr. Dimon. In Europe, what we see is that the politicians 
have the will, they want to fix it, they talk about no plan B, 
there is only one plan, which is the keep the Euro alive. I 
think there the way is very hard, because you have 17 nations, 
and 17 parliaments, so what our economists think, and a lot of 
smart people I listen to, is that there will be a firewall for 
Italy and Spain, that you will have growth and austerity plans 
for the southern nations, and that the 17 nations will come up 
with a fiscal treaty which has more carrots and sticks in it, 
and that is believable by the world, and will show long-term 
progress of getting down the debts of Europe.
    Chairman Bachus. Thank you. Mr. Frank for 5 minutes.
    Mr. Frank. Mr. Dimon, you said that you want there to be 
smart regulation, as opposed to more regulation. The 
Commodities Futures Trading Commission's budget was $200 
million for the year, and it has been proposed to cut it. The 
President is supposed to raise it to $308 million, not a huge 
sum. Do you think at the level of $180 million, that you can 
get smart regulation out of the CFTC?
    Mr. Dimon. I have never looked at the CFTC's budgets, I 
don't know what they need, and so it would be almost impossible 
for me to comment on it.
    Mr. Frank. I am disappointed. By the way, the 
Appropriations Committee just voted 27-19 not to give them the 
additional funds. I am surprised because it did seem to me you 
are well-informed about other aspects of what the Federal 
Government does or doesn't do. And to talk about smart 
regulation, but in effect to give them a pass on the 
substantial reduction in the CFTC, seems to be a mistake. But 
you answered that.
    The next question is, the legislation that would remove any 
application--I understand there was a Volcker Rule debate, but 
as you know, over and above the Volcker Rule, there are 
requirements we have put on derivatives trading which you have 
spoken of somewhat favorably. But there is legislation that 
would have exempted the transactions in question and any other 
transactions conducted overseas, not in this country, from the 
rules of clearing where possible about transparency. Do you 
believe that we should enact that and exempt the kinds of 
activities talked about here even when conducted by an American 
institution from these regulations?
    Mr. Dimon. These trades are not exempt from regulations.
    Mr. Frank. No, I am talking about the regulation--you know 
what I mean, I am talking about the specific rules enacted in 
the financial reform bill that are about to be adopted 
regarding derivatives, transparency, et cetera. There is a 
bill, as you know, that would exempt derivatives trades 
overseas, over and above the Volcker Rule, whether in a bank or 
not; there are two sets of rules here. Do you believe and are 
you supportive of the bill that would exempt these trades from 
the rules on derivatives that we hope to have in place?
    Mr. Dimon. Yes.
    Mr. Frank. Why do you think that they are adequately 
regulated elsewhere? Why would you not want the American 
regulators to have an ability to--for instance, transparency, 
and clearly where possible, I thought you were approving of 
those, why would we want to exempt these kind of activities 
from these rules?
    Mr. Dimon. These trades are visible and regulated by the 
OCC and the Fed. Sixty percent of these trades were, in fact, 
cleared; all of them were fully collateralized. So we are not 
against rules that caused those things.
    Mr. Frank. Mr. Dimon, excuse me, then they would have met 
the rule. But it does seem to me there were problems with this 
in terms of your knowing about when they happened, about your 
being uninformed about them, or underinformed. But you are in 
favor of exempting these kinds of trades from any American 
derivatives regulation?
    Mr. Dimon. Not any, prudential they should have, 
transparency they should have.
    Mr. Frank. Regulation derivatives. Transparency is part of 
the thing you would be exempted from, there is no legal 
requirement for transparency other than that--once again, I am 
disappointed.
    Let me ask you--we have a time issue. You said because you 
have a fortress balance sheet, these were not a threat. What 
about institutions whose balance sheets are less impregnable, 
as I said, a couple chain link, maybe a picket fence or two. 
Should we have rules since we don't legislate just for JPMorgan 
Chase, is there a danger that this kind of activity in a 
financial institution and insured institution with less in a 
strong balance sheet might cause some problems?
    Mr. Dimon. I don't know, but I think you should all take 
comfort in the fact that all American banks are better 
capitalized. The system is far stronger today--
    Mr. Frank. I appreciate that, but that wasn't the question 
I asked. And we can't assume it will be that way forever, and 
there are some who are resisting the capitalization. So if you 
were not as well-capitalized, would this have had some problems 
in it that we didn't have because of your balance--you said you 
have a fortress balance sheet, which assumes there is something 
special about the way you are that made us have to worry about 
it. But we can't assume that is going to be the case for every 
financial institution.
    Mr. Dimon. But I also said we would be solidly profitable 
this quarter, so relative to--
    Mr. Frank. That is not the question, Mr. Dimon. Please 
don't filibuster. Let me ask you now.
    I am sorry, Mr. Chairman, I asked a specific questions. Mr. 
Dimon knows full well what we are talking about. You did say 
finally that there would be some clawbacks for compensation. 
You have also taken some responsibility here, will the 
clawbacks for compensation--is your compensation on the table 
for consideration of clawbacks?
    Mr. Dimon. Yes, all of the--this whole action should be 
reviewed by the board.
    Mr. Frank. Yours is a specific question.
    Mr. Dimon. My compensation is 100 percent up to my board.
    Mr. Frank. Mr. Dimon, you said there are going to be 
clawbacks for people responsible. Is your compensation in the 
pot that is going to be considered for that?
    Mr. Dimon. They will do what they see as appropriate. I 
can't tell my board what to do.
    Chairman Bachus. Thank you. Mrs. Biggert for 5 minutes.
    Mrs. Biggert. Thank you, Mr. Chairman. Mr. Dimon--
    Chairman Bachus. Let me explain to the witness, because it 
is a little bit of an unusual procedure. The Republican side 
elected to go in order and not to come back up to the top to 
allow all the Members to ask questions. The Democratic Members 
are starting over.
    Mr. Frank. Let me say, Mr. Chairman, not entirely, with 
modifications for people who were here and not here.
    Chairman Bachus. Yes, that is fine. Thank you. Mrs. Biggert 
for 5 minutes.
    Mrs. Biggert. Thank you. Mr. Dimon, what went wrong with 
JPMorgan's Value at Risk model which is used to estimate losses 
that occur on a particular trade or in a portfolio? The press 
has reported that JPMorgan changed its model which allowed its 
London traders to take on more risk, and then JPMorgan changed 
its model again. And then to top it off, this change occurred 
in January, which seemed to be material in nature but was not 
included in its Value at Risk model. The SEC has said that when 
a public company changes its model, those changes must be 
disclosed. So why exactly were the risk models changed?
    Mr. Dimon. We have hundreds, maybe a thousand models, which 
are periodically changed and updated. The intent is usually to 
make them better. Back in June of the prior year, the CIO and 
an independent model risk group were trying to update and 
improve a model. It was approved, and it was implemented in 
January. As of April 13th, we had no reason to think it wasn't 
a better model and didn't better reflect some of the risks that 
were being taken there. Clearly, when things started to go 
south several weeks later, we felt that the new model was not 
better, and went back to the old model which we thought was 
better. We disclosed that in our 10-Q, and we told our 
shareholders on May 10th.
    Mrs. Biggert. So it was changed on May 10th, but was there 
approval?
    Mr. Dimon. There is an independent model review group which 
approved it and we have a review taking place--this is one of 
the things we will go through in a lot of detail and make sure 
we know all the facts exactly as they happened. I should also 
point out that we don't run trading risk based on one model. 
There are a lot of other things that should determine your 
decisions.
    Mrs. Biggert. Did you think that was adequate disclosure?
    Mr. Dimon. We disclosed what we knew when we knew it.
    Mrs. Biggert. Okay. So who was responsible for making the 
change?
    Mr. Dimon. It was approved by an independent model review 
group. Whether it was implemented really well, I don't know, it 
is still part of the review.
    Mrs. Biggert. You don't know who made the change within the 
company or decided there needed to be a change?
    Mr. Dimon. There are constant changes, people asking for 
updates and adjustments based upon new facts and new history.
    Mrs. Biggert. Do you think that regulators should have 
noticed whether there was adequacy in the reporting?
    Mr. Dimon. Regulators periodically review models and model 
changes, and in this case, I wouldn't blame that. If we failed 
to pick up its inadequacy, I don't think we should expect the 
regulators to pick it up.
    Mrs. Biggert. So you don't think these changes had anything 
to do with what happened?
    Mr. Dimon. I think it may have aggravated what happened. I 
wouldn't say it was the cause of what happened.
    Mrs. Biggert. All right. I yield back.
    Chairman Bachus. Ms. Waters for 5 minutes.
    Ms. Waters. Thank you very much, Mr. Chairman. Mr. Dimon, I 
am trying to understand your position relative to Dodd-Frank 
and a number of other issues. I am not going to try to use this 
as a ``gotcha'' moment, and I don't want to you use this as a 
way or a time that you can basically just give us a lot of 
information that we don't need.
    You said you support 75 percent of Dodd-Frank, but after 
your testimony last week, and after following your statements 
in the lobbying of some of the industry over the last 2 years, 
I really don't know what you really support. When it comes to 
the most important substantial elements of Dodd-Frank, I am 
afraid that we don't have your support, even when these reforms 
would actually benefit your firm, your shareholders, and 
America's taxpayers by preventing another financial crisis.
    Of the Volcker Rule, in testimony before the Senate last 
week, you called it unnecessary and you asserted that some 
banks like JPMorgan should be treated differently under the 
rule; they should have a higher speed limit. But at the same 
time, you also conceded that the Volcker Rule may have 
prevented the recent trading losses in the CIO. Of capital 
standards, you told the Senate last week that you support 
higher capital for larger banks, but your chief risk officer 
has testified here in this committee against a capital 
surcharge for the largest U.S. banks. On Title VII derivatives 
requirements in Dodd-Frank, you say that you want to work with 
us to implement those reforms, but you work for loopholes 
through bills here in Congress.
    So I want to ask a few questions, and this one requires a 
simple yes-or-no answer. When we think about the losses coming 
out of the CIO in London, did those losses stay in London or 
did the $30 billion or more drop in your market value impact 
your shareholders here in the United States?
    Mr. Dimon. Yes, it did affect our shareholders.
    Ms. Waters. But you have lobbied very strongly and you just 
answered Mr. Frank that you do believe that the foreign markets 
should be exempt from the extraterritorial regulations that we 
are proposing here. And if this impacted your shareholders 
here, why do you continue to take that position?
    Mr. Dimon. I think I said the overseas operations are 
regulated by the Fed and the OCC, these things went to 
clearinghouses and they collateralized. The reason we are 
careful about overseas competition is if JPMorgan overseas 
operates under different rules than our foreign competitors, we 
can no longer provide the best products and services to our 
U.S. clients or our foreign clients. That is why we are 
concerned about extraterritoriality. It is not about the 
protection, but the ability for us to compete. And when we 
compete, we give our clients, which include major U.S. 
companies, better deals. They will go elsewhere if we cannot 
give them the best possible deal no matter how much they like 
us.
    Ms. Waters. So you take that position, despite the fact 
that the losses do not stay in London?
    Mr. Dimon. Yes.
    Ms. Waters. And you continue to lobby for exemptions for 
the foreign trades?
    Mr. Dimon. Lobbying is a constitutional right and we have 
the right to have our voice heard.
    Ms. Waters. I am not questioning your right to lobby. I am 
questioning what is in the best interest of the American 
public. While the public doesn't know the full details of this 
trade, it is clear that these trades were not subject to the 
full panoply of rules we crafted under Title VII. I think we 
all need to be just very, very clear about that. And I want to 
know whether or not you are aware of Mr. Gensler's testimony 
here today, and what he said about the risk that you take in 
having that kind of exemption, and whether or not you agree 
with Mr. Gensler and what he testified here today in any way, 
any shape, form, or fashion.
    Mr. Dimon. I don't agree with him. I heard part of it, and 
I think the starting point should be that the United States is 
the best, widest, deepest, most transparent capital market in 
the world that has flaws. We should fix the flaws, we are 
concerned about some of these things making us not the best 
capital markets in the world. The best capital markets in the 
world in part is what made this the best business machine ever, 
the United States of America. We just want to get it right, it 
is not binary, it is not one thing, these are very complex 
rules. We want to get it right so it works for America.
    Chairman Bachus. Thank you. Mr. Duffy for 5 minutes.
    Mr. Duffy. Thank you, Mr. Chairman. Mr. Dimon, good 
morning. I think it is clear that we are not here because a 
private firm lost $2 billion. I think it is clear that we are 
here because many of the American taxpayers are concerned when 
big banks go bad, and they are left holding the loss. It is one 
of these philosophies where we have capitalism on the way up, 
where you and your firm make a lot of money when you do well. 
And when you fail, we have socialism on the way down, and the 
taxpayers bear the brunt of that loss. That is why we sit here 
today to make sure that taxpayers in Wisconsin don't bear the 
loss of big banks on Wall Street. So when we look at what is 
going on, would you say that the regulators are capable of 
sufficiently regulating a bank the size of JPMorgan?
    Mr. Dimon. First of all, I completely agree with the fact 
that taxpayers should never pay for a big bank failing, 
totally. So we should work on things to make sure that is true.
    Mr. Duffy. But we will agree, we were a little nervous 
about it when we had TARP and the taxpayers did it just a 
couple of years ago. We are a little gun shy with big bank 
losses. Are other regulators sufficiently staged to regulate a 
bank the size of JPMorgan?
    Mr. Dimon. I think the regulators have been challenged with 
a lot of new rules and regulations. I think it's challenging 
them to get them all done on time.
    Mr. Duffy. Can they regulate a bank the size of JPMorgan?
    Mr. Dimon. I believe they can, yes.
    Mr. Duffy. And so, I want to be clear on this, per your 
testimony, you said that as one of the best and brightest CEOs 
in this industry, held in high esteem, you didn't know about 
these trades, and you didn't know about these losses. How do 
you come forward today and say the regulators should have known 
what one of the best CEOs in the industry didn't know and 
couldn't have known?
    Mr. Dimon. I didn't say that. Remember, we have high 
capital standards, high liquidity standards, far more rules, 
most banks are stronger, there are far more--boards are more 
engaged, risk management committees are engaged, there are no 
off-balance sheet vehicles, there are no more subprime 
mortgages.
    Mr. Duffy. Mr. Dimon, the system is far healthier, and you 
have to look at regulation in its whole, not the one thing that 
they might have missed. If one of the best CEOs in the industry 
doesn't know about these trades, how can we expect the 
regulators to know about these trades and protect the American 
taxpayers?
    Mr. Dimon. I think it would be an unrealistic expectation 
that they would capture everything, some things will get 
through their screen, like some things get through our screen. 
However, they can make it a better system by disseminating that 
kind of information to a lot of other companies, they audit us 
regularly, they constantly are criticizing some of the things 
we are doing, it makes us a better company. I just think we 
need realistic expectations for regulators.
    Mr. Duffy. And I would agree. But is it fair to say that a 
$2.3 trillion bank is too-big-to-manage? Too-big-to-regulate? 
Too-big-to-control? Is it too complex? Are you too-big-to-fail?
    Mr. Dimon. No, we are not too-big-to-fail. We believe that 
a bank should be bankruptable, and that when the bank fails 
that the clawbacks should be invoked on management, the board 
should be fired, and the company should be slowly dismantled.
    Mr. Duffy. And who bears the losses?
    Mr. Dimon. In a way, that doesn't cost the economy 
anything.
    Mr. Duffy. Who bears the losses?
    Chairman Bachus. Mr. Duffy, allow the witness to answer the 
question.
    Mr. Dimon. They are charged back to the other big banks to 
survive, that is what I believe.
    Mr. Duffy. If JPMorgan fails, who picks up the tab?
    Mr. Dimon. If JPMorgan fails, I don't think anyone is going 
to pick up any tab because we have $190 billion of equity, $290 
billion of unsecured debt, so I don't think there is any chance 
we are going to fail. If we did, any losses the government 
would bear should go back, be charged to the banks. Just like 
the FDIC today is charged back the banks. JPMorgan is going to 
spend $5 billion of fees to the FDIC to pay for the failure of 
other banks.
    Mr. Duffy. So--
    Mr. Dimon. I don't like the $5 billion, but I think it is 
appropriate that the American taxpayer doesn't pay for that 
guarantee.
    Mr. Duffy. I thought were you done. The Orderly Liquidation 
Authority would step in and bear the brunt of JP Morgan's loss 
should you fail, right?
    Mr. Dimon. The loss would mostly be borne by equity and 
unsecured debt. They might provide temporary funds to keep the 
company functioning in the short run.
    Mr. Duffy. But is it fair to say that JPMorgan could have 
losses of a half trillion dollars or a trillion dollars?
    Mr. Dimon. Not unless the Earth is hit by the Moon.
    Mr. Duffy. Okay. I want to go to your trades that brought 
us--brought you the $2 trillion--I am sorry, the $2 billion to 
$5 billion loss. The dollars that were used to trade, those 
were dollars that were backed up by the FDIC; is that right?
    Mr. Dimon. I am sorry, say that again?
    Mr. Duffy. The $2 billion to $5 billion loss that you 
incurred, the dollars that were used to make those trades, 
those were dollars that were backed up by the FDIC?
    Mr. Dimon. Yes.
    Mr. Duffy. Okay. And why then weren't you taking this 
excess deposit and investing those dollars here with American 
businesses, American consumers, instead of taking those excess 
dollars backed up by the American taxpayers, or the FDIC, and 
sending them over to London to make very complex--
    Mr. Dimon. It is not either/or. We have $700 billion of 
loans, we have $200 billion of short-term investments in 
central banks around the world to handle cash flow for our 
clients, and we have a $350 billion, AA-plus securities 
portfolio. Any valid loan that comes in the door that we can 
make, small business, middle market where we are, we try to 
make those loans.
    Chairman Bachus. Thank you. And let me say, I am sure that 
somewhere in Dodd-Frank, there is a prohibition against the 
Moon striking the Earth.
    Mrs. Maloney?
    Mrs. Maloney. Thank you, I would like to welcome Mr. Dimon, 
who resides in the district I am privileged to represent. I 
would like to note that he has been a major employer in a 
number of different financial institutions before joining 
JPMorgan Chase.
    I would like to ask you, Mr. Dimon, I always thought that 
you loved New York. So why are all these jobs and all this 
activity taking place in London? I specifically would like to 
know why were the losses incurred in the London unit? They 
didn't take place in the New York unit. Could they have 
incurred in New York just as easily?
    We learned in the prior regulatory panel that a substantial 
portion of the bank's Chief Investment Office's activities, 
including its credit derivatives trading, are conducted through 
the London branch, and that other large financial institutions 
likewise have London offices. And I certainly understand that 
we are in a global market and we have to be in global markets 
around the world, but what is it about the regulatory regime of 
the United Kingdom that encourages such a large portion of 
these activities to take place in London as opposed to the 
United States?
    And I would also say that a large portion of the credit 
disasters have taken place in London: AIG, we bailed out $184 
billion; Lehman; UBS; there is a whole series. And I want to 
understand why all this is taking place, why London?
    Mr. Dimon. The predominant part of the CIO is done in New 
York, but we operate in 100 countries. We are on the ground in 
60 countries, we take deposits in all of those countries, we 
have to invest in some of those countries, they all have laws, 
rules, and requirements. That operation could have been in 
London or somewhere else, sometimes the operation where we have 
the people, so--
    Mrs. Maloney. Is the regulatory regime lighter in London? 
Why is all the activity overwhelmingly, and all the problems 
appear to be in London?
    Mr. Dimon. I don't think this activity was in London 
because regulatory activity is less in London. And most of what 
we do in London is serving European companies.
    Mrs. Maloney. What are the lessons that you have learned 
for large financial institutions going forward? Is there any 
way to ensure against this type of loss where a trader is 
forced to hedge the hedge and cover losses that led to more 
losses? Is it possible to ensure that legitimate hedges never 
morph into something else?
    Mr. Dimon. It is not possible to ensure we will never make 
a mistake. Anyone who has ever been in business knows you make 
mistakes, hopefully they are small, hopefully they are few and 
far between, and hopefully they are not life-threatening, and 
this is not life-threatening. We, in this one area, failed to 
have the granular limits and the rigorous review that we should 
have. We believe it is not true for the rest of the company. We 
try to be very, very disciplined, and we fixed this problem the 
second we found it.
    Mrs. Maloney. And were the risk limit rules raised while 
the loss-making position was on the books?
    Mr. Dimon. No, they--sometimes limits hit triggers and it 
asks you for further focus and detail. I think some of the 
things you heard about were when some of these limits were hit, 
people did what they were supposed to do.
    Mrs. Maloney. Did they raise them?
    Mr. Dimon. They do get raised sometimes, yes.
    Mrs. Maloney. Why were they raised again?
    Mr. Dimon. I didn't say they were--I don't know if they 
were raised. I am saying sometimes they do get raised.
    Mrs. Maloney. So you don't know whether they were raised or 
not?
    Mr. Dimon. They might have been, I don't recall.
    Mrs. Maloney. Was the loss-making position increased in 
size after it began generating losses?
    Mr. Dimon. What I recall is that they weren't really 
increased in size after early April. At one point, they stopped 
taking positions. I think that was in late March.
    Mrs. Maloney. And what was the delay between the start of 
the losses and senior management action?
    Mr. Dimon. Prior to April 13th, there had been some losses, 
and management was looking at it. People looked at stress 
testing, a lot of folks thought of it as an aberrational thing 
that would come back, which happens sometimes. The real losses 
started later in April, late April, like the last week of 
April. At that point, we brought in some top experts again, 
they dug deep, and we realized we had a much more severe 
problem and that we--that was late April that we started--
    Mrs. Maloney. And what was the delay between the start of 
the losses and disclosure of the losses to the Office of the 
Comptroller of the Currency on-site at JPMorgan Chase?
    Mr. Dimon. I don't believe there was a delay in the 
disclosure of the losses. We run a regulatory--we try to run 
the company that--what I call open kimono with--the regulators 
to tell them what we know and when we know it. I don't know 
exactly what all reports they were looking at, but we don't 
hide reports from them. They do see P&L, so they saw the 
losses. I do know at one point our CO went to see them to 
explain what had happened prior to April 13th. We did not 
understand the seriousness of it until later in April, on April 
13th.
    Mrs. Maloney. My time has expired.
    Chairman Bachus. Thank you.
    Mr. Schweikert?
    Mr. Schweikert. Thank you, Mr. Chairman. Forgive me, as I 
have been bouncing around, just so I can get my--put it on the 
record. What is the best model estimate of what the loss is?
    Mr. Dimon. We have not disclosed that because when we make 
disclosures to shareholders, we will disclose the quarter on 
July 13th. At that point, we will give a full and fair 
explanation of what went on. I personally feel that this will 
never be life-threatening to the company, and we are going have 
a solidly profitable quarter, and more details to come when we 
report the quarter.
    Mr. Schweikert. Mr. Chairman--
    Chairman Bachus. I will reserve your time, so we can stop 
the clock. I think we all need to realize, and I think if you 
have read the articles on this, the more disclosure that is 
made, the more those betting against the position of JPMorgan 
can use that to the disadvantage of JPMorgan. In fact, I think 
it is pretty well-established that part of the open disclosure 
and discussion has precipitated some of those losses. But it is 
not necessary for him to disclose proprietary information. I 
think if you read any of these articles, you see that they are 
managing this, and independent people have said the loss could 
be $6 billion, but that is just an estimate. It could be $2 
billion, it could be--some estimated it could be less than 
that.
    Mr. Schweikert. Thank you, Mr. Chairman.
    Chairman Bachus. Start the clock again.
    Mr. Schweikert. Being respectful that you will be doing 
your quarterlies very shortly, sir, the second question I was 
going to ask is profit for the quarter, but I guess we will 
just wait on that one too.
    Mr. Dimon. But there will be profits in the quarter.
    Mr. Schweikert. That was basically the point I was trying 
to head towards is that at least as an institution this is--it 
is not happy that it is shareholders' money, but it is not 
devastating.
    Mr. Dimon. Not devastating, not fun either.
    Mr. Schweikert. And this is actually more of an offshoot, 
having read over some of the Senate testimony. I want to get my 
head around something that is actually all up and down both the 
financial, the fixed income and the banking community. We are 
all operating in an environment that literally is zero interest 
rates, you plug in interest rates today and plug in what real 
inflation, so slight movements whether it be caused by 
cascading Europe or Argentina or some pop Fed policy or fiscal 
policy here. My understanding is just little bit of movement 
would be devastating to your book of business if you have not 
hedged that. What scale are you hedged for the fear of 
movements and interest rates a couple of ticks up?
    Mr. Dimon. Our biggest exposure is credit and interest 
rates. And we try to manage the portfolio and all interest 
rates such that rising rates don't hurt us because our biggest, 
what I call ``fat tail risk'' is rapidly rising rates. In fact, 
we are positioned today that if rates went up, we make more 
money. It does cost us to do that.
    Mr. Schweikert. You are heading towards the ultimate 
question here. I am trying to get a sense of the cost to do 
that type of risk management, and that is one of the 
frustrations I hear lots of discussion going on about, are you 
doing risk management here or here? A lot of folks don't 
understand that it is expensive.
    Mr. Dimon. It is expensive, yes. I am guessing now it costs 
us probably over $1 billion a year to be positioned where we 
are to benefit from rising rates as opposed to neutral to 
rising rates. But I think it protects our company, which is why 
we are there. Again, we may be wrong.
    Mr. Schweikert. And do you have to do excessive amounts of 
hedging in that fashion or buying, we will call it interest 
rate insurance, it might be an easier way to understand it, 
because of your imbalance in both deposits to the loan 
portfolio?
    Mr. Dimon. Yes, so the investment portfolio is invested to 
help manage that exposure, which is why it is invested very, 
what I call shorter than most. The average maturity or duration 
is 3 years. If you invest that longer, you can earn more money; 
having it shorter is more conservative. It gives us the ability 
to reinvest like $40 billion a year at whatever the new current 
rates are. So that portfolio is one of the main things we use 
to manage interest rate exposure.
    Mr. Schweikert. So, you were just saying what, 3 years?
    Mr. Dimon. The duration is 3 years of the AFS portfolio, 
the $350 billion portfolio.
    Mr. Schweikert. And that costs you almost $1 billion a year 
just to insure?
    Mr. Dimon. Just to keep it positioned so that we benefit 
from rising rates.
    Mr. Schweikert. In this type of environment--in your 
understanding, and I know we are all still all working on the 
mechanics of the Volcker Rule, what would have happened in 
these trades if the Volcker Rule was fully implemented as you 
understand it?
    Mr. Dimon. The Volcker Rule specifically allows portfolio 
hedging, and I think initially the original intent, it would 
have been allowed because it was a hedge that would benefit the 
company in a terrible stress like Eurozone. What it morphed 
into I cannot defend. It violated common sense, and I don't 
know if the Volcker Rule could have or would have stopped that, 
if it did it wouldn't bother me. I wouldn't be sitting here.
    I think the far more important think about the Volcker Rule 
is the ability to make active markets here which keep down 
spreads for everybody, for all investors, and that makes it 
easier for companies to raise money, and cheaper for investors 
to invest money. Those investors are veterans, retirees, and 
mothers; they are not just people like me. So that is why we 
think the Volcker Rule has to be written carefully to maintain 
the best capital markets in the world and not stifle them.
    Mr. Schweikert. Okay, in 6 seconds, how do you, as an 
international organization, hedge against political risk, such 
as what is happening in Argentina, what is happening in Europe, 
and what is happening in other places? What do you have to do 
and what does it cost?
    Mr. Dimon. Well, some places we don't do that much business 
in, so it is obviously an easy solution. In other places, you 
have conversations with the board about if you are wrong about 
a country, how much you might be willing to lose. So we do do 
investments in certain countries, but we don't want any one 
country or anything to damage JPMorgan if we are wrong about 
our view about that country.
    Chairman Bachus. Thank you.
    Ms. Velazquez for 5 minutes.
    Ms. Velazquez. Thank you, Mr. Chairman. Mr. Dimon, although 
these trading laws cannot do substantial harm to Morgan Chase's 
capital position, it very well may have caused the collapse of 
a weaker bank. Do you think separating similar investment 
activities from traditional banking, taking deposits and making 
loans, is a reasonable approach to protecting the fragile 
economy from bank failures?
    Mr. Dimon. I do not. If you look at most of--
    Ms. Velazquez. I thought so.
    Mr. Dimon. Let me give you some facts to support what I 
say. Early on, mortgage bankers went bankrupt, monoline 
investment banks, Bear Stearns and Lehman, a monoline insurance 
company AIG, WaMu, and IndyMac which were monoline thrift kind 
of savings companies. Fannie Mae and Freddie Mac, which were 
the biggest financial disasters of all time, were monoline 
mortgage insurance type companies. All of that happened and it 
had nothing to do with Glass-Steagall.
    And in other parts of the world that didn't have Glass-
Steagall, like Canada, they didn't have any problem at all 
because they had good banks and good regulations and proper 
capital levels, et cetera.
    Ms. Velazquez. As you know, the rulemaking to implement the 
Volcker Rule is ongoing, and experts are still debating 
whether, in its current draft, the rule will have prohibited 
these trades. How should, given the lessons learned, the 
Volcker Rule be implemented to account for the complexity of 
trades like those that cost JPMorgan's loss, and the 
possibility that they move beyond purely hedging risk?
    Mr. Dimon. Look, I am not writing the rules. That is other 
people's jobs. But I think I said it was a strategy that was 
badly vetted, badly implemented, and badly tested. And I would 
ask companies if you are going to do something like that, 
properly vet it, properly test it, so that it never morphs into 
something which isn't what it was really intended to do.
    Ms. Velazquez. Where does the hedging risk stop and risky 
proprietary trading start?
    Mr. Dimon. I can't define that for you. I am sorry.
    Ms. Velazquez. Thank you, Mr. Chairman.
    Chairman Bachus. Thank you.
    Mr. Grimm for 5 minutes.
    Mr. Grimm. Thank you, Mr. Chairman.
    Good afternoon, Mr. Dimon.
    Just to continue with--we have been hearing a lot about 
this Volcker Rule. We heard before from Ms. Waters that if all 
of Dodd-Frank was implemented, it is possible that these trades 
wouldn't have occurred.
    Would it be safe to say that if you didn't do any trading 
at all, you wouldn't have any losses. Is that true?
    Mr. Dimon. Yes.
    Mr. Grimm. So if we made banks a utility and we couldn't 
compete with Europe, that would pretty much clear this up as 
well. Would that be one way to get rid of losses and take all 
the risk out?
    Mr. Dimon. Yes, I think so.
    Mr. Grimm. Okay. So when we look at--before, we were 
talking about the regulators, and my colleague, Mr. Duffy, was 
saying--he asked you, do you think the regulators can regulate 
JPMorgan Chase? You said yes. And his argument was, why 
couldn't they find this one trade?
    I think the point is that--again, my humble opinion--
regulators are there to look overall at the major rules, such 
as maybe minimum capital requirements, maximum leverage ratios, 
maybe some concentration risk, some rules in place so you are 
not too concentrated in one area. And those three things 
combined, regardless of whether you have a bad trading day--is 
it safe to say that we could never expect regulators to be able 
to have foreseen this loss of JPMorgan Chase?
    Mr. Dimon. Yes. But I think it is fair to say if regulators 
do their job, the system will be healthier, most banks will be 
healthier, and the chance of having a systemic collapse should 
be virtually zero.
    Mr. Grimm. Okay. But would you agree--
    Mr. Dimon. But to expect them to capture any one trade, I 
just think is an unrealistic expectation.
    Mr. Grimm. Okay. I happen to agree with that. I don't think 
regulators will ever be set up to do that for the amount of 
institutions and the amount of trading. And the amount of 
metrics that would need to be put in place to figure out 
whether something is a proper trade or not is an unrealistic 
goal, and we are setting ourselves up for failure.
    I think if we focus--and I want to ask you a question--on 
things like the capital requirements, leverage ratios, making 
sure there is not too much concentration, that is something 
that regulators can actually get their hands around and do a 
good job at. Would you agree with that?
    Mr. Dimon. Yes.
    Mr. Grimm. Okay.
    Now, if I can get into the weeds a little bit just to 
understand a little bit about your risk models, without 
divulging your proprietary information, could I just ask, your 
Value at Risk model, how did you calculate it? Was it daily, 
weekly, monthly?
    Mr. Dimon. I believe it to be daily.
    Mr. Grimm. Daily. Do you know if it was at a 95 percent 
concentration, 95 percent confidence?
    Mr. Dimon. I think we look at both 95 and 99 percent. I 
forget what the public disclosures are.
    Mr. Grimm. Okay. Because my question was going to be, a 95 
percent confidence level is approximately 2 standard 
deviations. If you go to 3, 4, you are talking 98, 99 percent. 
Would that have helped your scenario? I am just curious. Would 
that have actually helped?
    Mr. Dimon. VaR is just a basic statistical thing that shows 
how much volatility there is in a security or a basket of 
securities. There is nothing mystical about VaR.
    The other things which normally help is having limits at a 
very granular level and doing what I would call real stress 
testing, like what happens if rates blow out, what happens if 
credit spreads blow out, what happens if the Eurozone has a 
crisis, what happens if you have a credit crisis in the United 
States.
    So we do all of these serious things to manage risk. VaR is 
one measure and, in my opinion, not the best of them either.
    Mr. Grimm. Okay.
    And I want to also go back to make a point. At any point--I 
know that the sums were technically insured by the FDIC--even 
now, having the benefit of having looked at these trades, were 
the taxpayers at risk?
    Mr. Dimon. No. And I believe one of the Fed Governors here 
is saying that the bank can bear $80 billion of risk before the 
taxpayer might be at risk.
    Mr. Grimm. And, lastly, I just want to--because I am 
actually trying to get my hands around this--look at some areas 
of concentration risk. Because we hear a lot about--what I 
think we are doing is trying to turn banks into utilities, and 
I think there are better ways to do it, and maybe looking at 
concentration risk.
    With the financial meltdown in 2008, much of the 
concentration was in loans. We know it was in subprime. Based 
on JPMorgan's size, just your size alone, other market 
participants were able to clearly notice your London desk's 
activity related to somewhat illiquid credit indexes.
    Do you think reevaluating your concentration risk, 
especially in light of things that are liquid, is something 
that makes sense for the banking institutions overall, besides 
just JPMorgan?
    Mr. Dimon. Yes, that was one of the flaws here. In this 
book we should have had more granular limits. I didn't mention 
this specifically, but one of them would have been specific 
limits on anything that might be illiquid, specific limits on 
credits, specific limits on counterparties. We had some but not 
all, and they all should have been in place.
    Mr. Grimm. Thank you, and I yield back.
    Chairman Bachus. Thank you.
    Mr. Ackerman for 5 minutes.
    Mr. Ackerman. Thank you.
    If I may, I would like to get back to some very basic 
concepts. In your opinion, is gambling investing?
    Mr. Dimon. No. No, it is not.
    Mr. Ackerman. What is the difference between gambling and 
investing, briefly, if you can?
    Mr. Dimon. I think when you gamble, on average, you lose. 
The house wins.
    Mr. Ackerman. That has been my experience with investing.
    Mr. Dimon. I would be happy to get you a better investment 
advisor and see if we can improve upon your experience.
    Mr. Ackerman. You have, in general, except for recently, an 
excellent track record.
    I would tend to agree with you, but we seem to be treating 
them quite the same. I used to think that all of Wall Street 
was on the level, that it facilitated investing, that it 
allowed people and institutions to put their money into 
something that they believed in and believed would be helpful 
and beneficial and grow and make money, and especially help the 
economy and, on the side, create a lot of jobs and be good for 
our country and good for America.
    Now, a lot of what we are doing with this hedging--and you 
could call it protecting your investment or whatever, but it is 
basically gambling. You are just betting that you might have 
been wrong. It doesn't help anything succeed anymore. It 
doesn't encourage anything anymore. It creates the possibility 
that people are saying, do these guys really know what they are 
doing if they are now betting against their initial bet?
    And then if you go and hedge against your hedge, which 
means you are betting against your bet against your first bet, 
it seems to me that you are throwing darts at a dartboard and 
putting a lot of money at risk just in case you were wrong the 
first time.
    I don't see how that creates one job in America. I don't 
see how it helps the American economy. I don't see how it helps 
the housing market or the building market or the let's-make-
steel-or-widgets market. One-tenth of a zillionth of a percent. 
What it helps is, if you were right a majority of the time, 
then it makes a bunch of money for the guys who did it, and 
doesn't help the company, the industry, the economy, or the 
country at all. And if you were wrong, it puts systemically 
everything at risk. And when I say everything, I mean the 
confidence that the American people, the public, the investing 
community, and everybody else has in the system. And that is a 
loss you can't hedge against, because the more you hedge, the 
more questions you raise in the confidence of what you are 
doing with your initial investment.
    And the fact that you have chosen to do this overseas 
raises a lot of fuzziness. Maybe the businesses there--da-da-
da-da-da-da-da-da-da. And it is not illegal to do it over 
there, it is just as good to do it over there. And, when you 
come back from an overseas trip, at customs there is always the 
question on the form, did you have any exposure to farm 
animals? And I am sure the nice people over in Europe and 
Africa and Asia, they have safety codes and enforce them, but 
they still ask the question because they are worried about the 
infiltration of the problem into the American system and 
putting us at risk. They ask that question.
    How is this hedging and wedging thing any different than 
protecting yourself by taking the odds to Las Vegas?
    Mr. Dimon. We don't gamble. We do make mistakes. The main 
mission of this company is to serve clients around the world.
    Mr. Ackerman. But isn't it--
    Mr. Dimon. Last quarter, we did $40 billion in mortgages. I 
assume you want us to do that. We are the biggest, or one of 
the biggest small-business lenders in the United States. We 
have raised $400 billion, $500 billion for the biggest American 
corporations. We bank some of those corporations in 20 
countries around the world.
    Our main mission is serving those clients, investors, 
capital issuers, small businesses, and consumers. That is what 
we do.
    Mr. Ackerman. Granted, but when you--
    Mr. Dimon. And we lost $2 billion on Chrysler. I assume you 
want us to continue lending to Chrysler.
    Mr. Ackerman. I want all good things to happen. But 
wouldn't you be serving those clients better--and you have done 
a pretty adequate job, from what I can see--wouldn't you be 
serving them better if you spent more time and energy or that 
billion dollars in figuring out all these mathematical 
formulas, wouldn't you do a better job if you evaluated the 
investment a lot clearer with another billion dollars into 
that?
    Mr. Dimon. In this case, yes.
    Mr. Ackerman. Why shouldn't we apply that to the whole 
program? What I am doing is I am raising a question on what is 
the purpose of hedging. If you are right, you win; if you are 
wrong, the system loses. We all lose in that context. Because 
there is nothing more important than that confidence.
    Chairman Bachus. Thank you.
    Mr. Fitzpatrick?
    Mr. Fitzpatrick. Thank you, Mr. Chairman.
    Much of the discussion regarding JPMorgan's trading loss is 
focused on whether the activity in question would have been 
prohibited if the so-called Volcker Rule had been in effect. 
What is your view on that?
    Mr. Dimon. I have already said I don't know. The Volcker 
Rule isn't fully vetted yet, it is not fully written, and I 
just don't know.
    The Volcker Rule specifically allows portfolio hedging, 
properly done, if properly vetted. What this became wasn't 
really that. So if it does or didn't prohibit it, it wouldn't 
bother me.
    Mr. Fitzpatrick. Putting aside the question of whether it 
would have been prohibited under the Volcker Rule, since the 
regulators who wrote it can't seem to answer that question 
either, what is your view on whether it should be prohibited?
    Mr. Dimon. I believe that portfolio hedging, properly done, 
should be allowed. It protects the companies, particularly in 
times of dramatic credit crisis or Eurozone crisis. I do 
believe it should be allowed, portfolio hedging.
    Mr. Fitzpatrick. Mr. Dimon, some have suggested that your 
position as a board member on the New York Federal Reserve 
Board is a significant conflict of interest and have suggested 
that you and other bankers who sit on the board should resign 
your positions. How do you respond to that?
    Mr. Dimon. The Federal Reserve rules are written by you 
all, and so--but I should tell you that I don't vote for the 
president, I don't get involved in supervisory, I can't serve 
on the Audit Committee. The board basically sits around and 
talks about the economy, what is going on. There are 12 Federal 
Reserve Boards. That information, I think, is put together and 
sent to Washington. It is more of an informational advisory 
group. And whatever the lawmakers write would be fine with me.
    I, personally, if I was head of the board, I would want to 
hear from a lot of different types of people. It would be funny 
to be talking about global markets and not have someone 
involved in the global markets at the table. It surely does not 
have to be me.
    Mr. Fitzpatrick. Nothing further.
    Chairman Bachus. Thank you.
    Mr. Sherman for 5 minutes.
    Mr. Sherman. Thank you.
    Mr. Lynch wanted to swear you in. You have already said 
something that is false, that we all know is false--
    Chairman Bachus. Let me--
    Mr. Sherman. Excuse me. Let me finish my statement.
    Chairman Bachus. No, I--
    Mr. Sherman. Sir, I--
    Chairman Bachus. --want to clarify something about swearing 
people in.
    Mr. Sherman. That is--
    Chairman Bachus. We had a hearing in September of 2009, 
when Mr. Frank was chairman. And Mr. Frank made a decision not 
to swear in any of the CEOs of the banks about what had gone on 
in September of 2009. I am following the protocol of the 
committee.
    Mr. Sherman. Mr. Chairman--
    Chairman Bachus. If you want to continue to say he ought to 
be sworn in, that is fine.
    Mr. Sherman. I wasn't saying that, Mr. Chairman. I was not 
criticizing you. But if I can't get to the end of the 
sentence--
    Chairman Bachus. I am saying the ranking member has said I 
am doing something unusual here. What I am doing is following 
the standard policy--
    Mr. Frank. Excuse me, Mr. Chairman. I didn't say you were 
doing anything unusual.
    Chairman Bachus. Well, I took it as saying that.
    Mr. Frank. What? I didn't--I made no comment.
    Chairman Bachus. I am sorry. I think it was Mr. Lynch.
    Mr. Frank. Not everybody from Boston talks the same.
    Chairman Bachus. That is right.
    Mr. Frank. But let me just say--
    Chairman Bachus. I am just saying this is normal, standard 
operating procedure.
    Mr. Frank. Mr. Chairman, I do want to take exception. I 
have made no comment on the swearing in. Let me just--if I 
could, just another 30 seconds. I am gratified that you are 
following my precedent. And I will have by tomorrow another 
list of precedents that you can also follow, and we would all 
benefit.
    Chairman Bachus. Don't be in any rush to give it to me.
    Mr. Sherman. Mr. Dimon, had you been sworn in, you would 
face no legal liability for the comment that I think you have 
made that is erroneous, because we are here because we are in 
touch with Main Street in our districts. And you put forward 
the idea that there were $350 billion that you had given to 
your Chief Investment Office because there weren't small and 
medium-sized businesses in the United States that were 
creditworthy that wanted the money. And I assure you, there 
isn't a member of this panel who couldn't bring you 100 small 
and medium-sized businesses, creditworthy, in need of loans 
from you. And, instead, you took the $350 million to London.
    That is why we are here. Because if you had made the small 
and medium-sized business loans, you wouldn't be here. And some 
of that money in London went to the gambling tables in London. 
And whether it was $2 billion lost or some multiple of that, 
that is why we are here.
    I would hope that you would leave here dedicated to taking 
the money away from your London operations and lending it to 
small and medium-sized businesses. And if you can't find 100 in 
each one of our districts, we will do it for you.
    Now, I would like to, without objection, put in the record 
an editorial by the wild socialists over at Bloomberg. I assume 
there is no objection.
    Chairman Bachus. Without objection, it is so ordered.
    Mr. Sherman. They point to a study just published by the 
IMF that says that your bank enjoys a $14 billion subsidy, that 
its cost of funds is some 0.8 percent lower because of the 
implicit Federal guarantee.
    What we saw in 2008 is a belief around the world that if a 
bank your size was going to go under, there would be a bailout 
not just of insured depositors but of all creditors. And that 
belief reduces your cost by 0.8 percent of your total funds, is 
responsible for $14 billion.
    You are in a position where you are simply too-big-to-fail. 
And this raises--and I think the gentleman from Wisconsin made 
this point. You lost $2 billion or some multiple of that. You 
happen to be very well-financed. But you bet over $300 billion. 
You are lucky, and fortunate and wise that you didn't lose 
more.
    Can you say on behalf of all the banks with over $100 
billion in assets that all of them could have survived a 
mistake this size? I will ask you to answer that for the 
record.
    The question is, why should we allow you to be so big that 
if you go under, we are going to have to bail out your 
creditors?
    Mr. Dimon. Banks should take risks relative to their size 
and capability. So you can't compare all the banks. And I would 
venture--and I am not going to change what you believe--but a 
lot of banks were a port in the storm. I know it is convenient 
to blame them all for everything, but JPMorgan's size and 
capability and diversification in 2008, 2009, and 2010 allowed 
us to continue to do the things that you want us to do. We 
never stopped making loans. We bought Bear Stearns at the 
request of the United States Government. We helped the FDIC 
fund by buying WaMu. We lent money to California and New 
Jersey. It allowed us to do it.
    So we try to be a conservative company that does the right 
thing. Every now and then, we make mistakes.
    Mr. Sherman. And how can medium-sized banks compete against 
you when your cost of capital is reduced by 80 basis points, 
0.8 percent, because of a belief that if they go under, we will 
let them go under, but if you go under, we will bail out your 
creditors?
    Mr. Dimon. I don't believe that is true. I am going to give 
you two facts, if you don't mind.
    Fact number one is we borrow in the marketplace, unsecured, 
with the smartest people in the world. It costs us 200 basis 
points over Treasury. It costs the average single A industrial, 
like, 100 basis points over Treasury. So we are--if everyone is 
so smart and knew that we are too-big-to-fail, we would be 
trading at 10 basis points over Treasury.
    Mr. Sherman. After you lost all that money in London, I 
would expect that creditors would be reluctant to lend you 
money at less than that rate.
    Mr. Dimon. Most of that $350 billion predominantly is in 
the United States. It is not in London. Most of it is here.
    The second is the FDIC report, which looks at average 
funding costs, because we have studied this report a way back 
and all almost of it, if I remember correctly, was related to 
mix. We are a money center bank. We have a tremendous sum of 
money, which we keep very short term and overnight, which costs 
us very little right now because of the way the yield curve is. 
But we have to put out--we are the checking accounts for large 
corporations, including some nations, and so we invest that 
money very short and make almost no money on it. It shows up as 
a low funding cost, but our actual cost of funds for retail 
deposits, middle market deposits, and negotiated deposits is 
probably pretty much like everybody else.
    Mr. Sherman. There isn't a small or medium-sized--
    Chairman Bachus. Thank you, Mr. Sherman.
    Mr. Sherman. --banker who agrees with you.
    I yield back.
    Chairman Bachus. Mr. Canseco for 5 minutes.
    Mr. Canseco. Thank you, Mr. Chairman.
    I have spent a number of years in the banking sector, and I 
am approaching this hearing keeping in mind a primary truth 
about the banking industry, which is that the business of 
banking is inherently risky. Lending money is a risky 
proposition.
    This was evident back in February when your firm disclosed 
in an investor presentation that it had set aside $27 billion, 
more than 10 times the amount of its recent trading losses, in 
loss reserves against its loan portfolio, providing that 
lending and exposure to credit was and is the largest risk 
facing America's banks today.
    So we must keep this in mind as today's hearing has focused 
on whether it is appropriate or not, the Volcker Rule, and the 
attempt to keep banks from making so-called risky investments. 
Yet, in the years leading up to the financial crisis, there was 
hardly a riskier proposition than extending mortgage loans in 
the midst of an artificially inflated housing bubble. And if 
you want further proof of this, look no further than Fannie and 
Freddie, who didn't need to make proprietary trades with 
depositors' funds in order to lose $200 billion of taxpayer 
money.
    The irony is, of course, that had the Volcker Rule been in 
effect prior to the crisis, it is likely that banks would have 
had even more exposure to the housing bubble and the crisis 
would have been far deeper and far worse.
    Someone once said that, like energy, risk is not created or 
destroyed; it is simply transferred, passed on. And I feel the 
push for ever more regulation in your economy represents a 
continued misunderstanding of our banking system and the roots 
of the financial crisis and that this misunderstanding is, by 
itself, a great risk to our financial system and economy as we 
move forward.
    So, with that said, Mr. Dimon, during your testimony in the 
Senate last week, you stated that we don't actually know who 
has jurisdiction over many issues we deal with anymore. Did 
Congress miss an opportunity with Dodd-Frank to simplify our 
regulatory structure and put an end to regulators passing the 
buck to one another?
    Mr. Dimon. It would have been my preference that we 
simplify it. And we made it a little more complicated, yes.
    Mr. Canseco. Thank you.
    So how do you respond to those who cite JPMorgan's recent 
trading loss as evidence that JPMorgan and other banks are 
simply too large and complex to manage?
    Mr. Dimon. There are huge benefits to size, and you see 
them in the kinds of scale in aircraft and banking and 
diversification. I have already mentioned that we were a port 
in the storm because of our size and diversity.
    The benefit of size has to eventually accrue to clients, 
not to us. That is the capitalist system, that you do things 
better, faster, and the client benefits. There are some 
negatives to size--lack of attention to detail, et cetera. So 
some of those lack of benefits of size happen to small firms 
too, and you have to weigh and balance.
    So I think, on balance, the company has done a good job for 
its clients and its shareholders. And we continue to grow and 
expand and away from this problem. Our businesses are healthy 
and strong and serving more and more people, both in the United 
States and around the world. And we are helping a lot of 
American corporations travel around the world, helping them do 
a better job where they want to do business and do more 
exports.
    Mr. Canseco. So, Mr. Dimon, if the activities of the Chief 
Investment Office at JPMorgan were severely restricted under 
the Volcker Rule, especially to the point where portfolio 
hedging was disallowed, what would that do to the risk profile 
of the CIO portfolio?
    Mr. Dimon. We would probably just modify the risk profile a 
little bit of the CIO portfolio and try to make sure we are not 
taking undue risks.
    As I mentioned before, the AFS portfolio has an $8 billion 
unrealized profit. It is double-A-plus average rating. And it 
has invested rather shorter term, not short, but shorter term 
to protect us from rapidly rising interest rates. So I would 
call it a fairly conservative portfolio, and maybe would have 
changed the nature of it a little bit.
    Mr. Canseco. As I understand it, the CIO portfolio is 
around $400 billion of excess deposits that have not been lent 
out. Is that correct?
    Mr. Dimon. $350 billion, I think.
    Mr. Canseco. It seems to me that if activities were 
restricted, JPMorgan would be left with the unappealing option 
of lowering underwriting standards or increasing risk somehow 
in a portfolio. Is that a fair assumption?
    Mr. Dimon. It is possible, yes.
    Mr. Canseco. All right. So would you say that if the 
Volcker Rule were implemented, it is likely that overall risk 
in the financial system would actually be increased?
    Mr. Dimon. I would love to answer the question. I don't 
know the answer to that.
    Chairman Bachus. All right. Thank you.
    Mr. Dimon. Remember, it is one rule out of hundreds that 
are all being done together. So, I can't tell you the 
cumulative effect of all of them.
    Mr. Canseco. Thank you.
    Thank you, Mr. Chairman.
    Chairman Bachus. Thank you.
    Mr. Meeks for 5 minutes.
    Mr. Meeks. Thank you, Mr. Chairman.
    Mr. Dimon, I have been listening, and I think there is 
another reason why you are here. Some of it has to deal with 
the fact that--some of it has to deal with politics, to be 
quite honest with you. Some feel that Dodd-Frank has a role, 
and others feel that Dodd-Frank doesn't have a role. Some think 
regulations, others think no regulations. I think that we were 
at a point where we were talking about a lot of deregulation at 
one point, when I first came to Congress anyway, and we got 
into the problem that we are in. I remember the Secretary of 
the Treasury coming and saying, disaster was about to happen. 
And so Dodd-Frank came into existence because we wanted to fix 
the problem so that we would not be where we were when we had 
this terrible catastrophe that was facing our country.
    And during that debate--and I want to pick up someplace 
around where I think Representative Maloney was talking about--
there was concern about a lot of individuals doing business in 
London. That has been some of the questions that have been 
taking place. And I understand that you have to get the best 
deal for your investors, et cetera.
    But I kept hearing about this London loophole. And from 
what I heard you answering to Representative Maloney, that 
there is no London loophole, it wasn't due to any regulations 
or lack of regulations in London. Yet when I talk to, not to 
you but a number of other financial institutions--I am from New 
York also, and I talk to them--and they tell me that if we put 
certain regulations in place, they will leave New York and they 
will go to London, because they will have less regulations in 
London.
    So I don't understand if--isn't there something, some kind 
of loophole in London that other institutions, maybe not 
JPMorgan Chase--but they say that if we put these regulations 
in place, they will leave New York and take those jobs with 
them--that is what they tell me--to London. Why is that if 
there is no London loophole?
    Mr. Dimon. Our problem has nothing to do with, as far as I 
know, any loopholes, going to London. It could happen in New 
York. So that is a separate issue.
    If a U.S. company calls up JPMorgan and says, make me a bid 
on interest rate swap, and we can't give them the best deal and 
they are going to get the best deal out of Deutsche Bank in 
Europe, that is where they are going to go. The rules at the 
transaction level about margin, reporting, all those 
requirements may enable Deutsche Bank to make them a better 
deal.
    Two things will happen. Caterpillar or whoever the big 
company is will get less bids; it won't be good for the 
American company. And the business will move to another bank 
overseas. You would see some--I don't know the head count 
numbers--some firms, if they can, put some people overseas to 
do the business in foreign subsidiaries with the same company 
that they were doing it within the United States.
    If a U.S. bank can't do the business at all, at all, 
because the rules are written so broadly, then we will lose a 
lot of business, you will lose a lot of jobs here. They will 
not move to London. But I assure you, they will one day be in 
Singapore, China, and other parts of the world.
    Mr. Meeks. Let me--time is so short. Last week, you 
referred to ``big, dumb banks.'' In your opinion, could a big, 
dumb bank be successfully resolved under Title II of the Dodd-
Frank Act without harming the American economy?
    Mr. Dimon. Yes, but we all have work to do to harmonize 
that globally and get the exact rules in place, things that you 
all call living wills and resolutions, et cetera. But, yes, I 
believe it can be done. More work needs to be done to make it 
real. And people have to believe it is real. It is not just 
sufficient for us to say it is real. We need the regulators and 
the people, the countries to say we believe it is doable.
    Remember, it was doable in the United States for years. The 
FDIC took down Continental Illinois, WaMu, American Savings 
Bank very successfully, all without damaging the American 
economy. So there are examples. It is just a bigger, more 
complex world. It is going to take a little more time.
    Mr. Meeks. But it could be done under Dodd-Frank?
    Mr. Dimon. I think it could be done. But it is going to 
take foreign jurisdictions, particularly London, working out 
common sets of rules on how it would take place.
    Mr. Meeks. And, we also are concerned with reference to the 
American taxpayers being stuck. Last, in 2009, we wanted an ex 
ante fund to resolve big banks. And I think that a number of 
individuals--I forget, I think maybe JPMorgan Chase was against 
an ex ante fund--
    Chairman Bachus. The gentleman's time is up. Thank you.
    Mr. Garrett for 5 minutes.
    Mr. Garrett. I thank the chairman.
    Thanks, Mr. Dimon.
    So, before you came here, the previous panel, I don't know 
if you were watching it in the back room. One of the cute 
little analogies that Mr. Gensler used was about, before he 
gives those keys to his daughter, he wanted to make sure that 
the rules and regulations were out there, and if not 
regulators, maybe a cop on the beat.
    The only problem with that, to try to compare that to this 
analogy, was that there were--sitting right where you are--one, 
two, three, four, five regulators or cops on the beat, and each 
one of them gave basically the same answer, that they got to 
the accident scene afterwards. And in each case, they were 
going to tell us what they are going to do next time. So the 
analogy just really doesn't hold true, because we are trying to 
do, obviously, better than that.
    I know you gave testimony here and back at the Senate. Your 
exact quote I had was, with regard to the role of the 
regulators and what they could and couldn't do, you said, ``I 
think you have to give the regulators realistic objectives. I 
don't think realistically they can stop something like this 
from happening. It was purely management's mistake, and we were 
misinformed a little bit. We are not purposefully misinforming 
them too.''
    You had 100--there were 100 regulators, what, embedded, if 
you will, working full-time, getting up every day to go to your 
firm to work. So aren't we in a case where there is a little 
bit of a charade here with the American public with regard to 
what it is that the regulators, even after 2,300 pages of Dodd-
Frank, are able to do in these circumstances, that they are 
really not able to get into the detail, into the granular 
nature of things with or without modifications to the rules?
    Mr. Dimon. I think I mentioned before--
    Mr. Garrett. Yes.
    Mr. Dimon. --realistic assumptions help, realistic goals. I 
don't think that stopping one thing--but they could disseminate 
good information. They could demand best practices. They do 
have constant audits. They can make the system better in total 
so that there are fewer mistakes and farther between.
    But I would never blame them for a mistake we made. Maybe 
what they learn from us will stop someone else from making a 
similar mistake.
    Mr. Garrett. I know that the ranking member and the ranking 
member of the full committee were somewhat taken aback maybe by 
some of your responses to Dodd-Frank and the legislation and 
how it is being implemented, and that is fine. And I concur and 
I commend you, as for your part. Your part is to lobby for, if 
you will, what, the position for your firm on positions of 
these issues and also something more than that, as far as what 
is best in the interest of your investors, too, I would 
presume. Correct?
    Mr. Dimon. No. My highest, most important thing to me is 
the United States of America.
    Mr. Garrett. Actually, I was--
    Mr. Dimon. I hope when I look back that anything I say was 
in the interest of the United States of America and not in the 
interest of JPMorgan Chase. And I feel that JPMorgan Chase 
will--
    Mr. Garrett. Will improve.
    Mr. Dimon. --meet all the rules, meet all the regulations, 
we will continue to serve our clients. And that is what we are 
going to continue to try to do.
    Mr. Garrett. And I was going to lead there, if your answer 
to the first question was yes. So part of the reform of the 
reform that we may need in this area is, what, the 
extraterritorial effect of some of the rules that we have had 
so far. And we have done that in a bipartisan manner, right? So 
we had a Member, he is not here right now, but Mr. Himes from 
Connecticut has legislation with us to try to reform it, to 
limit it.
    But you see at the same time, what, the previous panel, you 
had the CFTC Chair coming out with their proposed regulations--
actually, not regulations, rules, but guidance in certain of 
these areas, in the areas of coming up with various standards, 
coming up with two separate standards for swap and security-
based swap dealers.
    Is that the appropriate manner that we should have, purely 
guidance rules coming out, where you don't do a cost-benefit 
analysis beforehand? Or should there actually be more of a 
close working relationship between the CFTC and the SEC when 
issuing and promulgating rules in this area?
    Mr. Dimon. The CFTC and the SEC is a primary example where 
we should have one set of rules around derivatives and swaps. 
We have competing sets of rules. They haven't been defined yet. 
And, yes, of course, I think thinking through what makes sense 
and cost-benefit always is the right way to do it. It is hard 
for me to imagine it is better to do something better than 
that.
    Mr. Garrett. You would agree that we haven't seen that, 
though, since Dodd-Frank has been passed into law.
    Mr. Dimon. There may have been places where it was done, 
but I am unaware of it, yes.
    Mr. Garrett. Okay.
    And just to close, then, I thought your answer was going to 
be slightly different with regard to the Volcker Rule when you 
said that things may not have been different had the Volcker 
Rule been fully implemented here. I thought the answer would 
be, had the Volcker Rule been law at the time, there simply 
would not have been trades going on because of the uncertainty, 
not only by the regulators, but the uncertainty by institutions 
such as yours as to how is it actually going to be implemented 
and what trade is permissible and what trade is not 
permissible.
    I will close on that.
    Mr. Dimon. Yes, no, I think the most important--we are 
really focusing on portfolio hedging, which I think is the 
minor part of Volcker.
    Mr. Garrett. Yes.
    Mr. Dimon. I think it is the market making that allows 
these great capital markets in America to remain healthy, to 
finance companies at a very cheap cost to investors and 
issuers. That, to me, is the more important part.
    And there are, if I remember correctly, like, 170 things 
written around that. And we are concerned that will stifle the 
capital markets here if they are not done right. They may very 
well end up being done right. The regulators, I think a lot of 
them want to get them to the right place. It is just very hard 
to do.
    Mr. Garrett. Very hard to do.
    Thank you. I yield back.
    Chairman Bachus. Thank you.
    Mr. Capuano for 5 minutes.
    Mr. Capuano. Thank you, Mr. Chairman.
    Thank you, Mr. Dimon, for being here.
    First of all, I want to tell you that I have agreed with a 
lot of the statements that you have made. I know that may 
surprise some people, but it shouldn't. Because but I think, 
first of all, I welcome your voice in the discussion about what 
is appropriate regulation. There is no golden answer that any 
of us--at least, I don't come to the table thinking I know the 
answers. You think, you try, you talk to people like you. Does 
this work? Does that not work? So I welcome your voice, whether 
we agree or not in the final analysis.
    I particularly welcome your comments on Title II of Dodd-
Frank. You have clearly stated that you are not too-big-to-
fail. Is that a misinterpretation?
    Mr. Dimon. Nope.
    Mr. Capuano. I agree with you, but I wish that some of my 
colleagues on the other side would finally hear that, because I 
think we handle that in Dodd-Frank. You have stated it. I agree 
with you.
    I also fully agree with you on the simplification of 
regulators. I think we have too many regulators, as well. And I 
wish that some of the large institutions--I don't remember 
whether you personally, your institution was, but, in general, 
the larger institutions and the organizations were nowhere to 
be found when we were having this debate during Dodd-Frank. I 
was on the side of trying to simplify the number of regulators, 
not because of what they were going to regulate, because it is 
too many people doing the same thing. I totally agree. I would 
work with you or anyone else to try to reduce the number of 
voices at the table to make your job easier. That doesn't mean 
that I would reduce the regulation, just simplify it.
    I do want to talk a little more about the 
extraterritoriality because, again, I don't think you have said 
anything here that I disagree with relative to competitiveness. 
We want to keep our financial institutions competitive. But I 
want to be clear, I want to make it clear that I am 
understanding you correctly.
    You are not arguing that all financial institutions, U.S. 
or any others, should always seek the least regulated regime. 
That is not your argument, is it?
    Mr. Dimon. That is not my argument, no.
    Mr. Capuano. I didn't think so, but I wanted to be clear 
about that.
    I would suggest very clearly that you are not wrong about 
competitiveness. It is nobody's goal, I hope, not my goal, to 
try to regulate you into a competitive disadvantage. And I 
think that is what the world is trying to accomplish now. Basel 
III is a classic example. It is not the answer, but it is a 
step in the direction of trying to get all the major different 
countries around to have similar approaches toward financial 
institutions.
    There are still loopholes. Whether you take advantage of 
them or not, there are loopholes. They exist in London and 
elsewhere, which is why people are there. You may not be there 
for that reason. I don't know, and I don't really mind whether 
you are, because you are one institution. The institution of 
JPMorgan, in and of itself, is of little interest to me. What I 
am interested in is the entire system and the U.S. competitive 
advantages we might have. And when you have a loophole in 
London or anyplace else that people take advantage of through 
regulatory schemes, we need to talk about it openly to try to 
find out whether their regulation is better than ours, whether 
their regulations are worse than ours, and, regardless, how we 
can work them together so the loophole is not just for you but 
also for your competitors, don't give them an advantage.
    And I would argue that, very clearly, when you say that you 
are looking at who offers the best deal, you are 100 percent 
right. You should. But the truth is, if it is only about the 
bottom-line best deal, you would be loaning your money on the 
corner of some street someplace because they get a better deal 
than you do. They loan out their money at much better rates 
than you get. The difference is, it is a little less secure.
    So when you talk about best deal, it is not just bottom 
line, is it? It is also the ability to get those loans paid 
back and to make a profit. Is that an unfair--you are not just 
looking at the bottom line?
    Mr. Dimon. I was referring to the best deal for the client. 
We are not going to win their business if we don't give them 
the best deal.
    Mr. Capuano. Exactly right. But the best deal is more than 
just the lowest common denominator.
    Mr. Dimon. Yes.
    Mr. Capuano. It is also security, it is stability, it is 
operations under the rule of law, to know what those rules are 
so that you know the deal you are making is the deal you are 
going to be able to enforce. Is that a fair way to say it?
    Mr. Dimon. That is true. Yes.
    Mr. Capuano. Thank you. See, I told you, Mr. Dimon. We are 
not that far off from what we--we may have differences of 
opinion where we go.
    But I do want to talk about one thing that is happening 
today. As we speak, there is another committee meeting that is 
about, at least the last I read, at least the news reports are 
reporting they are going to cut out $25 million from the CFTC's 
ability to pay their staff. Do you think that is a smart thing 
for us to be doing, to be cutting the ability of regulators to 
do their job?
    Mr. Dimon. I have never looked at the CFTC budget. We have 
already said, by the way, that we have a CFTC and an SEC in 
duplication. I would prefer we fix the duplication before we 
throw more money at it, but that is what I do at my company. I 
can create a lot more staff tomorrow too, but it is not 
necessarily the right thing to do.
    Mr. Capuano. And I agree with you on the analysis, but in 
the meantime, until we get there, do you really think it is a 
smart idea? With the regulatory regime that we have today--we 
both agree that it is not what we want, but it is what we 
have--do you really think it is a smart idea to be cutting the 
legs out of one of those major regulators? Do you think that is 
good for America?
    Mr. Dimon. I have enough problems. I am going to leave that 
to you.
    Mr. Capuano. Mr. Dimon, the only reason I ask is because 
you have had no hesitancy whatsoever in expressing opinions on 
other matters. I thought you might want to take an opportunity 
to express one today.
    Mr. Dimon. I know nothing about their budget. I don't know 
how many employees they have. I really don't know. So it would 
be--I try not to have a comment if I know nothing.
    Mr. Capuano. I would like you to learn it and maybe get 
back to us on the answer. Because the truth is, I would like to 
hear your answer before we actually vote on the Floor.
    Thank you, Mr. Dimon.
    Chairman Bachus. Now, you do know that we are in serious 
trouble down here on our budget. I guess you would rather have 
your budget than ours, I am sure.
    Mr. Dimon. No comment.
    Chairman Bachus. Ms. Hayworth?
    Dr. Hayworth. Thank you, Mr. Chairman.
    Mr. Dimon, I realize that the activity that we have talked 
about in terms of the loss for JPMorgan in April was bank 
hedging that was within the institution. But I have introduced 
legislation, in fact it passed unanimously through our 
subcommittee and committee, to repeal most of the swaps push-
out, Section 716 of Dodd-Frank.
    It strikes me that this example of the potential risk 
undertaken--and there is always risk involved, and there is 
going to be loss from time to time--but the potential risk 
undertaken in these sorts of activities does, it would seem, 
perhaps highlight the need for us to keep those activities 
within institutions where they are more regulated, if you will.
    I would just appreciate your comments on that.
    Mr. Dimon. I would agree with that. And the push-out, I 
never understood it. I thought it could make things riskier, 
not safer.
    Dr. Hayworth. Right.
    Mr. Dimon. I never understood why it was put in there at 
all.
    Dr. Hayworth. Right. And, in fact, we have broad support 
for that, so I am hopeful that we will be able to move that 
through expeditiously.
    With regard to the fact that derivatives activity seems to 
be concentrated in London, I get the sense that--I am a 
physician--I get the sense that it is because they are the 
specialist, so to speak. They do that kind of thing all the 
time. But Chairman Gensler implies that the rules are 
inadequate governing those activities. And yet, through the G-
20, all regulators and extraterritorial regulators have 
coordinated fairly closely.
    Do you feel that there is a need for us? The SEC is about 
to come out with its ruling on extraterritorial activity. Do 
you feel that we need to have some sort of regulation that we 
apply to our subsidiaries extraterritorially?
    Mr. Dimon. No. I have been clear, I think the foreign laws 
should apply over there so we can compete fairly over there. 
And it is not--they were always regulated, the OCC and the Fed, 
so it is not true that there is no regulation. There is 
prudential regulation at the top. And the trades that I 
mentioned were collateralized, 60 percent cleared. So I think 
some of those rules wouldn't have mattered at all.
    Dr. Hayworth. Right.
    Mr. Dimon. And AIG, which I know keeps on coming up as an 
example, AIG was insured only. They weren't trying to hedge 
anything. AIG was an insurance company. AIG didn't have 
regulators who understood credit derivatives. And AIG, they 
accounted for them as insurance contracts.
    Dr. Hayworth. Right.
    Mr. Dimon. They were not mark-to-market and, for the most 
part, not collateralized. So a completely different example in 
a different industry.
    Dr. Hayworth. Right. And yet an enormous level of risk, 
obviously, that had great implications. But you cannot map that 
situation onto the JPMorgan situation.
    Now, clearly, sir, there have been questions about the 
activities of risk committees. Obviously, there are lessons 
that you have referred to that JPMorgan has learned. Are there 
lessons that we can apply to what our regulators use, the 
criteria they use when they look at how our institutions 
undertake risk?
    Mr. Dimon. Yes. Risk committees--and, obviously, we have 
failed in this regard, but we have very strong risk committees. 
You need properly staffed, properly reported, that everyone 
gets it, independent-minded. Their job is to challenge 
management, all the way to the CEO. Why are we doing that? Why 
don't we have more limits? What can go wrong? Let's stress test 
it. And that is what those committees are supposed to do. 
Proper reports, granular limits, constantly testing, and 
protecting the management from themselves sometimes.
    And our risk committees do report independently. In this 
particular case, the risk committee made the same lack of 
oversight that I probably made a little bit down the line about 
this one activity. They had some pretty good disciplines in the 
other activities. It was in this synthetic credit activity that 
it should have been much tougher.
    Dr. Hayworth. Yes, sir. And in terms of--obviously, 
JPMorgan has regulators inhouse who closely monitor your 
activities. Is there an element of human nature that makes us, 
to a certain extent, comfortable with each other and how we do 
things that may lend a certain amount of hazard to these 
relationships over time?
    Mr. Dimon. No, they are not. They can be pretty tough on 
us. But I think what happens sometimes is--and it is just human 
nature--I say it is okay, the next person doesn't spend that 
much time on it, the next person doesn't spend that much time 
on it. You go around the table, everyone says it is okay.
    Dr. Hayworth. Because you have a track record.
    Mr. Dimon. Yes, all of us. So you can't be complacent about 
risk. It has to go through a rigor. It is not whether you trust 
the person, because I trust a lot of people. It is that it has 
to be independently verified.
    Dr. Hayworth. Right. Trust but verify. Thank you, sir.
    And thank you, Mr. Chairman. I yield back.
    Chairman Bachus. Thank you.
    Mr. Hinojosa for 5 minutes.
    Mr. Hinojosa. Mr. Dimon, thank you for your testimony.
    The recent JPMorgan loss comes at a time when we have many 
in your industry complaining about the new regulations that 
were put in place with the Dodd-Frank Wall Street Reform Act. 
For good reason, the $2-billion-plus loss has pressed the pause 
button on the constant stream of attempted rollbacks to Dodd-
Frank. It seems to me that with the recent conviction of a 
prominent Wall Street corporate director, Wall Street firms do 
not seem to be going out of their way to restore trust with the 
American people.
    I understand that JPMorgan will still turn a profit this 
year, but the size of the loss and the complexity of the trades 
and macro hedging that caused the loss still gives cause for 
concern. There needs to be an evaluation of not only prudent 
regulations but also the broken culture on Wall Street, a 
culture that some believe provides perverse incentives to play 
fast and loose with other people's money. After the crisis, 
there should have been major self-reflection and reevaluation 
of Wall Street.
    Mr. Dimon, looking back at this loss, do you feel that the 
compensation structure at JPMorgan might have created 
incentives for excessive risk?
    Mr. Dimon. I don't agree with what you said about Wall 
Street, so I will be direct about it. I think there are a lot 
of people you can trust on Wall Street. And there are a lot of 
people you can trust anywhere, and I think when anyone blankets 
a whole industry with the same thing, I think we are making a 
mistake. It is like when people blanket all of Congress the 
same way. I just think it is not fair.
    We try to have a culture at the company where people have 
long-term careers. They aren't paid just because of profits. 
They are paid because they are good managers. They are paid 
because they recruit, they retain, they are open-minded, they 
are independent on risk committees, they participate in the 
company, they mentor our younger people. That is what we do. It 
is not just financial results that drive people's compensation 
at JPMorgan. And no one in this area had formulas.
    Now, is it possible that someone here says, yes, I was 
driven a lot by money? Yes, people--it shouldn't be a great 
surprise to you or anybody else that some people are driven a 
lot by money. Some are not.
    Mr. Hinojosa. Next question: Do you feel there is a problem 
with Wall Street culture?
    Mr. Dimon. I think there might be a problem with some 
people on Wall Street. And, Wall Street for the most part are 
honest, decent, hardworking people. Their clients trust them. 
And to the extent we lose it, we should earn it back. I think 
if you talk to most of our clients, they think that JPMorgan 
tries to do a very good job for them, including when we make a 
mistake, we admit it. We try to rectify it.
    And all firms are different, so I can't speak for every 
firm while I am standing here.
    Mr. Hinojosa. Mr. Dimon, what would you personally 
recommend be done by Congress to strengthen the Dodd-Frank Act 
so that we can prevent actions with the complexity of trades 
and risky derivatives and macro hedging that caused the loss of 
at least $2 billion at JPMorgan which brought us to this 
congressional hearing? We want to ensure similar losses do not 
occur in other banks, and I would like to hear your 
recommendations.
    Mr. Dimon. I have lost this argument publicly many times, 
but I will make it again. Regulation is not binary. It is not 
left or right. It is not Democrat or Republican. These are 
complex things that should be done the right way, in my opinion 
in closed rooms--I don't think you make a lot of progress in an 
open hearing like this--talking about what works, what doesn't 
work, and collaborating with the business which has to conduct 
it.
    We want a safer system, too. We have as much a vested 
interest in having a safe and good financial system as anybody 
else. And we will do anything we can to be part of a process to 
make it healthy and safe.
    I should point out, it is a lot healthier and safer today. 
The market did a lot of things, like I mentioned--no off-
balance-sheet vehicles, no subprime mortgages, exotic 
derivatives are going away. Regulation has created more 
capital, more liquidity, standardized derivatives go to 
clearing houses. It is a much stronger system today. A lot has 
been accomplished.
    Mr. Hinojosa. My time has ended, and I yield back.
    Chairman Bachus. Thank you.
    Mr. McHenry for 5 minutes.
    Mr. McHenry. Thank you, Mr. Chairman.
    Mr. Dimon, there is this discussion today, the distinction 
between hedging and proprietary trading. Can you define to us 
the difference, in your view, of hedging versus proprietary 
trading?
    Mr. Dimon. I will tell you what I think. A hedge is meant 
to protect you if something goes wrong in a decision you make. 
Proprietary trading I think people mean is just making a bet 
that prices change and you can make money in a price change.
    The problem with that is, every time we make a loan, it is 
proprietary. The riskiest thing we do is loans. They are all 
proprietary. If we lose money on them--and one of the 
Congressmen mentioned how much money we can lose on loans--that 
is to the house account. We still make them. We try to do the 
right thing to risk-manage it.
    I understand and never disputed the intent of the Volcker 
Rule to make companies safer. I totally agree. I think we have 
made something very complex which is going to be very hard to 
legislate or put in regulatory terms that works.
    Mr. McHenry. Is there a bright-line distinction between 
hedging and proprietary trading? Because don't they look 
similar unless there is a balanced trade on the other side that 
matches up?
    Mr. Dimon. I think in some cases there is a bright line, 
yes.
    Mr. McHenry. Okay. And how long have you been in finance, 
how many years?
    Mr. Dimon. A long time, 30 years or so.
    Mr. McHenry. Okay. We will just say a long time. And for a 
living, you are supposed to know the distinction between this. 
You are testifying before Congress. You have obviously spent a 
lot of time doing this. So is there a bright-line distinction 
between that? And if you can't determine what that is, how can 
a regulator determine that?
    Mr. Dimon. Okay. I wouldn't have set it up proprietary 
versus hedging. That is not how I would have had the 
conversation. If you wanted to make the system safer, I would 
have said for trading, proper capital, proper liquidity, make 
sure it is largely done with clients, look at age inventory, 
you have proper risk reporting. You do have the ability to 
portfolio hedge and hedge because you need that in trading. And 
you could track all these things to say if you are running a 
good customer business or not. It does not eliminate risk; it 
will mitigate the risk.
    Mr. McHenry. Okay. So did you support Dodd-Frank?
    Mr. Dimon. That is a hard one to say. There are parts--we 
had a major crisis. We--
    Mr. McHenry. Did you support Dodd-Frank in its conception?
    Mr. Dimon. We had a major crisis, and we never denied that. 
And the crisis unveiled lots of flaws in our system--not one 
flaw, lots of flaws. So we understood the need for reform. 
There are parts of Dodd-Frank we supported; there are parts of 
Dodd-Frank we didn't.
    Mr. McHenry. Okay. Suffice--
    Mr. Dimon. If you do remember, there are lots of parts to 
Dodd-Frank, so it is not like we had the same vote--
    Mr. McHenry. Suffice it to say, you have a little buyer's 
remorse. That is kind of what I am hearing. So, I understand, 
you are basically saying, yes, you understand the need for 
changes, you just don't like the results.
    Mr. Dimon. Some of the results.
    Mr. McHenry. Some.
    Mr. Dimon. It should be modified.
    Mr. McHenry. Okay. So with Volcker, as it is being written, 
the distinction between proprietary trading and hedging, that 
is a bit of the debate that is going on right now.
    So, look, my concern is, in the post-TARP era, when we said 
we are going to end bailouts, we have actually codified it and 
institutionalized it. Therefore, when a company like yours that 
received extraordinary support from the government has a 
trading loss, the government gets very involved. Why is the 
government very involved? Because we have institutionalized 
``too-big-to-fail'' and bailouts with Dodd-Frank.
    Now, to that point, during your hearing last week with the 
Senate, you discussed the distinction between a resolution 
authority and bankruptcy. Would you touch on that? Would you 
explain your view on what is preferable, the resolution 
authority as written in Dodd-Frank or bankruptcy?
    Mr. Dimon. You are asking for a lot of semantics. I would 
use the word ``bankruptcy.'' A bankruptcy implies that the 
equity gets wiped out. The unsecured debt only recovers if 
there is some left over to recover. And a court manages the 
wind-down of the company.
    You do need an expert like the FDIC to manage the process, 
that has the right people, the right structures, the right 
capabilities to manage the wind-down. And that it should be 
wound down, and all clawbacks invoked, the board of directors 
fired. The company should eventually be dismantled in a way 
that does not damage the economy. The name should be buried in 
disgrace. That is what should happen.
    Mr. McHenry. Okay. So that is called bankruptcy, right?
    Mr. Dimon. You guys can call it whatever you want. I am not 
going to get involved in the debate between bankruptcy and 
resolution.
    Mr. McHenry. If you are involved in the debate, actually, 
sir, I don't know if you have been here for as long as--
    Mr. Dimon. Yes.
    Mr. McHenry. Anyway. But the distinction between resolution 
authority, which is in essence codifying ``too-big-to-fail,'' 
in essence codifying the fact that the government will lift you 
up if you fail, therefore these trading risks can be as risky 
as possible--this is the crux of the debate and why you are 
here today.
    Mr. Dimon. They won't lift you up. They will keep it going 
so that--but the equity is wiped out, management is wiped out, 
unsecured is wiped out. The company gets dismantled and 
eventually is not there, without damaging the economy.
    Mr. McHenry. So we will put you on record in support of 
that.
    Chairman Bachus. Your time is up, Mr. McHenry. Thank you.
    Mr. Miller for 5 minutes.
    Mr. Miller of North Carolina. Thank you, Mr. Chairman.
    Mr. Dimon, you were very dismissive last week with the 
Senate about a Bloomberg article--I think you told the Senate 
committee not to believe everything they read--that said that 
the CIO had really changed in the last few years from being a 
fairly sleepy, cautious risk mitigation unit and had become 
much more aggressive, much more risk-tolerant and profitable, 
and it was your intention that it become a profit center. And, 
in fact, more than a quarter of JPMC's profits for 2010 came 
from CIO's trading.
    But there was a question that Senator Johnson asked you 
from that article about a--that there had been a limit, that 
traders had to liquidate, had to get out of any position that 
had lost $20 million. And you were very puzzled by that and 
said you knew nothing about it. Have you inquired since then if 
there was such a limit and it was changed?
    Mr. Dimon. No.
    Mr. Miller of North Carolina. You have not asked within 
your organization?
    Mr. Dimon. I think it referred to something back in 2007 or 
2008, so I did not ask, no.
    Mr. Miller of North Carolina. All right. You did say last 
week that the failure with these trades was not that it was 
rogue traders; they weren't violating the risk controls. The 
risk controls were not sufficient. That is correct, right?
    Mr. Dimon. They were too low--they were too high. There 
should have been much more lower limits that they had, yes.
    Mr. Miller of North Carolina. Did they have any limits? 
Last week, you seemed to indicate not.
    Mr. Dimon. No, the CIO as a total had limits, but this unit 
didn't have its own. But they used the CIO's limits, which they 
eventually hit and stopped it at this level of loss.
    Mr. Miller of North Carolina. But a limit of $20 million in 
losses and then you close the position, that would be a fairly 
granular risk control, wouldn't it?
    Mr. Dimon. If that were true, that would--it depends what 
the area is, but yes.
    Mr. Miller of North Carolina. All right. You have been very 
critical of JPMC in this matter, and you said that it was a 
significant risk management failure. You said it is flawed, 
complex, poorly reviewed, poorly executed, poorly managed. But 
on February 29th, you filed a certification required by law 
that you had adequate risk controls in place, that management's 
assessment of the firms determined that there were no material 
weaknesses in its internal controls over financial reporting as 
of December 31, 2011.
    I know that you are entitled to rely upon your 
subordinates, and I am sure you have relied upon your 
subordinates in making that certification. But was that 
certification correct?
    Mr. Dimon. I believe it to be, yes.
    Mr. Miller of North Carolina. It was correct?
    Mr. Dimon. It was to my knowledge at the time. And--
    Mr. Miller of North Carolina. No, no. Not based upon your 
knowledge at the time, but based upon what you know now, was 
that certification correct?
    Mr. Dimon. That is why we are having the review, to make 
sure that we have all the right things in place. That is what 
companies do when they have problems. They analyze them, they 
review them, and they make determinations like that. And the 
review is not done yet.
    Mr. Miller of North Carolina. All right. Who is entitled 
to--it seems like that certification is intended for 
regulators, but it is also intended for investors, isn't it? 
Aren't they entitled to rely upon the representation that there 
are adequate risk controls?
    Mr. Dimon. I don't know the thing you have in front of you, 
but--
    Mr. Miller of North Carolina. What is that?
    Mr. Dimon. I don't know what you are referring to, but we 
try to give proper disclosures to our investors.
    Mr. Miller of North Carolina. I am referring, actually, to 
the certification about risk controls. That certification is 
required by law. And presumably it is for both regulators and 
also for investors, isn't it?
    Mr. Dimon. Yes. We try to disclose what we are supposed to 
disclose.
    Mr. Miller of North Carolina. All right.
    What inquiry did you make about risk controls at the CIO 
before you signed that certification?
    Mr. Dimon. I believed at that time that the risk controls 
in the CIO were being done properly.
    Mr. Miller of North Carolina. You were surprised last week 
at the question about a $20 million limit. It appeared to be 
something you were hearing for the first time, and you haven't 
inquired in the 6 days since then whether that was true. I know 
that you rely upon--you are entitled to rely upon your 
subordinates, you said that last week, but there seems like 
there must be a limitation on that entitlement if you have 
noticed that there may be something wrong. One of the ways you 
might get other information would be from the financial press. 
Did you read the Bloomberg article?
    Mr. Dimon. I don't remember if I read the Bloomberg 
article.
    Mr. Miller of North Carolina. It was an article that said 
there was a $100 billion limitation, that traders at the CIO 
had to close positions once they lost $20 million. That would 
seem like that would stick out as a pretty big deal.
    Mr. Dimon. It wouldn't stick out to me. It happened many 
years ago. I would pay virtually no attention to it. I am 
sorry.
    Chairman Bachus. Mr. Miller, your time has expired.
    Mr. Stivers for 5 minutes.
    Mr. Stivers. Thank you, Mr. Chairman; and thanks for being 
here today, Mr. Dimon.
    Before you were seated, we had a first panel where we had 
five regulators; and the two things that really struck me out 
of that panel was something Mr. Alvarez from the Federal 
Reserve said about capital. Obviously, that is a theme we have 
had here today, about how capital--your strong capital position 
saved this from causing JPMorgan from having a big problem and 
ensures that it won't cause the rest of the system a problem.
    The other thing was Mr. Gruenberg from the FDIC talked 
about risk management. Your questions you got from Mr. Grimm 
and Ms. Hayworth centered around risk management. Is there 
anything in your internal review other than capital and risk 
management that have come out that are lessons learned that 
other institutions should know?
    Mr. Dimon. I agree. You all brought up some things a little 
bit about models and implementation of models, making sure the 
risk committee is independent minded and not just sitting 
around having a cup of coffee, all those kind of things. So 
there will be more than just that, but--
    Mr. Stivers. Mr. Frank talked a little bit about smart 
regulation that you had referred to earlier. We had those five 
regulators sitting in the seats before you. Not one of them 
really is in charge of the others. They don't really coordinate 
with a lot of questions about how they share communication. In 
fact, no questions came up from any of the previous panel about 
harmonizing the regulations between Europe that they passed in 
March--on March 29th with the U.S. regulations. And there don't 
appear to be any lessons learned that are shared with the other 
firms after what you go through to make sure that there is real 
shared knowledge. Do you want to comment any more about what 
smart regulation means to you?
    Mr. Dimon. So when Dodd-Frank was done, one of the things 
it had was the FSOC, like an oversight committee to make sure 
there are no gaps in the system and that learnings are shared, 
and we kind of supported that. It was set up with I say 
virtually with no teeth, and the legislators would have to 
change it.
    But someone should tell them who is responsible for 
mortgages, who is responsible for Volcker, as opposed to five 
people having jurisdiction. You see how complex it gets, how 
long it takes, how long it takes to work it out with foreign 
regulators. So I think simplifying it, clarifying it, 
adjudicating disputes, and giving authority and responsibility 
to the same people would be a good thing.
    Mr. Stivers. Do you want to comment a little bit about how 
the impact on a multinational financial firm like yourself with 
regulations in Europe and regulations here that are not 
harmonized?
    Mr. Dimon. Yes, we talked about Dodd-Frank, which has 400 
rules. We have to accommodate Basel, which has hundreds of 
different things. We are not against them all, but liquidity, 
capital, et cetera. But the rules coming out of Brussels FSA, 
which is in the U.K., and several others and the CFTC, the SEC. 
So we have to deal with a lot, and we are going to. We are 
going to. I just wish it was a little bit more coordinated, and 
we did the important ones first and not just treat everyone 
like they are all the same. Like they are equally important. To 
a hammer, everything is a nail; and that is kind of what we are 
doing.
    Mr. Stivers. Some questions have come up earlier today, and 
I am going make a statement instead of asking you this. There 
have been a lot of questions about too-big-to-fail, and I will 
just say as a policymaker, too-big-to-fail only happens when 
policymakers let it happen. So I am not asking you to comment 
on that, but that is a fact.
    I do want to talk to you about the Volcker Rule a little 
bit. You had some questions about it before. But, really, the 
key thing on the Volcker Rule would be getting it right. I 
don't want financial institutions that can run to the Fed 
fund's window borrowing money and then putting it in a trading 
account and then essentially gambling--
    Mr. Dimon. And they don't.
    Mr. Stivers. But, at the same time, you have to be able to 
risk to hedge your positions. So I hope that we can work with 
the regulators as policymakers here and with the industry to 
craft something that makes sense. And if you have any ideas for 
us--I have a minute and 4 seconds--I will let you tell us if 
you have any ideas on how to make that happen.
    Mr. Dimon. The only idea I have is people should actually 
get in a room, talk about what they are going to accomplish, go 
through the specifics, and not pretend they are either for 
Volcker or against Volcker. For us, it is the process of the 
law of the land. You all may want to get rid of it, but we have 
to deal with it, and it is a very detailed thing.
    And I remind people we do have the best capital markets in 
the world. You should go home at night and say that we sit upon 
the best economy in the world, the best capital markets of the 
world, the best job creator of the world. We need to start 
doing jobs again, and we need to fix the mortgage market. We 
need to do a lot of things. If we do, I think it will help this 
economy recover quicker, not slower.
    Mr. Stivers. One of the things Mr. Gensler said earlier 
today--there weren't many things he said that I agreed with, 
but the one thing he did talk about is the advantage Europe has 
being in a time zone between Asia and the United States. There 
have been a lot of questions about why certain trades go to 
London, and I know you need to follow your customers who are 
global, too, but aren't there some advantages to that time 
zone?
    Chairman Bachus. Thank you. Mr. Stivers, your time is up. I 
think the answer was yes.
    Mr. Dimon. Yes, sir.
    Chairman Bachus. Mr. Scott for 5 minutes.
    Mr. Scott. Thank you, Mr. Chairman.
    Welcome, Mr. Dimon. It is good to have you here.
    I want to start off by paying you and your operation down 
in Georgia a tremendous compliment. Georgia is number one in 
home foreclosures. We had a great foreclosure event down there, 
and I want you to say a good word for your folks down there in 
Georgia: Mr. David Balo and Todd Williams and Vanessa 
Williams--Vanessa Mims. Your Chase Home Ownership Center, good 
job. We saved over 1,785 homes, many of them yours. So good 
work.
    I think it is very important for us to set the stage here. 
I think that we in the United States of America and probably 
the world economy dodged a bullet, and we dodged a bullet 
basically because of your size, because of your largeness. You 
were able to handle and absorb this loss. But there is much we 
can learn from it. And I think, if I get my hands around this 
correctly, one was not enough attention was paid early on in 
the game; is that correct? Would you say that is one of the 
major reasons why the loss was substantial?
    Mr. Dimon. In hindsight, yes.
    Mr. Scott. And your reporting was diluted in the aggregate, 
which caused a problem as well.
    The fundamental issue here, so we can learn from the 
future, is your risk management tool is referred to as Value at 
Risk. That was your model. And it is one of the reasons it was 
used to effectiveness, but it is basically predicated on large 
financial institutions. You are the largest financial 
institution in the world, certainly in the United States of 
America, and that is why we are still profitable, taxpayers 
didn't lose anything on this, and it was effective.
    But here is the question: Would smaller firms have been 
able to have those same protections, using the same Value at 
Risk model as Chase?
    Mr. Dimon. We use lots of protections. VaR is one of many 
things we do to manage risk.
    I should point out there are reasons for big banks. There 
are reasons for small banks. Community banks do a great job. 
JPMorgan Chase in fact is one of the biggest banker to banks. 
The history of JPMorgan, as a money center bank, was to bank 
banks; and I think some of them can, yes. I can't go through 
each one. They have different business models. But each one 
should do what they need for their own business, the ame 
business as we are in.
    Mr. Scott. Let me ask you this, Mr. Dimon. As a result of 
this, should one of the things we do now--should banking 
entities like JPMorgan be allowed by our regulators to hedge 
only on positions specific basis, as opposed to on an aggregate 
or portfolio basis?
    Mr. Dimon. If I were the regulator, I would allow portfolio 
aggregate. I will give you one example, because several people 
have mentioned Europe today. JPMorgan has been doing banking in 
Europe for 75 years. JPMorgan himself used to love Italy and 
would go there. We have exposures to Italian companies that you 
can't get out of tomorrow. So if you were on my board of 
directors and you said, I don't want Italian exposure, there is 
only one way to really do it, would be to go and do certain 
portfolio hedging, which would accomplish part or all of that. 
If you said do it by individual name, it would be impossible.
    Mr. Scott. And, Mr. Dimon, I think the American people 
would want to know, when this happened, when you first got wind 
of this $2 billion loss, what was your initial reaction?
    Mr. Dimon. When I fully realized it, I told our people that 
everything is going to happen, from coming down to Washington, 
to questioning Volcker, that I think we have hurt other 
bankers--it causes a lot of commotion inside the company, soul 
searching. But my attitude is let's admit our mistakes, and fix 
them. Let's put our jerseys on and fix it. That we would have 
to make changes. It would be a very tough time for us.
    However, it didn't affect--it does affect it, but it 
shouldn't detract us from our mission of serving clients. We 
have 82 Chase home offices, we have opened them all in the last 
3 or 4 years, and we will do all the things we have to serve 
the clients right. I don't want this detracting from what all 
of our 260,000 people do every day.
    Mr. Scott. And I can't let you leave without this question. 
Because the fundamental question going forward is this whole 
issue of too-big-to-fail, how do you feel about that, 
especially since you are the biggest of the biggest?
    Mr. Dimon. Our goal is not to be the biggest. It is to be 
the best. I think everyone kind of agrees we have to get rid of 
that in any incarnation.
    Mr. Scott. You said get rid of too-big-to-fail?
    Mr. Dimon. We cannot have too-big-to-fail. We have to 
eliminate too-big-to-fail, therefore allowing a big bank to 
fail in a way that doesn't damage the American economy and the 
taxpayer never pays. And I think we are on our way to working 
through the things that would allow that to take place.
    Chairman Bachus. Thank you.
    Mr. Neugebauer for 2 minutes, and that will then conclude 
our hearing.
    Mr. Neugebauer. Thank you, Mr. Chairman.
    Mr. Dimon, I want to kind of just go through a little 
calendar here. On April 6th, Bloomberg had an article. You are 
familiar with that article.
    Mr. Dimon. Yes.
    Mr. Neugebauer. And I think the Wall Street Journal had an 
article that same day. Are you aware that the regulators had 
come into your shop on April 9th and had expressed concerns 
about this article in the trades?
    Mr. Dimon. I am aware that--I don't know if they came or we 
called them. Like I said, we share everything with them. So I 
do believe some of the people spoke to the regulators and 
described what they thought about it, yes.
    Mr. Neugebauer. It is reported on Tuesday, April the 10th, 
that particular position lost $300 million that day and I think 
subsequently on the next Tuesday and Wednesday with smaller 
losses. Were you familiar with those?
    Mr. Dimon. Yes.
    Mr. Neugebauer. And so then on April 13th, you made a 
statement that it is no big deal; it is just a tempest in a 
teapot. Was that an accurate reflection of that transaction?
    Mr. Dimon. It is totally a positive, accurate reflection of 
what I believed at the time. Because folks had done work to 
look at the additional stress. That day it lost $300 million 
was the first trading day after the article. So part of that 
was expected, since we just showed the world our hand a little 
bit. The stress tests showed that it could be that dramatic. 
Several people believed that, reported that back to me. So on 
April 13th, I believed it was a tempest in a teapot.
    I obviously was dead wrong. It won't be the first time I 
have ever been wrong. It won't be the last. I obviously was 
dead wrong, and I deeply regret having said it.
    Mr. Neugebauer. I understand. We all--I think the concern I 
had was that was a couple of days after that $300 million pop, 
and that is a pretty big pop even in your organization, isn't 
it?
    Mr. Dimon. Our folks have looked to reports after that 
about how bad it can get. We stress-tested it. Some of the 
stress reports, I may have seen them, but there were reports to 
me that doesn't show it could be that much worse. So, no, if 
that is what we believed, I would have considered that a small 
thing for JPMorgan. We had a very profitable quarter. You have 
to put things in relative size.
    Mr. Neugebauer. Thank you.
    Chairman Bachus. Thank you.
    Mr. Green for 2 minutes.
    Mr. Green. Thank you, Mr. Chairman. I will be quick.
    Mr. Dimon, thank you for appearing today.
    Is it fair to say that you probably had more than 50 
meetings concerning this issue that we are talking about today?
    Mr. Dimon. Fifty what?
    Mr. Green. Fifty meetings, meetings. Meeting with people, 
talking on the phone about this?
    Mr. Dimon. Yes.
    Mr. Green. Probably a hundred. More than a hundred.
    And is it fair to say that you are amenable to meeting with 
and talking to various people about these things and other 
things associated with your business and that probably you meet 
with Members of Congress and talk to them about these issues?
    Mr. Dimon. I talk to people if appropriate. We operate 
under a lot of rules and laws of what I can and can't say to 
certain people.
    Mr. Green. If appropriate, do you meet with Members of 
Congress?
    Mr. Dimon. On occasion, yes.
    Mr. Green. I am asking this because I want to talk to you 
about a concept that is near and dear to my heart. We have been 
talking about too-big-to-fail. I want to talk to you about a 
concept that I have called ``too-small-to-live-off.'' That 
concerns something that is happening in this country. We have 
in Houston, Texas, some persons who are janitors; and they are 
paid $8.35 an hour. Now I know this is very small compared to 
what we have been talking about. I think you made about $19 
million in 2011, or thereabouts; is that right?
    Mr. Dimon. Yes.
    Mr. Green. And I understand that your 4th highest paid 
person made about $14 million in 2011. I won't mention the 
name, but there is a reason for picking the 4th highest. With 
persons making this kind of money--
    By the way, I salute you for it. I am a capitalist. I 
commend people for making the money that they make, within the 
rules, of course.
    But what I want to talk to you about is this: $47,000 is 
what it costs a family of 4 to live off in Houston. The poverty 
level is $23,000 a year. The average janitor working full time 
will make about $18,000 a year. That is working full time and 
living below the poverty line.
    I would like to meet with you and talk to you about ``too-
small-to-live-off.'' And I will pay my way. I won't use 
congressional funds. I will be willing to do it anyplace that 
you would like. Can you and I meet and talk about ``too-small-
to-live-off,'' Mr. Dimon?
    Mr. Dimon. Yes, we can.
    Mr. Green. I will talk to you after the meeting.
    Chairman Bachus. Actually, maybe tomorrow or the next day.
    Mr. Green. I am going to miss the vote.
    Chairman Bachus. Thank you.
    This concludes the hearing. The Chair thanks our panelist 
for his testimony.
    The Chair notes that some Members may have additional 
questions for this witness, which they may wish to submit in 
writing. Without objection, the hearing record will be open for 
30 days for Members to submit written questions to this witness 
and to place his responses in the record.
    Mr. Dimon. Thank you very much, Mr. Chairman.
    Chairman Bachus. This hearing is now adjourned. Thank you.
    [Whereupon, at 1:49 p.m., the hearing was adjourned.]


                            A P P E N D I X


                             June 19, 2012


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