[Senate Hearing 112-715]
[From the U.S. Government Publishing Office]
S. Hrg. 112-715
A BREAKDOWN IN RISK MANAGEMENT: WHAT WENT WRONG AT JPMORGAN CHASE?
=======================================================================
HEARING
before the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED TWELFTH CONGRESS
SECOND SESSION
ON
EXAMINING WHAT WENT WRONG AT JPMORGAN CHASE
__________
JUNE 13, 2012
__________
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
TIM JOHNSON, South Dakota, Chairman
JACK REED, Rhode Island RICHARD C. SHELBY, Alabama
CHARLES E. SCHUMER, New York MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey BOB CORKER, Tennessee
DANIEL K. AKAKA, Hawaii JIM DeMINT, South Carolina
SHERROD BROWN, Ohio DAVID VITTER, Louisiana
JON TESTER, Montana MIKE JOHANNS, Nebraska
HERB KOHL, Wisconsin PATRICK J. TOOMEY, Pennsylvania
MARK R. WARNER, Virginia MARK KIRK, Illinois
JEFF MERKLEY, Oregon JERRY MORAN, Kansas
MICHAEL F. BENNET, Colorado ROGER F. WICKER, Mississippi
KAY HAGAN, North Carolina
Dwight Fettig, Staff Director
William D. Duhnke, Republican Staff Director
Charles Yi, Chief Counsel
Laura Swanson, Policy Director
Glen Sears, Senior Policy Advisor
Jana Steenholdt, Legislative Assistant
Colin McGinnis, Professional Staff Member
Andrew Olmem, Republican Chief Counsel
Mike Piwowar, Republican Chief Economist
Dawn Ratliff, Chief Clerk
Riker Vermilye, Hearing Clerk
Shelvin Simmons, IT Director
Jim Crowell, Editor
(ii)
?
C O N T E N T S
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WEDNESDAY, JUNE 13, 2012
Page
Opening statement of Chairman Johnson............................ 1
Prepared statement........................................... 43
Opening statements, comments, or prepared statements of:
Senator Shelby............................................... 3
Senator Warner
Prepared statement....................................... 43
WITNESS
James Dimon, Chairman of the Board, President, and Chief
Executive Officer, JPMorgan Chase & Co......................... 5
Prepared statement........................................... 44
Responses to written questions of:
Chairman Johnson......................................... 47
Senator Reed............................................. 50
Senator Menendez......................................... 52
Senator Warner........................................... 58
(iii)
A BREAKDOWN IN RISK MANAGEMENT: WHAT WENT WRONG AT JPMORGAN CHASE?
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WEDNESDAY, JUNE 13, 2012
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Committee met at 9:58 a.m., in room SD-G50, Dirksen
Senate Office Building, Hon. Tim Johnson, Chairman of the
Committee, presiding.
Senator Reed [presiding]. On behalf of Chairman Johnson, I
would like to call the hearing to order, and we will suspend
the hearing until the Chairman arrives.
[Pause.]
Senator Reed. The Chairman--the hearing has been called to
order. We are suspending until the Sergeant at Arms and the
Capitol Police restore order. This is a hearing in which we
will ask people to cooperate so that we can conduct a serious
inquiry into this matter.
Thank you.
[Pause.]
OPENING STATEMENT OF CHAIRMAN TIM JOHNSON
Chairman Johnson [presiding]. This hearing will come to
order. I ask the Capitol Police to please remove anyone in the
audience who is interrupting the hearing. Before we proceed, I
will remind my audience that any interruption of the hearing
will not be permitted and you will be escorted out of the room.
We will now proceed.
This hearing is part of the Banking Committee's ongoing
oversight of the massive trading loss announced by JPMorgan
Chase and the implications for risk management, bank
supervision, and the Wall Street Reform Act. Since the
announcement of the loss in early May, this Committee has heard
from the OCC and the Fed, which are the primary regulators for
JPMorgan, as well as the SEC, the CFTC, and other relevant
officials to review and learn from these events. Several
members of the Committee have asked to hear from Mr. Dimon, and
after due diligence conducted together by my staff and Ranking
Member Shelby's staff, I decided to invite Mr. Dimon.
Last week, the regulators informed the Committee that there
was a breakdown in the risk management involved with these
trades, despite the fact that the trades were reportedly
designed to reduce the bank's risk. As they continue to look
into the matter, officials have assured our Committee that the
firm's solvency and the stability of our financial system are
not in jeopardy at this time. While this is welcome news,
questions remain that must be answered if we want our largest
banks to better manage their risks to maintain financial
stability, as I believe we do.
Today marks the 2-month anniversary of Mr. Dimon's
``tempest in a teapot'' comments where he downplayed concerns
from initial media reports of the company's Chief Investment
Office trades. We later learned, however, it was an out-of-
control trading strategy with little to no risk controls that
cost the company billions of dollars.
I have said before no financial institution is immune from
bad judgment. In Mr. Dimon's own words, he later explained,
``We made a terrible egregious mistake. There is almost no
excuse for it . . . We know we were sloppy. We know we were
stupid. We know there was bad judgment . . . [I]n hindsight,
we took far too much risk. The strategy we had was badly
vetted. It was badly monitored. It should never have
happened.''
So what went wrong? For a bank renowned for its risk
management, where were the risk controls? How can a bank take
on ``far too much risk'' if the point of the trades was to
reduce risk in the first place? Or was the goal really to make
money? Should any hedge result in billions of dollars of net
gains or losses, or should it be focused solely on reducing a
bank's risks? As the saying goes, you cannot have your cake and
eat it, too.
As for the policy implications, some of my colleagues
complain that Wall Street reform micromanages the operation of
large banks and that regulators cannot keep up with bank
innovation. I disagree that less supervision and less
regulation will magically make the system less risky. While
risk cannot be eliminated from our economy, we can, and must,
demand that banks take risk management seriously and maintain
strong controls. We must also demand that regulators do their
job well. After all, banking is an important but risk-filled
business that needs careful scrutiny and oversight so that
mismanagement or unsafe and unsound practices do not threaten
the stability of our economy.
Some also suggest that capital is the silver bullet in
financial regulation. While capital does and must play an
important role as a backstop, we should not rely only on
capital. Any well-capitalized bank can fail and threaten
financial stability if it is not well managed or well
regulated. Our financial system will be safer and stronger with
multiple and well-calibrated lines of defense, which Wall
Street reform requires in addition to higher capital standards.
We need our regulators to finalize these Wall Street reform
rules, and Congress should fund them with sufficient resources
so that they can effectively monitor the financial system.
Again, it has been 2 months since he first publicly
acknowledged the trades, so I expect Mr. Dimon to be able to
answer tough but fair questions today. A full accounting of
these events will help this Committee better understand the
policy implications for a safer and stronger financial system
going forward.
I now recognize Ranking Member Shelby for his opening
statement.
STATEMENT OF SENATOR RICHARD C. SHELBY
Senator Shelby. Thank you, Mr. Chairman.
Today the Committee will hear from the chief executive
officer, president, and chairman of JPMorgan Chase, Mr. Jamie
Dimon. Mr. Dimon is here today because JPMorgan Chase lost more
than $2 billion on derivatives trades.
Normally, it is not and I believe it should not be the role
of Congress to second-guess decisions by private sector
businesses. However, because the Federal Government guarantees
bank deposits, this Committee has a responsibility to ensure
that banks do not unnecessarily put taxpayers at risk. Congress
has in large part delegated the responsibility of oversight to
our financial regulators. They are supposed to be monitoring
the activities of banks like JPMorgan Chase to ensure that they
operate in a safe and sound manner.
As we learned from the most recent financial crisis and
this particular incident, regulators do not always meet our
expectations. Banks take risks because that is what they do.
Usually, those risks are beneficial because they enable
Americans to buy homes, attend college, and save for
retirement. When banks fail to prudently manage those risks,
however, serious problems can arise.
For example, in the years leading up to the financial
crisis, some banks claimed that they could safely provide
mortgages to borrowers with no documentation and small
downpayments. Advances in risk management supposedly enable
them to lend to riskier borrowers without threatening the
bank's safety and soundness.
We now know that this was false. These banks were not
applying better risk management techniques. They were simply
foregoing time-tested underwriting standards. The result was a
failure of some of the Nation's largest financial institutions,
including Countrywide and Fannie Mae and Freddie Mac.
Certainly, there were many bankers that did not make these
mistakes, and by most accountable, our witness today was one of
them. Yet, as the financial crisis shows, poor risk management
of even a single large bank can have profound consequences.
Congress and bank regulators must always watch for risks
that could, if improperly managed, threaten the banking system.
Accordingly, we should examine the facts and circumstances
surrounding JPMorgan's $2 billion plus loss. As we do so, I
believe that there are two key questions that need to be
answered: First, did the losses from these trades threaten the
safety and soundness of JPMorgan? And, second, could it happen
again?
Last week, the Committee heard from the bank regulators
that supervised JPMorgan. They answered the first question when
they told us that the $2 billion plus loss did not threaten the
bank's solvency because the bank has strong earnings and
sufficient capital. This conclusion shows once again why the
single best way to protect taxpayers from bailouts is to ensure
that banks are properly capitalized. Strong capital
requirements provide a valuable buffer against unexpected
losses arising from the inevitable missteps by banks and bank
regulators. And although capital should be the first line of
defense against taxpayer bailouts, it should not be the only
defense. Banks also need to have good risk management. Although
JPMorgan enjoyed a strong reputation for effective risk
management, something obviously went very wrong.
Regrettably, the Comptroller of the Currency, the Federal
Reserve, and the FDIC were unable to tell us what happened last
week despite having more than 100 onsite examiners at JPMorgan.
Hopefully, Mr. Dimon today can fill in the details.
In particular, I hope Mr. Dimon can explain here why these
trades were made and why they produced such large losses. I
also hope to learn the extent to which Mr. Dimon and other
JPMorgan senior executives were involved in the decisions that
permitted these trades. Mr. Dimon has long been recognized for
his effective management of a very successful institution, yet
it appears in this particular case things perhaps got away from
him. Why? Did Mr. Dimon put too much faith in the company's
risk models? Or did he ignore them?
It has been reported that officials at JPMorgan may have
dismissed warnings that the bank was not instituting
appropriate risk management practices. If that happened, was
Mr. Dimon aware of these warnings? If so, did he respond or did
he disregard them?
It has also been reported that the office responsible for
these trades may have had contradictory mandates. And while the
stated goal of the office may have been to reduce risk,
employees of the office apparently believe that they were
expected to turn these trades into a profit. Bank employees
reportedly referred to this profit as ``the icing on the
cake.''
What were Mr. Dimon's expectations for this office? Was he
incentivizing them to manage risk or to maximize profits? If it
was the latter, were the incentives to profit consistent with
proper risk management? Moreover, what did the Board of
Directors of JPMorgan Chase know about how Mr. Dimon was
managing risk? It has been reported that JPMorgan's risk
committee may not have had the expertise necessary to oversee
such a large bank. I hope to learn not only about Mr. Dimon's
role in selecting the members of the risk committee but how the
committee oversaw the firm's risk management.
Finally, I hope today's hearing can reveal what lessons Mr.
Dimon and JPMorgan and others have learned. This hearing will
have served a valuable purpose if it helps banks and bank
regulators avoid repeating the mistakes of JPMorgan. In this
regard, I believe it is unfortunate that the Committee has not
held similar hearings with the heads of other financial
institutions. And although the Committee is hearing from Mr.
Dimon, who bank lost $2 billion or more of its own money, it
has never heard here testimony from executives of Fannie Mae
and Freddie Mac who have lost nearly $200 billion of taxpayers'
dollars. Perhaps the Committee could turn its attention to the
GSEs' massive public losses when it completes its review of the
relative private losses thus far of JPMorgan Chase.
Thank you, Mr. Chairman.
Chairman Johnson. Thank you, Senator Shelby.
This morning's opening statements will be limited to the
Chairman and the Ranking Member to allow more time for
questions from the Committee Members. I will note that Senator
Warner as a valuable Member of this Committee is absent to
attend his daughter's graduation, but he will be submitting a
statement and questions for the record.
I want to remind my colleagues that the record will be open
for the next 7 days for opening statements and any other
materials you would like to submit.
Now I will introduce our witness. Mr. Jamie Dimon is the
chairman of the board, president, and chief executive officer
of JPMorgan Chase & Company.
Mr. Dimon, your full written statement will be included in
the hearing record. Please begin your testimony.
STATEMENT OF JAMES DIMON, CHAIRMAN OF THE BOARD, PRESIDENT, AND
CHIEF EXECUTIVE OFFICER, JPMORGAN CHASE & CO.
Mr. Dimon. Chairman Johnson, Ranking Member Shelby, 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-profit
institutions. These include deposit accounts, loans, credit
cards, mortgages, capital markets advice in fundraising, 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 held 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
portfolio serves as an important vehicle for managing the
assets and liabilities of the consolidated entity. In short,
the bulk of CIO's responsibility is to manage an approximately
$350 billion portfolio in a conservative manner.
While the CIO's 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 eurozone situation.
So what happened?
In December 2011, as part of a firmwide effort in
anticipation of new Basel capital requirements, we instructed
CIO to reduce risk-weighted assets and associated risk. To
achieve this in the synthetic credit portfolio, the CIO could
have simply reduced its existing positions; instead, starting
in mid-January, it embarked on a complex strategy that entailed
adding positions that it did believe 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 risks.
This portfolio morphed into something that, rather than
protect the firm, created new and potentially larger risks. As
a result, we have let a lot of people down, and we are very
sorry for it.
Now let me tell you how it went wrong. These are not
excuses. These are reasons.
We believe now that a series of events led to the
difficulties in the synthetic credit portfolio. These are
detailed in my written testimony, but I would highlight the
following:
CIO's strategy for reducing the synthetic credit portfolio
was poorly conceived and vetted.
In hindsight, the CIO's traders did not have the requisite
understanding of the new risks they took.
The risk limits for the synthetic credit portfolio should
have been specific to that portfolio and much more granular,
i.e., only allowing lower limits of risk on each specific risk
being taken.
CIO, particularly the synthetic credit portfolio, should
have gotten more scrutiny from both senior management--and I
include myself in that--and the firmwide risk control function.
In response to this incident, we have already taken a
number of important actions to guard against any recurrence.
We have appointed entirely new leadership for CIO.
Importantly, our team has made real progress in aggressively
analyzing, managing, and reducing our risk going forward. While
this does not reduce the losses already incurred and does not
preclude future losses, it does reduce the probability and
magnitude of potential 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
we are often our own toughest critic. In the normal course of
business, we apply lessons learned to the entire firm. While we
can never say we will not make mistakes--in fact, we know we
will make mistakes--we do believe that this was 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 impacted by this event.
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 which remain far in excess of regulatory capital
standards. As of March 31, 2012, our Basel I Tier 1 common
ratio was 10.4 percent; our estimated Basel III Tier 1 common
ratio is at 8.2 percent. Both are among the highest levels in
the banking sector. We expect both these numbers to be higher
by the end of the year.
All of our lines of business 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 an 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 communities around the
globe.
During 2011, JPMorgan Chase raised capital and provided
credit of over $1.8 trillion for consumer and commercial
customers, up 18 percent from the prior year. We also 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 a decision not
to retrench--but to step up--as we did with markets in turmoil
when we were the only bank willing to commit to lend billions
of dollars to the States of California, New Jersey, and
Illinois.
All of these activities come with risk. And just as we have
remained focused on serving our clients, we have also remained
focused on managing the risks of our business, particularly
given today's considerable global economic and financial
volatility.
We will learn from this incident, and my conviction is that
we will emerge from this moment a stronger, smarter, and better
company.
I would also like to speak directly for a moment to our
260,000 employees, many of whom are watching this hearing
today. I want them all to know how proud I am of JPMorgan
Chase, the company, and proud of all of what they do every day
for their clients and their communities.
Thank you, and I would welcome any questions you might
have.
Chairman Johnson. Thank you, Mr. Dimon, for your testimony.
As we begin questions, I ask the clerk to put 5 minutes on
the clock for each Member.
Mr. Dimon, there was clearly a breakdown in risk management
at your firm. What did you know when you made your ``tempest in
a teapot'' comment? Why were you willing to be so definitive a
month before publicly announcing the losses when it appears you
did not have a full understanding of the trading strategy?
Mr. Dimon. Let me first say, when I made that statement, I
was dead wrong. I had been on the road. I called Ina Drew, who
ran the CIO. I had spoken to our risk officers, our CFO. They
were looking into it. There were some issues with CIO before
April 13th when we announced earnings. I was assured by them--
and I have the right to rely on them--that they thought this
was an isolated, small issue and that it was not a big problem.
They look at things like how bad can it get, they stress it,
and under no event did it look like it would be getting nearly
as bad as it got after April 13th.
Chairman Johnson. Mr. Dimon, there were reports that the
CIO had scrapped a risk limit that would have required traders
to exit positions if losses exceeded $20 million. Is this true?
If yes, did you approve this? And why was the limit removed?
Mr. Dimon. There was no loss limit of $20 billion.
Chairman Johnson. $20 million.
Mr. Dimon. How much?
Chairman Johnson. $20 million.
Senator Shelby. Million.
Mr. Dimon. Billion.
Chairman Johnson. With an ``M.''
Mr. Dimon. Oh, million.
Chairman Johnson. Yes.
Mr. Dimon. No, I am unaware of a $20 million loss limit.
CIO had its own limits around credit risk and exposure. At one
point in March, some of those limits were triggered. The CIO at
that point did ask the traders to reduce taking risk, and she
started to look very heavily into the area, which was the
proper thing to do. Sometimes triggers on limits do get hit,
and what should happen afterwards is people focus on it, think
about it, and decide what to do about it.
Chairman Johnson. There have been concerns raised about the
change made in the CIO's risk model. When were regulators
notified? Why was the risk model changed? Did this change mask
the true risks of the trading activity?
Mr. Dimon. So what I am aware of is that sometime in 2011
the CIO had asked to update their models, partially to get them
updated to be compliant with the new Basel rules. Model reviews
are done by an independent model review group. They started the
process 6 months earlier, and in January they did, in fact, put
in a new model.
I should note that models are changed all the time, always
being adjusted to try to be better, inform yourself from the
past and try to make models get better. The models were run,
were approved by the model review group, were implemented in
January, and did effectively increase the amount of risk this
unit was able to take.
On April 13th, we were still unaware that the model might
have contributed to the problem, so when we found out later on,
we went back to the old model. So the old model was more
accurate in hindsight than the new model--than we thought it
was going to be.
Chairman Johnson. Reports suggest there were multiple
warnings of weak controls at the CIO that were ignored, and
your testimony states that your trading strategy was not
reviewed outside CIO. Did you, Mr. Dimon, make the decision to
exempt the CIO from any review of risk controls outside of the
unit? Why was no one watching?
Mr. Dimon. I think the first error we made was that the CIO
unit had done so well for so long that I think there was a
little bit of complacency about what was taking place there,
and maybe overconfidence. It did have its own risk committee.
That risk committee was supposed to properly overview and vet
all the risks. I think that risk committee itself, while
independent, was not independent-minded enough and should have
challenged more frequently and more rigorously this particular
synthetic credit portfolio.
I think the second related risk is that the synthetic
credit portfolio itself always should have had more scrutiny.
It was higher risk. It was mark to market. It should have had
more scrutiny and different limits right from the start.
Chairman Johnson. Mr. Dimon, did the pay structure for the
employees at the CIO incentivize risky behavior that led to the
massive trading loss instead of rewarding those who reduced the
bank's risks? Were there bonuses for generating profits out of
the CIO? Will you seek claw backs from traders, management, and
executives involved in this trading debacle?
Mr. Dimon. So I think let me just give the big picture
about compensation at JPMorgan. To start with, we have not had
for 5 or 6 years special severance packages for executives,
change of control, parachutes. There was no one in CIO who was
paid on a formula. The management of the CIO portfolio was
subordinated to the rest of the company. They were not allowed
to do what they want. They could not invest very long. They
could not take too much high-yield exposure, et cetera. They
were paid for what they did for the whole company, and when we
pay people, everyone, we look at their performance, the unit's
performance, the company's performance, and their performance
includes recruiting, training, integrity, sharing with senior
management, all the things that we need to do to make it a
better company. So I do not believe that the compensation made
this problem worse, but--and like I said, none of these folks
were paid on a formula.
Oh, your second question was claw backs. When the board
finishes a review, which I think is the appropriate time to
actually make those final decisions--I think it would be
inappropriate to make those decisions before you finish your
final review. You can expect it will take proper corrective
action, and I would say it is likely, though this is subject to
the board, but it is likely there will be claw backs.
Chairman Johnson. Senator Shelby.
Senator Shelby. Thank you, Mr. Chairman.
Mr. Dimon, so that we would have some idea of what
happened, could you explain a little further what really
happened without divulging your proprietary interests? We do
not want you to do that. And could you tell us a little more?
In other words, you were managing risk. What were you managing
of it?
Mr. Dimon. The biggest part of--remember, the biggest risk
we take is credit, loans, the $700 billion in loans. The excess
deposits, we have a $350 billion portfolio. That is the biggest
part of CIO. Its average rating in AA-plus. It is
conservatively managed. It has an unrealized profit of $7
billion. In addition, I should also point out in terms of risk
management, we also have $150 billion in cash today pretty much
invested at central banks around the world. So we try to be a
very conservative company.
Senator Shelby. We understand that, but this particular
occasion that brought these losses on, explain to us, without
getting into your proprietary area, what you were doing and
what went wrong? We do not really know yet.
Mr. Dimon. The synthetic credit portfolio originally had
been designed----
Senator Shelby. And by ``synthetic credit portfolio,'' what
do you mean?
Mr. Dimon. Index, swaps, derivatives, credit-related. They
are traded. Some are very actively traded in the markets.
Senator Shelby. You took a position in them, right?
Mr. Dimon. We took a position in them, and if you look at
the position, what it was meant to do was to earn--in benign
environments, maybe make a little money. But if there was a
crisis, like Lehman, like eurozone, it would actually reduce
risk dramatically by making money. That was the original intent
of the portfolio. In fact, during 2008 and 2009, it did
actually accomplish some of those objectives.
Senator Shelby. Were you investing or were you hedging, or
was it a combination of both?
Mr. Dimon. No, I would call this hedging at that point in
time.
Senator Shelby. OK.
Mr. Dimon. This was hedging the risk to the company. They
would protect the company in the event things got really bad.
They did get really bad at one point, and it did have some of
that protection.
Senator Shelby. Had the credit went bad, is that the
index----
Mr. Dimon. Yes, if credit went really bad, this would do
better--this would do well. That was the original intent.
In January, February, and March, we had asked them to
reduce this risk, and you can reduce shorts by going long or
just by selling the positions you have. And they actually
created a far larger portfolio. It had far more risks in it.
They were far more complex risks. And on April 13th, we were
not aware of that. But soon after we were, we made a public
announcement because we thought we owed our shareholders that.
And since then we have been managing, analyzing, and reducing
that risk.
Senator Shelby. To detail what really happened--here we are
talking in general terms now--would you feel better in a closed
hearing? Or would you not like to divulge things because you
still have a position proprietary interest in----
Mr. Dimon. No, I think I would prefer not to divulge things
because it protects the company right now. We have told our
shareholders that on July 13th we intend to make far more
disclosures about what happened and specific disclosures about
this portfolio, what happened to this portfolio, and what we
have done to reduce the risk in the portfolio.
Senator Shelby. I guess the question comes up: Is this
hedging or proprietary trading? According to some press
reports, there is disagreement about whether the Chief
Investment Office, which executed these trades, was supposed to
be hedging risk or earning a profit? It has been reported that
this office contributed more than $4 billion of net income in 3
years, which is about 10 percent of your overall profit. What
was your expectation for this unit, the CIO unit? Was it
supposed to hedge, was it supposed to earn profits, or some of
both?
Mr. Dimon. The whole CIO unit invests money and earns
income, and like I said, that is invested across a broad array
of diversified investments, and that income is used to pay
depositors, open branches, pay our people. So, yes, it is
supposed to earn revenue. This particular synthetic credit
portfolio was intended to earn a lot of revenue if there was a
crisis. I considered that a hedge. It was protecting the
downside risks to the company and, in fact, the biggest risks
of the company. The biggest risks to--there are two major risks
to the JPMorgan face: dramatically rising interest rates and a
global type of credit crisis. Those are the two biggest risks
we face. So the hedge was intended to improve our safety and
soundness, not to make it worse.
Senator Shelby. Was what went wrong, was it the way the
hedge was contrived? Or was it events beyond your control?
Mr. Dimon. I think it was the way it was contrived between
January, February, and March. It changed into something that I
cannot publicly defend.
Senator Shelby. Lessons learned. What have you as the CEO
of JPMorgan, which is our largest bank, what have you learned
from this problem, this debacle?
Mr. Dimon. I think that no matter how good you are, how
competent people are, never, ever get complacent in risk.
Challenge everything. Make sure people on risk committees are
always asking questions, sharing information, and that you have
very, very granular limits when you are taking risk. A granular
limit says you can take no more than X risk in Y, no more than
this risk in a name, no more than this risk in a market,
including things like liquidity risks so that you are
controlled. In the rest of the company, we have those
disciplines in place. We did not have it here, and that is what
caused the problem.
Senator Shelby. Thank you, Mr. Chairman.
Chairman Johnson. Senator Schumer.
Senator Schumer. Thank you. Good morning and thank you for
coming.
My first question is about risk committees. I was a
proponent in the Dodd-Frank of increasing corporate governance
and fought to have included in Dodd-Frank a provision, 165(h),
requiring all banks with over $10 billion in assets and all
nonbank financial firms supervised by the Fed to have a
separate risk committee on the board that includes ``at least
one risk management expert having experience in identifying,
assessing, and managing risk exposures of large, complex
firms.''
As you know, some questions have been raised about the
oversight provided by your risk committee. You already had one,
so obviously you did not need the legislation to do it. But
what went wrong with the risk committee? And what can you
suggest to the regulators as they formulate rules about risk
committees? Why didn't it do its job? Why didn't they, say,
find out that this is the one area that did not have the limits
that were in place elsewhere?
Mr. Dimon. The risk committee does a lot of work in
conjunction with the audit committee and the full board to talk
about the main risks to the company. I think it is a little
unrealistic to expect the risk committee to capture something
like this, so they spend an awful lot of time--it is hard to do
that. I would point out this risk committee took this company
through the most difficult financial crisis of all time with
flying colors. So the risk committee did a great job. This is a
flaw that I would completely blame on management, certainly not
on the risk committee, since recently we have added two new
directors who also have extensive experience in financial
markets.
Senator Schumer. OK. So you feel the risk committee, this
was too small an item for them? Just give me a little more
context for this.
Mr. Dimon. I think the risk committee reviews a lot of
issues, regulations, requirements. They meet a lot of
management. They talk to risk committees. They make sure that
there is governing in place. I just think it would have been
hard for them to capture this if management did not capture it.
To the extent we were misinformed, we were misinforming them.
Senator Schumer. OK. The second question goes to the
broader context. I think what frightens most people about what
happened is not the effect on JPMorgan. As you said, it is a
large institution, well capitalized, and the shareholders lost,
but the taxpayers and customers did not. But I think the
question that bothers most people is: What is to stop this from
happening again, maybe being a larger loss of the same type,
but particularly at a weaker or less well capitalized
institution? It was institutions smaller than JPMorgan that
caused all--you know, that started the catapult in the
financial system, firms like Lehman Brothers. So were we just
lucky that we found out about this one when we did? What is
your assessment, as somebody who knows the financial industry,
about the danger of this type of thing happening in other
institutions that are not as well capitalized as JPMorgan and
the effect on our financial system?
Mr. Dimon. We were not just lucky to capture it. We did
have limits in place that captured it. They should have been
much smaller in this particular activity.
I think one of the things that regulators can and do do is
disseminate and promulgate best practices everywhere. I do
think that since the crisis--and you should have comfort in
this--banks are better capitalized. They have more liquidity.
There is more transparency. Their boards are more engaged. Risk
committees are more engaged. There are no off-balance-sheet
vehicles. So a lot of the strengthening has happened across
companies across America.
Senator Schumer. What about nonbanking institutions that do
this that do not have the same requirements but are engaged in
similar activities that could cause problems for the system?
Mr. Dimon. I think the regulators are currently deciding
which of the nonbanks are going to be part of systemic risk
oversight, and I will leave that to them at this point in time.
Senator Schumer. OK. A final point. The Chairman asked
this, but it is about claw backs. I was glad to hear that there
is a claw back policy. It seems to me that that is an
appropriate thing to do. When people make tens of millions of
dollars for taking risks and they do it poorly, if there is a
claw back it may be a good internal incentive to be a little
more careful, if you will, not just to have an upside but to
have a downside in their own personal compensation. Can you
tell us a little bit about the policy that you have for claw
backs? I know you do not want to talk about individual cases
because the investigation is not done, but tell us how it
works, how widespread it is, how mandatory it is, that kind of
thing.
Mr. Dimon. There are several layers, but for senior people,
which most of these people are, we can claw back even for
things like bad judgments. We can claw back any unvested stock.
We can even claw back things like cash bonuses. So it is pretty
extensive, the ability to claw back.
I was in favor of the claw back system. I think that one of
the legitimate complaints was that after the crisis, a lot of
people walked away from companies that went bankrupt with a lot
of money. Some of that was inappropriate. In this particular
case, the board will review at the end of this every single
person involved, what they did, what they did not do, and what
is appropriate.
Remember, a lot of these people have been in the company
and been very successful for a long period of time.
Senator Schumer. Is there a limit to how much the claw back
is or anything else in your policy or it is discretionary? And
a second and final question: Has it been used thus far in your
bank over the years you have had the policy?
Mr. Dimon. These new policies have not been used thus far.
Senator Schumer. And are there limits?
Mr. Dimon. Well, there are limits essentially to what you
have been paid the last--it is somewhat limited to what you
have been paid over the last 2 years.
Senator Schumer. Thank you, Mr. Chairman.
Chairman Johnson. Senator Crapo.
Senator Crapo. Thank you, Mr. Chairman and Mr. Dimon.
Last week, in the testimony that we were presented by the
regulators, one of the tensions that we face here is we want to
be sure that we are adequately regulating our financial
institutions, but we want to be sure also that we basically do
not have the regulators running our private sector
institutions. In that testimony last week, Comptroller Curry
from the OCC indicated that there are approximately 65 onsite
examiners from the OCC who are full-time onsite at JPMorgan. Is
that correct?
Mr. Dimon. I believe so, yes.
Senator Crapo. And, again, what should the function of the
regulators be? Many people say our primary focus from our
perspective in terms of policy should be to make sure that the
banks are properly capitalized. Should that be our primary
focus? And what other areas of oversight would be the most
effective for us in terms of our regulatory structure?
Mr. Dimon. So the regulators--I have been in regulated
businesses my whole life, and regulators look at many things we
do. They audit it, they criticize it. I think it is important
to recognize that I think there have been improvements in
companies, including JPMorgan, because of their audit and
criticism. So I think you have to give regulators realistic
objectives. I do not think realistically they can actually stop
something like this from happening. It is purely management's
mistake. And, again, if we are misinformed a little bit, we
are, not purposely, but misinforming them, too.
So I think the most important things regulators can do is
high capital, good liquidity standards, proper disclosures,
proper governance, proper functioning risk committees. All
those things will not stop mistakes. They will just make them
smaller and fewer and far between. And I do think in
implementing all the new regulations from Dodd-Frank to Basel,
you are going to accomplish some of those things.
Senator Crapo. Well, thank you. In terms of the capital
structure, and to give it a little context here, one of the
other things we learned was that during the stress test that
was applied to JPMorgan, it was assumed that JPMorgan could
deal with losses of around $80 billion and still be adequately
capitalized. Is that correct?
Mr. Dimon. We would still be adequately capitalized, but I
would not be the person standing in--sitting in front of you
right now.
Senator Crapo. My understanding----
Mr. Dimon. We are great believers in stress tests. The Fed
put us through what I would call a very severe stress test, and
if I remember correctly, it was like 13 percent unemployment,
home prices going down another 10 or 20 percent, crisis in
Europe, and markets as bad as what you saw after the Lehman
crisis. And we came through that, in my opinion, with flying
colors. And we actually stressed hundreds of other scenarios
because there were plenty of other scenarios which you could
say could affect a company like a bank. And in all of those, we
wanted to make sure we have adequate capital and adequate
liquidity, so much so to the extent that you never question
JPMorgan.
Senator Crapo. Well, thank you. And----
Mr. Dimon. We believe we have that kind of capital.
Senator Crapo. And your current Tier 1 capital is
approximately $128 billion?
Mr. Dimon. I do not know the number offhand, but
approximately, yes.
Senator Crapo. Thank you. I would like to conclude with a
discussion of the Volcker Rule. Some have said that it is not
possible to distinguish between proprietary trading and
hedging. Clearly that is what the Volcker Rule contemplates,
and it is what, if we implement it, is going to be imposed on
banks like yours.
Could you discuss for a moment whether we can distinguish
between proprietary trading and hedging and, if so, how we make
that distinction?
Mr. Dimon. I think it is going to be very hard to make a
bright-line distinction between proprietary trading and
hedging, because you can look at almost anything we do and call
it one or the other. Every loan we make is proprietary. If we
lose money, the firm loses money. If we buy Treasury bonds and
they lose money, we lose money. So I have a hard time
distinguishing it.
I do understand the intent of the Volcker Rule. If the
intent is to reduce activities that can jeopardize and threaten
a big financial company, I completely understand that. I think
the devil is going to be in the detail in how these rules are
written that allow the good of our capital markets and not the
bad. And I would be happy to talk more about our capital
markets.
Senator Crapo. Tell me for a minute how you would describe
what is a proper hedge in the context of the Volcker Rule
distinction that we are trying to make.
Mr. Dimon. So portfolio hedging, which I think should be
allowed, is something to protect the company in bad outcomes.
And you can analyze that. Sometimes you--it does not mean you
are always going to be exactly right, but you can analyze that.
So I do believe you should be allowed to do portfolio hedging,
and there are ways and methods and analytics to make sure you
think it protects the company in a bad outcome.
Senator Crapo. And that would be something like going short
in the----
Mr. Dimon. Going short credit, if you think there might be
a credit crisis, would be one way of doing that, yes.
Senator Crapo. Well, thank you very much.
Mr. Dimon. You are welcome.
Chairman Johnson. Senator Reed.
Senator Reed. Well, thank you very much, Mr. Chairman. I
think this is a very important hearing because the issues that
have been raised go right to the capability of large, complex
international financial institutions to manage risk, and
complementing that is the ability of regulators to oversee the
management of the risk by those corporations. And I think it
also is a strong case, in my view, for a very clear but very
strong Volcker Rule, and also for standing up finally a
Director at the Office of Financial Research. I know I have
been talking to Chairman Johnson and also Ranking Member Shelby
about that.
But let me ask a question. This goes to risk management. In
your proxy materials, risk management seems to be the
responsibility of the Office of Risk Management, which is an
individual different than the CIO. Was this individual--and I
know there were several changes--monitoring and supervising the
CIO, the Chief Investment Officer, on a regular basis? Did he
or she approve the change in modeling for the VaR?
Mr. Dimon. So every business we have has a risk committee.
Those risk committees and the head of those businesses report
to the head of risk of the company, and there are periodic
conversations between the risk committees and the head of risk
of the company and our senior operating group about major
exposure we are taking. Obviously, that chain of command did
not work in this case either because we missed a bunch of these
things. So you can blame it on anyone in that chain, that if we
had been paying a little more attention to why there were not
more granular limits here, we could actually have caught this
and stopped that at this point.
There is an independent model review group that looks at
changes in models, and we do change models all the time. Models
are constantly being changed for new facts. I would just
caution you. Models are backward-looking. You know, the future
is not the past. And they never are totally adequate in
capturing changes in businesses, concentration, liquidity, or
geopolitics or things like that. So we are constantly improving
them. I also do not think model--we do not run the business of
models. Models, VaR, they are one input. You should be looking
at lots of other things to make sure you are managing your risk
properly.
Senator Reed. Did you share with or did the OCC inquire
about the change in the modeling? And for the record, this
change was just in the Chief Investment Office, correct? It was
not----
Mr. Dimon. There was a change in the Office of Investment
in January. A new model was put in place, and we took it out
and put the old model back in sometime in----
Senator Reed. Why didn't you change the model firmwide?
Mr. Dimon. Well, the firm has hundreds of models. This
model was very specific to that synthetic credit portfolio.
Senator Reed. Let me get back to my question about OCC.
Were they aware of the change? Did you bring it to their
attention?
Mr. Dimon. I do not know. You know, we generally are open
kimono with the regulators and tell them what they want to
know. They often look at models. Some models they actually do
in extensive detail. I do not know particularly in this one.
Senator Reed. Going to the proxy, if the Chief Investment
Office is responsible for measuring, monitoring, reporting, and
managing the firm's liquidity, interest rates, and foreign
exchange risk and other structural risks, which basically is
essentially--at least the implication is their job is risk
management, not generating profits by investing deposits. It
seems that their model, their VaR model, was loosened up
considerably, giving them the opportunity to engage in more
risky activities. Is that your conclusion?
Mr. Dimon. Half. In January, the new models put in place
that allowed them to take more risk and they contributed to
what happened. We do not as of today believe it was done for
nefarious purposes. We believe it was done properly by the
independent model review group. There may be flaws in how it
was implemented, but once we realized that the new model did
not more accurately reflect reality, we went back to the old
model.
Senator Reed. Let me ask, it appears from looking at some
published reports that essentially these credit default swaps
were first made to protect your loans outstanding, particularly
in Europe, and that was in the 2007-08 time period, which is a
classic hedging. You have extended credits to corporations. If
those credits go bad, you want to be able on the side to insure
yourself against that.
But then in 2011 and 2012 at some point, the bet was
switched, and now you started, rather than protecting your
credit exposures, taking the other side of the transaction,
selling credit protection, which seems to me to be a bet on the
direction of the market unrelated to your actual sort of credit
exposure in Europe, which looks a lot like proprietary trading
designed to generate as much profit as you could generate,
which seems to be inconsistent, again, if this is simply a risk
operation and you are hedging a portfolio. How can you be on
both sides of the transaction and claim that you are hedging?
Mr. Dimon. I think I have been clear, which is the original
intent I think was good. What it has morphed into I am not
going to try to defend.
Senator Reed. So----
Mr. Dimon. Under any name, whatever you call it, I will not
defend it. It violated common sense, in my opinion. I do
believe the people doing it thought that they were maintaining
a short against high-yield credit that would benefit the
company in a crisis. And we now know they were wrong.
Senator Reed. But that leaves us in a situation of how do
we build in, because our responsibility--build in rules and
regulations that prevent, as you would say, well-intentioned,
extremely bright people from doing things that are very
detrimental? First of all, you have lost several billions of
dollars, which this activity was located in the bank, and,
frankly, it was deposits that are insured by the Federal
Government. And, second, you have lost a significant amount of
your market value to your shareholders. And the irony to me is
that if there was a good Volcker Rule in place, they might not
have been able to do this because it clearly does not seem to
be hedging customer risk or even the overall exposure of the
bank's portfolio.
Mr. Dimon. I do not know what the Volcker Rule is. It has
not been written yet. It is very complicated. It may very well
have stopped parts of what this portfolio morphed into.
Senator Reed. So there is a possibility, in fact, if it is
done correctly and proposed, which I hope it is, that it could
have avoided this situation?
Mr. Dimon. It is possible. I just do not know.
Senator Reed. Thank you very much.
Chairman Johnson. Senator Corker.
Senator Corker. Thank you, Mr. Chairman, for having the
hearing and, Mr. Dimon, for being here. I wish we had had these
kinds of hearings prior to the passage of financial regulation,
and I think one of the good things that has come out of this is
a lot of folks on this Committee have really focused in on
issues that are relevant, and, again, I think that part of this
has been positive.
Mr. Dimon, you mentioned the biggest risk a bank takes is
making loans. Is that correct?
Mr. Dimon. Yes.
Senator Corker. That is the largest risk a bank--and you
have $700 billion in loans outstanding. Is that correct?
Mr. Dimon. Yes.
Senator Corker. What would happen in an institution like
yours if you had $700 billion in loans, the riskiest business
you do, what would happen if you did not have the ability to
hedge that risk in ways that made sense, not the way you did
it?
Mr. Dimon. I think there are two things. One is smaller,
which is you might reduce the amount of risk you are taking, so
if everyone----
Senator Corker. You mean less loans?
Mr. Dimon. You might make less loans just under the
circumstance that if things got bad, you could still handle it.
That might change the price of loans in the marketplace if all
banks did that. But I think more than that is you would not be
able to protect the company from a systemic event. We want to
be able to protect JPMorgan from systemic events. We know they
happen, and so to me, I want to survive good times and bad
times.
You know, JPMorgan's balance sheet and capital allowed us
to do good things in 2008 and 2009 for clients. If we could not
protect ourselves, I think we would have a hard time serving
our clients.
Senator Corker. So I think you have made it clear, and I
know numbers of people in the last hearing were talking to
regulator about why they could not catch something like this.
There is really no way for a regulator to catch this type of
activity. Would you agree?
Mr. Dimon. I think it would be very hard for them to do. I
would look at regulations like you want to have continuous
improvement, always get better, clarity, cleaner. But I think
you cannot--it is hard to have the unrealistic expectation you
can just capture things like this. If you try to set up rules
to capture this, I think----
Senator Corker. A banker is always going to be ahead of a
regulator, basically, and you are giving them the information
they are using to regulate. So there is just not really
realistic to think that a regulator is going to catch this.
So a lot of people think that--as a matter of fact, one of
your peers at one of the large, large institutions was in
yesterday talking about the fact that Dodd-Frank just really
missed the mark. I mean, we had this huge amount of regulation
taking place at the institutions, and what we should have done
is looked at regulating the markets themselves. Much of what
happens in the markets takes place outside of the regulated
entities.
Let me just ask you this question. Has Dodd-Frank more than
marginally made our banking system safer?
Mr. Dimon. You know, we supported some elements----
Senator Corker. I know what you supported. Has it made our
financial system safer?
Mr. Dimon. I think parts of it in conjunction with higher
capital liquidity, the financial system is safer today than it
was in 2007.
Senator Corker. I am talking about the--I understand we
have larger capital and all banks are doing--the boards are
causing that to happen. I am talking about the regulatory
regime that Congress put in place. Has it made our system
safer?
Mr. Dimon. I do not know.
Senator Corker. OK. One of your peers, not quite as well
known as you, believes not, and as I look back, you know, we
looked at the 20 largest institutions in the world. Since the
1990s, the Japanese meltdown that occurred, 16 of the 20 are
either Government owned or have had taxpayer money injected
into them. And so you look at what we have done, and many
people obviously are coming out with all kinds of models now.
You have got the Hoenig model, the Behr model; Glass-Steagall
is being talked about.
Would you share with the Committee the purpose of a highly
complex institution, what societal good an institution like
yours is, and what our financial system would be like if we did
not have these highly complex institutions? And, second, you
are obviously renowned, rightfully so, I think, as being one of
the most--you know, one of the best CEOs in the country for
financial institutions. You missed this. It is a blip on the
radar screen. But are these institutions today just too complex
to manage? And the fact that 16 of the 20 have had injections,
what does that say about a highly complex institution like
yours?
Mr. Dimon. So we have a hugely complex economic ecosystem.
From small companies to large companies, there are 27 million
businesses. A thousand of the top businesses employ 30 million
people. The other folks in the private sector are employed by
all the other 26 million companies or so. There is a place for
large companies and for small companies.
For people like us, we bank some of the largest global
multinationals in America and around the world. We can bank
companies in 40 different countries. We do trade finance. We
give intraday lines of billions of dollars to some of the
biggest companies. We can do $5 billion revolvers or raise
money for America's Fortune 100 companies in a day or two when
they need it to do something.
We are the largest banker to banks. We extend something
like $23 billion of credit to smaller banks, and they need some
of that. There is a great role for community banks. We cannot
do all the things that community banks can do in their
communities.
So I look at it you need all these things. You know, there
are some negatives to size, so size brings you economies of
scale, brings you diversification. Our diversification was a
source of strength in the crisis. It was not a source of
weakness. It allows you to invest huge sums of money in data
centers, cybersecurity, some of the things you all want us to
do.
There are some negatives to size, you know, greed,
arrogance, hubris, lack of attention to detail. But if you do a
good job, your clients are being served, and you win their
business. And so if we were not doing some of these things for
the large global American companies, somebody else would. That
is all. These are services they need. They buy them because
they need them. They do not buy them because we want them to
buy them. We provide huge credit lines to them.
Senator Corker. My last question. You basically--you
believe that a highly complex institution is necessary, and if
you were not doing what you were doing, other people in the
world some other place would be. You also are unsure whether
Dodd-Frank has made our system any safer, especially at the top
level. We are here quizzing you. If you were sitting on this
side of the dais, what would you do to make our system safer
than it is and still meet the needs of a global economy like we
have?
Mr. Dimon. The biggest disappointment I have had is that we
never actually sat down, Republicans, Democrats, businesses,
and had real detailed conversations about what went wrong, what
needs to be fixed, to focus on what actually needs to be fixed.
You know, we still have not fixed the mortgage markets, which
is critical to the United States of America. We still have not
fixed some of the other credit markets. The markets have
already fixed a lot of things. There are no CMVS, there are no
subprime, there are no Alt-A, there are not SIVs, there are no
off-balance-sheet vehicles. And we could have a great financial
system. The American business machine is the best in the world.
It is the best in the world. We are all blessed to have it, and
we should focus on getting it working again as opposed to being
constantly just shooting at each other all the time.
Senator Corker. I hope we will do that, and, Mr. Chairman,
I thank you for calling the hearing, and I thank you for being
here.
Chairman Johnson. Senator Menendez.
Senator Menendez. Thank you, Mr. Chairman.
You know, I listen to this, and I paraphrase Shakespeare: A
hedge or not a hedge, that is the real question. And it seems
to me that you call these trades that lost anywhere between $2
and $4 billion ``economic hedges,'' ``a tempest in a teapot,''
which I now understand you regret, and when on to say that it
``morphed.'' But, really, a hedge, as I understand it, does not
create a loss without a corresponding gain. That is why you are
hedging. And what seems to me that happened here is that you
were pursuing a synthetic loan portfolio, selling CDSs, which
in essence was a toxic instrument that caused a big part of our
challenges in 2008, the crisis of 2008. And so really, you
know, when you reduce a hedge or hedge a hedge, isn't that
really gambling?
Mr. Dimon. I do not believe so, no.
Senator Menendez. So this transaction that you said
morphed, what did it morph into? Russian roulette?
Mr. Dimon. It morphed into something I cannot justify, that
was just too risky for our company.
Senator Menendez. And that is the real concern here: too
risky for your company, which is one of the Nation's finest,
largest, well-capitalized banks. If it is too risky for your
company, what stops it from being in the future too risky where
you lose not $2 to $4 billion but $50 billion, create a size
that ultimately creates a risk on the bank that takes that bank
into the possibility of a run, and then ultimately becomes the
collective responsibility of each and every American? That is
what we are trying to prevent here.
So I have heard you talk about the fortress balance sheet,
and I am glad to hear you say to Senator Schumer that we should
take comfort that banks are more collateralized. But in saying
so, one way to think about this is I wonder what your views--do
you regret calling the efforts to require banks to hold more
money ``un-American'' and ``putting the nail in our coffin.''
Today you cite the fortress balance sheet of your bank as a way
to prevent against the challenges, yet you railed against us
when we were, in fact, trying to pursue greater capitalization
of these banks. Is that a regret you have of those comments
then?
Mr. Dimon. No, I do not think what you said is true. I
supported parts of regulation and reform. I supported higher
capital and higher liquidity. We supported an oversight
committee. We supported standardized derivatives going to
clearinghouses. We supported proper transparency. We supported
most--a lot of the things that you requested. And we did not
fight everything. We only--when I mentioned the anti-American
thing, I was talking about between Dodd-Frank and Basel, things
which were being skewed against American banks. And American
banks cannot have preferred stock like foreign banks can have.
American banks cannot do qualified mortgages----
Senator Menendez. But did you not specifically say, as part
of your ``un-American'' comment, that the requirement for banks
to hold more money was un-American?
Mr. Dimon. I did not.
Senator Menendez. Well, you know, I would be happy to look
at that again. I think you might want to review that, because
what you criticized then and what your bank has been lobbying
extensively against is the very types of protections that at
the end of the day can guarantee that the American taxpayer
does not become responsible.
I think about the fortress balance sheet you talk about,
and I would like to remind you that fortress balance sheet has
a moat that was dug by taxpayers to the tune of $25 billion in
bailout money and more than $450 billion in loans from the Fed.
So it seems to me that the American people are a big part of
helping to make your bank healthy. And the one thing that they
would seek in return is to ensure that you are not working
against the very essence of what are legitimate efforts to
control the risk so that you can prosper and your shareholders
can prosper, but at the same time it does not become the
collective risk of the taxpayers of this country.
Do you not think that is a fair ask of the American people?
Mr. Dimon. I want a strong financial system like you do. We
have supported a lot. There are thousands of rules and
regulations. We do not fight them all. We are giving informed
advice on some of them. There are some that we think do not
make sense, and we think we are entitled to the ones to tell
you the things that do not make sense.
Senator Menendez. Well, I think you are entitled to tell us
the things that do not make sense. I also think that the
American people, after making major investments in your bank
and other institutions, are entitled to ensure that they do not
have to reach into their pocket again.
Chairman Johnson. Senator DeMint.
Senator DeMint. Thank you, Mr. Chairman. Thank you, Mr.
Dimon. I really appreciate you voluntarily coming in to talk
with us. It is important that we talk about things happening in
the industry. It will, I think, advise us, help us as we look
forward, and hopefully it will contribute to a best practice
scenario in the industry. And I appreciate your emphasis on
continuous quality improvement.
We can hardly sit in judgment of your losing $2 billion. We
lose twice that every day here in Washington and plan to
continue to do that every day. It is comforting to know that
even with a $2 billion loss in a trade last year, your company
still, I think, had a $19 billion profit. During that same
period, we lost over $1 trillion. So if we had a claw back
provision, none of us would be getting paid here. So the intent
today is really not to sit in judgment but to maybe understand
better what happened.
My concern--and some of the questions have been very
helpful. As you can tell, there is a temptation here every time
something goes amiss that we want to add a regulation, and we
have surrounded the banking industry with so many regulations,
and we still seem to have problems here and there.
I think we do need to recognize that you are a very big
bank, the biggest in the world. You have got very big profits.
Periodically you are going to have big losses. We need to look
at that as part of doing business, but also in the context of
making sure, as the Senator just said, that we do not create
additional risks for the taxpayer, which you appear to be in
much better fiscal shape than we are as a country.
We know risk is required to make a profit. You are dealing
with a lot of capital that you have to put to work, which
certainly is going to experience profits and losses, and
generally you have done pretty well. But I do want to follow up
on Senator Corker asking about the Dodd-Frank regulation, which
a lot of us are concerned about. I think a lot of us are
frustrated bank managers and want to manage your business for
you. And as I have mentioned, we are not capable of doing that
for what we have been given to manage. But I would like to come
away from the hearing today with some ideas on what you think
we need to do, what we maybe need to take apart that we have
already done to allow the industry to operate better, and at
the same time not put the American taxpayer at risk.
I am really honestly looking for some ideas as we look over
the next year and hopefully in a position where we can make
some positive changes.
Mr. Dimon. The only real suggestion I have is, you know, I
believe in strong regulation, not always more. It is not more
or less. It is good. What we set up was a system with more and
more regulators. We do not actually know who has jurisdiction
over many of the issues we are dealing with anymore. So when
something happens, we are dealing with four or five different
regulators. I would have preferred a simple, clean, strong
regulatory system with real intelligent design, and that is not
what we did. We created a really complex, hard to figure out
who is responsible, no one could adjudicate between all the
various regulatory agencies, and it is not clear to me who has
the responsibility or the authority.
Senator DeMint. In a lot of the industries that I have
worked in, they get together as peer groups to evaluate best
practices, to share information with each other. Is that
something that you regularly do with your peers, other banks
around the world, of how you deal with risk or how these
committees should work, what the failures are? Is that going on
in a way that----
Mr. Dimon. We used to do a lot more. We have constant
conversations. The regulators are constantly asking for
feedback and rules. We send them a lot of analysis and detail
and stuff like that. There is less collaboration either among
banks and among regulators and among legislators than there
used to be. It has become much more adversarial.
Senator DeMint. Because obviously, as we have seen, the
laws and regulations are not necessarily improving things, and
some of the things you have done voluntarily, and other banks,
like capital requirements, I think a best practice--if we could
do anything to encourage the industry to develop a lot of its
own voluntary rules, that would guide us a lot better. So I
guess if I could just leave you with any one thing, if you
could come back this time next year and talk about how the
industry has put together large-scale best practice committees,
that would help us keep banking as a private enterprise rather
than as a Government institution.
Mr. Dimon. I would be happy to do it.
Senator DeMint. Thank you.
Chairman Johnson. Senator Brown.
Senator Brown. Thank you, Mr. Chairman. Thank you, Mr.
Dimon, for being here today. You have some 19,000 employees in
the Columbus area who are also my constituents, so we have a
mutual interest in your institution running safely and soundly.
I do not want to see consumer lenders in Columbus losing their
jobs because cowboys in London make too many risky best, so I
want to ask you a series of brief questions. I have 5 minutes,
as others, and if you can possibly give a yes or no answer when
appropriate or a short answer, I would appreciate that.
To start with--and the Chairman touched on this earlier--if
you could just give a yes or no, did you personally approve of
the Chief Investment Office's trading strategy?
Mr. Dimon. No. I was aware of it, but I did not approve it.
Senator Brown. Did you personally monitor the Chief
Investment Office?
Mr. Dimon. Generally, yes.
Senator Brown. OK. Thank you.
Last week, I asked at a hearing about these issues a series
of questions of the OCC about their oversight or lack of
oversight of the trades in question. I finally got their answer
this morning. Their response was, ``OK, but a bit inadequate.''
They say they have five examiners in London who essentially
divide part of their time examining your operations. The
portfolio of assets in question is reportedly about $200
million, which is bigger than the vast majority of banks in the
United States, as you know.
In April, one of your executives told investors that the
trades in question were ``fully transparent to the regulators
as part of our normalized reporting.'' The OCC letter says,
though, that OCC examiners were unaware of the level of risk
occurring at your Chief Investment Office until April. Here is
my series of questions.
Was the OCC told about the trades taking place in your CIO
office prior to the April 6 media reports?
Mr. Dimon. We try to be very open-kimono regulators. We
give them reports. They do get some reports. We give them what
they want. We give them the information they want.
In this particular case, I think that since we were a
little misinformed, we probably have them misinformed. The
mistake we made we passed on to them. But the second we found
out, the first people we got on the phone with was our
regulators to explain: We have a problem, we want to describe
it to you. And, of course, they have been deeply engaged since
then.
Senator Brown. That was April 6th. April 13th--thank you
for that answer. The April 13th earnings call, were they told
about the trades prior to the earnings call? Was OCC?
Mr. Dimon. I do not know. Like I said, they get some of our
reports, but we probably had them--since we were misinformed,
we probably continued to misinform them. I think the important
thing is once we found out, among the first people we called
were our board and then the regulators--and probably not even
in that order.
Senator Brown. The issue is partly your side, partly the
OCC's side. Did you know if OCC inquired about trades as the
regulators, these five regulators, or maybe regulators back in
New York? Did they inquire about the trades prior to the
earnings call?
Mr. Dimon. I do not know.
Senator Brown. You do not know the answer to that?
Mr. Dimon. I do not know.
Senator Brown. Can you tell us at what point did OCC take
steps to challenge the trades?
Mr. Dimon. I think the second that they understood the
significance of the trades, they started to challenge it every
day, and they continued to.
Senator Brown. Is five regulators in London enough?
Mr. Dimon. I do not know the answer, but I would say that,
you know, in this modern day and age they get all the reports
from London, they get all the reports. They can do it by tele-
presence. So physical location is not as important.
I should point out, by the way, that the 19,000 employees
in Columbus serve global clients. They serve 30 million
Americans. They are the largest middle-market lender. They
serve a lot of middle-market companies. They innovate. We run a
lot of call centers there. They process our credit cards, which
we ship around the country. So those employees are not just
doing Ohio-based business.
Senator Brown. I understand that. I certainly appreciate
that. A couple other points. Since 2007, your Chief Investment
Office has grown from $76 to $370 billion. OCC says, and I will
quote, that ``your activities were not historically considered
to be high risk,'' but they go on to say that, ``A similar
level of activity or situation, large hedges that are illiquid
and otherwise very complex, is not present in other national
banks. Other large banks do not conduct activity with synthetic
credit derivatives to the extent in size or complexity that
JPMC has in this situation.''
My question is: Should OCC have been more focused on trades
of synthetic derivatives that they admit now in hindsight were
larger and more complex than any other banking system?
Mr. Dimon. I think we should have, and if they were and
they stopped folks from having this problem, I would have been
very happy with that.
Senator Brown. If your bank did not have $2.3 trillion in
assets, would your CIO need to be that $370 billion?
Mr. Dimon. Yes, most of that represents deposits, and a lot
of that increase would because we bought WaMu. When we bought
WaMu, we had a lot more cash in the door, and I assume you
wanted us to buy WaMu, and what we are doing now is we have had
like a thousand small business bankers in the States where WaMu
was. So we have become one of the largest small business
lenders in California and Florida. So investing in the assets,
and conservatively, other than this one thing, is what we do.
Senator Brown. Senator Corker made a statement a moment ago
or offered the assessment or the question or the observation--I
am not sure exactly where he was going--that just raised the
possibility that this may be--that JPMorgan Chase may be too
complex to manage, which also begs the question: Is it too
complex and too large to regulate? And I just want to lay out a
couple of--and then finish, Mr. Chairman.
JPMorgan Chase in 13 years has quadrupled in size from $667
billion in assets in 1999 to $2.3 trillion today. There are six
American banks that are $800 billion and above. Over the last 5
years alone, you have grown by $400 billion, from what you have
just cited. This case demonstrates that, as a practical matter,
neither you nor the OCC could monitor what was happening in a
$370 billion Chief Investment Office that would, if it were
standing alone, be the eighth largest bank in the United
States. When you have a $2.3 trillion bank with 559
subsidiaries in 37 countries, executives and regulators, it
appears--from listening to you and your comments, from watching
what has happened, in talking to the regulators, in seeing the
OCC response, it appears that executives and regulators simply
cannot understand what is happening in all of these offices at
once. It demonstrates to me that too-big-to-fail banks are,
frankly, too big to manage and too big to regulate.
Mr. Chairman, I yield back. Thanks.
Chairman Johnson. Senator Johanns.
Senator Johanns. Thank you, Mr. Chairman.
Mr. Dimon, let me just start out and say thank you for
being here today. I have listened to the various questions
about the trade, and I think to summarize everything, you have
acknowledged it definitely was a dumb move. The loss is
unfortunate. You have apologized for that. You have kind of
walked us all through that. So what I want to do is ask you
about some things maybe at a 25,000-30,000-foot level, if I
could.
Starting out, how many regulators do you have onsite in
your organization from some Federal entity?
Mr. Dimon. I believe there are hundreds.
Senator Johanns. Hundreds?
Mr. Dimon. Yes. And it is across multiple regulators.
Senator Johanns. Right. When something like this pops up,
are the channels clear anymore as to who you deal with and who
is regulating what and who you need to be paying attention to?
How do you deal with that?
Mr. Dimon. Look, we are always going to treat the
regulators the way they deserve to be treated. Whatever the
system is, we have to deal with it. But we have people who are
assigned specifically to deal with regulators--the FDIC, the
OCC, the Fed, now the CFPB--and we deal with all of them. On
this particular issue, the first three are all engaged--the
OCC, the Fed, and FDIC.
Senator Johanns. How much have your regulatory costs
increased as a result of Dodd-Frank, the Volcker Rule, whatever
it is?
Mr. Dimon. You know, I have estimated it, but I recall a
rough estimate that we are talking about probably about $1
billion a year, and it is across systems, technology, risk,
credit, compliance. It cuts across everything, maybe 8,000
programs we run. So we have to accommodate rules. These are
rules not just of the U.S. The rules come out of Brussels and
the rules come of out the U.K., et cetera. So we are going to
do all those things, meet all the requirements, but it will be
a little costly.
Senator Johanns. One of the things that I have maintained
in many hearings as we have examined Dodd-Frank before and
after its passage is that there is just a point at which it is
economically better business to do business elsewhere than the
United States. Do we run that risk with Dodd-Frank, that
literally we have made life so complicated, so hard to navigate
through, that you have enterprises who decide, look, I will
just go to Singapore or wherever to do business?
Mr. Dimon. We are going to be fine ourselves. We will be
able to navigate all that. I talk to a lot of business people,
and I do hear a lot of people saying it is easier to be
overseas, and several companies have moved overseas recently.
Senator Johanns. My concern is it does not stop there. What
I saw about Dodd-Frank, you know, we started out with, I think,
a laudable purpose. Let us try to figure out what happened in
2007-08 and how do we fix it. And then all of a sudden farmers'
co-ops were showing up in my office and saying to me, ``What
are you doing?'' And I am thinking, ``Well, how did a farmers'
co-op have anything to do with what happened in 2007 or 2008?''
I have not verified this because somebody just told me this
last night--and maybe you are aware of it--but somebody who
worked with this Banking Committee mentioned last night at an
event I was at that there had not been a single bank charter
last year in the United States, and it had been 78 years since
that had happened. Do you have any information on that?
Mr. Dimon. I was unaware of that.
Senator Johanns. Mr. Dimon, it further occurs to me that at
an enterprise as big and as powerful as yours, you have got a
lot of fire power, and you are just huge. We will find a way to
navigate what has happened here. What I worry about, though,
you are not located in my State, and I doubt that you are
probably considering locating in my State, although it would be
a great place for you to do business.
Mr. Dimon. We would hope to be there one day.
Senator Johanns. Yes. What I suspect is happening is that
our medium to small banks are now trying to navigate through
this very complex legislation. These are banks where maybe they
employ a dozen people or two dozen people, and they are just
going to give up. What is your impression of that opinion?
Mr. Dimon. Like I said, we bank a lot of smaller banks, and
I think some of these things are harder on smaller banks than
they are on some of the larger banks, unfortunately.
Senator Johanns. Thank you, Mr. Chairman.
Chairman Johnson. Senator Tester.
Senator Tester. Yes, I want to thank you, Mr. Chairman. I
appreciate you holding this important hearing. Thank you, Mr.
Dimon, for being here. I think it gives us a better chance to
understand how and why JPMorgan, in your words, committed
egregious and self-inflicted mistakes from an ineffective,
poorly monitored, poorly constructed hedging strategy.
I would like to focus, however, on JPMorgan's role in the
days leading up to MF Global's bankruptcy, resulting in the
loss of about $1.6 billion of client funds when MF Global was
obligated by law to segregate and protect.
In its final days of operation, MF Global shuffled hundreds
of millions of dollars around from account to account in what
MF Global treasurer Edith O'Brien described as a ``shell
game.'' MF Global customers, including many Montana farmers and
ranchers, saw their funds wiped away overnight in this so-
called shell game and the firm's failure to segregate these
funds.
Though MF Global's commodity customers have received about
72 cents on the dollar back, the fundamental trust that many
farmers and ranchers have in the commodity futures system has
been broken because of the firm's violation of a law as well as
their failure to segregate client funds, which is a bedrock of
commodities trading.
We have new information on the release of MF Global trustee
James Giddens' investigation and recommendations last week, and
we absolutely need to get to the bottom of this issue to ensure
that Montana farmers and ranchers and others see their funds
returned and that those responsible for the breach of
segregated customer funds are held accountable.
Over 100 of my constituents had their accounts raided by MF
Global to cover the firm's institutional losses, and if anybody
was complicit in this, I want to know about it.
Mr. Dimon, on May 18th, Mr. Giddens announced JPMorgan's
return of approximately $168 million in cash, proceeds of
excess collateral that your firm held at the time of MF
Global's liquidation more than 7 months ago. The funds
rightfully belong to MF Global customers, including hundreds of
farmers and ranchers. Why did it take your firm 7 months to
return these funds?
Mr. Dimon. We were a bank to MF Global, and the second they
had problems, we immediately went to the trustees and the
courts, told them exactly what we had and what we did not have,
and we have been waiting for them to finish their work before
we released anything. There was no hiding anything. We have
cooperated every step of the way with the authorities.
Senator Tester. Well, there was money released initially, I
believe, when MF Global started down this path by your firm,
but there was $168 million, I believe, that was held 7 months.
Why? If it was their dough, it should have went to them.
Mr. Dimon. I think we were waiting for the guidance of the
court and the trustee.
Senator Tester. OK.
Mr. Dimon. We were not deliberately withholding the money.
Senator Tester. OK. I note that Mr. Giddens' investigation
singled your company out. It highlighted your ongoing
negotiations with Mr. Giddens and potential litigation that he
may bring against JPMorgan Chase. It is clear that in the final
days before MF Global's bankruptcy, JPMorgan had significant
concerns about the health of the firm, MF Global, and its
compliance with regulations guiding the protection of customer
funds. Your firm was intensely focused on whether collateral
proposed by MF Global on October 28 and 29 was paid with
customer segregate funds.
According to Mr. Giddens' investigation, your firm took
steps to protect itself and its exposure to MF Global, placing
MF Global on debit alert, limiting the transactions the firm
could take, and increasing collateral requirements.
Mr. Dimon, despite repeated attempts by very senior risk
management officials at your firm, including Mr. Barry Zubrow,
to determine whether collateral for MF Global's $175 million
transfer request on October 28th was in compliance with the
rules regarding the segregated funds account, MF Global did not
sign a confirmatory letter that your firm demanded. And yet
without this confirmation, and your suspicions, JPMorgan Chase
ultimately transferred the funds and accepted the collateral.
Were you aware of the effort by senior risk management
officers at your firm to seek compliance confirmation from MF
Global?
Mr. Dimon. Not at the time I was not, no.
Senator Tester. So why did JPMorgan Chase relent on efforts
to secure signatures of the letter and allow the transfer
without written assurance?
Mr. Dimon. I think the transfer had been made, and we were
doing a follow-up letter, which was not required. We were
asking them to make sure that they had done the right thing.
Senator Tester. So what you are saying is that even though
you had placed MF Global on debit alert and you increased
collateral requirements, when they asked you to transfer the
money, there was no conversation about whether this money was
segregated funds, you just transferred it?
Mr. Dimon. They transferred it to us, yes.
Senator Tester. It was within your institution, they
requested it transferred?
Mr. Dimon. Right. It was covering overdraft from the prior
day or something, yes.
Senator Tester. So the question is, the real question here
is: You guys were concerned about MF Global. You guys know the
industry better than anybody sitting up here. You guys knew
what was going down with MF Global because you put them on
debit alert. They had requested money to be pulled out of--that
was in your facility to be sent to another facility. There was
some question by senior management officials in your firm
whether this was segregated money, money that farmers were
hedging with, and in your words, hedging was to protect a
company in bad outcomes, from bad outcomes.
Can you tell me if JPMorgan had any obligation to protect
those funds?
Mr. Dimon. My lawyers just gave me a note saying they gave
oral confirmation and then went bankrupt.
Senator Tester. OK. So you got oral confirmation on this.
Is that general operating procedure?
Mr. Dimon. No. The general operation procedure is you do
not have to ask at all.
Senator Tester. OK.
Mr. Dimon. It is their responsibility to make sure they
have customer funds in----
Senator Tester. Even when----
Mr. Dimon. We were using an excess of precaution.
Senator Tester. Even when a company is going belly up?
Mr. Dimon. Yes, even when a company is going belly up. That
is why we were trying to make sure--and we were also trying to
help them at that point in time. It was a debit alert.
Senator Tester. I appreciate that. My concern here is
because there were a lot of farmers that hedged to protect
themselves from bad outcomes, and if this money was transferred
and it was segregated money, there is a real problem there.
That is all. Just looking out for my folks.
Mr. Dimon. I hope they are going to get all their money
back. I still believe they will, by the way.
Senator Tester. OK. Well, I just want to make sure that the
individuals are held responsible.
I want to thank the Chairman for his flexibility on the
time, and I want to thank Mr. Dimon for being here, and thank
you for the hearing, Mr. Chairman.
Chairman Johnson. Senator Moran.
Senator Moran. Mr. Chairman, thank you very much.
Mr. Dimon, thank you for voluntarily being here. You
responded to someone's question earlier, describing the things
that are good about smaller institutions and things that create
problems in larger institutions. I do not have that list in my
memory yet, but ``hubris'' stands out, ``arrogance.'' How do
you manage a company the size of JPMorgan and overcome that
list of adjectives that you described are just a natural
occurrence within a large organization?
Mr. Dimon. Well, they can occur in smaller organizations,
too. Look, we hope we have very good people----
Senator Moran. You are not talking about the Senate,
surely.
Mr. Dimon. No.
Senator Moran. OK.
Mr. Dimon. Definitely not. Not now.
[Laughter.]
Mr. Dimon. Look, I think all companies want to have great
employees, open, you know, always analyze things, always
challenging yourself, always learning from your mistakes, that
people are very honest all the time, that you share reports. So
I think there are ways you can avoid the negatives of being a
big company. So hopefully we foster the right kind of culture
at JPMorgan.
At JPMorgan we do believe we are in business to serve
clients. That is job number one, and we do it every day around
the world in 2,000 communities around the world, and we hope
our people believe that and that it is in their hearts to do
the right thing every day the right way. We ask them to treat
people the way you would treat, you know, your friends or your
parents. We ask them, if you see a problem where things are
going wrong, raise your hand and call the right people. And we
have constantly tried to improve our products and services.
Sometimes there--and we try to acknowledge legitimate
complaints. There have been a lot of legitimate complaints
about some banking products and services. We try to acknowledge
them and fix them.
Senator Moran. Well, Mr. Dimon, how you manage at JPMorgan
really is the business of your board of directors, your
shareholders, but it does have consequences to those of us who
believe in a free market system, its value, its merits, and I
hope that that--I have the sense, and I hope that it is the
case, that that is a responsibility that you understand. In
protecting this American free enterprise system, how JPMorgan
and every other company, large or small, conducts themselves,
what behavior they exhibit really matters in our ability to be
an advocate for a free market system that creates jobs and
economic opportunity and allows Americans to pursue the
American dream. Anything I am missing here?
Mr. Dimon. I could not agree more.
Senator Moran. Let me ask a more specific question. Our
Ranking Member, Mr. Shelby, Senator Shelby, talks often about
sufficient capital as the greatest deterrent toward too big to
fail, toward systemic risk, and I certainly agree with that.
One of the other components that is involved, I think, in
trying to make certain that the taxpayers are not responsible
for the demise of a company like yours, a financial institution
like yours, is the living will, so-called living will. Would
you describe to me what process JPMorgan has gone through to
develop that living will, how transparent it is, what role the
regulators play? What evidence, if we saw the living will
developed for JPMorgan, would give me or others satisfaction
that your company can be dissolved without a call upon taxpayer
dollars?
Mr. Dimon. I think I would agree with most of the people
here. We have to get rid of anything that looks like too big to
fail. We have to allow our big institutions to fail. It is part
of the health of the system, and we should not prop them up. We
have to allow them to fail. And I would go one step further.
You want to be sure that they can fail and not damage the
American economy and the American public.
So a big bank, you want to be in a position where a big
bank can be allowed to fail. I would not call it
``resolution.'' I think that is the wrong name. I think we
should call it ``bankruptcy.'' Personally I call it
``bankruptcy for big, dumb banks.'' I think when you have
bankruptcy, I would have claw backs. I would fire the
management. I would fire the board. I would wipe out the equity
and the unsecured should only recover whatever they recover in
a normal bankruptcy. This resolution authority, which starts to
put the structure in place, and the living will, to me what it
means is doing--giving information to regulators that they know
how to do it. We do operate around the world. It is a little
more complex.
Remember, the FDIC has taken down a lot of large banks
without damaging the American public, including WaMu, many
years ago Continental Illinois, you may remember American
Savings Bank. It is a little more complex now. We have to
update it.
So they need to know what happens to this legal entity,
what happens to that legal entity, what are you going to do if
this thing happens. And we have actually filed recently an
analysis and report how they would go about dismantling
JPMorgan that did not cost the taxpayer.
We are also in favor of one other thing, by the way, which
is if the FDIC ever puts money into this bank--but I think the
bank should be dismantled after that and the name should be
buried in disgrace. So there is a little Old Testament justice
here. But after, even if it ever cost the FDIC money, like
today, that should be charged back to the other big banks. So
today we pay for the--I know it is a Government program. It is
paid for 100 percent by JPMorgan. During this crisis we will
pay them $5 billion. So we are paying the FDIC.
I also think it puts a hell of an incentive on the other
big banks to collaborate and make sure rules are in place that
we do not jeopardize each other.
Senator Moran. If JPMorgan became a big, dumb bank and was
in serious financial difficulty, is your sense that it would
be--you do not want to use the word ``dissolved.'' That the
circumstance would be concluded with JPMorgan's demise and no
cost to the taxpayer?
Mr. Dimon. Yes.
Senator Moran. Thank you.
Mr. Dimon. That is the objective, yes.
Chairman Johnson. Senator Kohl.
Senator Kohl. Thank you, Mr. Chairman.
Mr. Dimon, I understand that JPMorgan is lending more money
to businesses, and I appreciate that. However, it appears that
your bank's lending is not keeping pace with the deposits that
you are taking in. Last year, JPMorgan reported that it had
$1.1 trillion in deposits. This, of course, is more deposits
than any other bank in the United States. But the other big
banks reported loan-to-deposit ratios that are 10 to 20 percent
higher than your bank's. It seems like lending to American
businesses would be less risky than what was being done in the
London office.
Is your loan-to-deposit ratio lower than your peer banks
because you are perhaps prioritizing these risky trading
activities over lending? Can we hope that you are going to
focus more on lending in the American market?
Mr. Dimon. So we are making all the good loans we can in
all due haste. We are a global money center bank, and what that
means is we have deposits from Governments around the world,
from sovereign entities, from large corporations that can be
taken out tomorrow. So we do have to keep what we call
liquidity. We have several hundred billion dollars right now
invested, like I said, in central banks around the world in
case the biggest companies call us up and say, ``Send me the $5
billion.'' So we are bank for people who can take--so we need
huge liquidity funds.
Senator Kohl. But I understand, and I think the records
indicate, that your reported loan-to-deposit ratios--your other
big banks, their reported loan-to-deposit ratios are 10 to 20
percent higher than yours. That would seem to not square with
your statements that you are wanting to lend but you do not
have the customers to lend to?
Mr. Dimon. No, our middle-market loans are up something
like 12 percent on average the last 8 quarters. Our small
business loans are up 52 percent. Large corporate loans change
all the time because corporations have a lot of choices out
there. Our mortgages I think last quarter was $40 billion,
which was a huge number of new mortgages.
What I am saying is we need--we are not like all other
banks. We do need to keep a lot of cash around to deal with
immediate cash demands of the people who leave it with us. When
you are talking about some of the biggest companies in the
world, they can move $5 or $10 billion in a day.
Senator Kohl. I appreciate that. Just one final comment.
Again, the biggest banks with whom you are competing are
generally described in the same way you just described yours,
and their loan-to-deposit ratios are higher than yours.
Mr. Dimon. They are all different for historical reasons.
Senator Kohl. Mr. Dimon, Senate offices like ours often
hear from constituents who are trying to get a modification on
their home loans or to stave off foreclosures. They typically
come to us because they are having trouble getting through to
their lender. Sadly, it is all too common for our constituents
to say that the bank lost their paperwork. And 4 years since
the crisis began, we are still hearing about these mix-ups. As
a constituent, and just one of many, I am sure, who had a loan
with JPMorgan noted recently, ``I do not want to lose my house
because they cannot keep their paperwork straight.''
So the question is: Why have banks been unable to sort out
these paperwork problems, Mr. Dimon?
Mr. Dimon. I would agree with the constituent. They should
not lose a home because we failed in their paperwork, so I
would love you to send that to me, and I will follow up on that
one right away. We have hired 20,000 people to deal with
default modifications. We have offered modifications of 1.2
million loans. We have offered alternatives to foreclosure to
700,000 loans. We are doing it better, we are doing it faster
today. We have put in more systems to deal with it.
I have to confess we were not very good at it when the
problems really started. We were overwhelmed, yes.
Senator Kohl. Mr. Dimon, we, I am sure, all agree that the
CIO office carries out very complicated transactions and that
you employ some of the very smartest people in the industry to
work for you. Your bank undertakes such complicated business on
the one hand, but on the other hand, oftentimes you and other
banks of your size cannot seem to do something as simple as
straighten out your own paperwork promptly.
Does the plight of the American homeowner have the same
attention or should it have the same attention that the bank
gives to its CIO office?
Mr. Dimon. Yes, it should. We should do it properly, and
for anyone in this room, if they have issues that we are not
following up on probably your constituent, send it to me or
send it to our Government Affairs staff, and we will take care
of it right away.
Senator Kohl. Thank you, Mr. Dimon.
Mr. Dimon. You are welcome.
Senator Kohl. Mr. Chairman, thank you.
Chairman Johnson. Senator Wicker.
Senator Wicker. Thank you, Mr. Chairman, and thank you, Mr.
Dimon. I think this has been very instructive to the public and
to the Members of the Committee.
I think you told Senator Shelby that the purpose of hedging
is to earn a lot of revenue in the event of a crisis, and I
think you said that hedging worked to an extent in 2008 for
your company. Can you quantify the extent to which hedging
worked in 2008?
Mr. Dimon. I do not recall the 2008 year, but this
synthetic credit portfolio did earn several billion dollars of
income in the 3 or 4 years before it just lost some of it.
Senator Wicker. OK, so----
Mr. Dimon. We can follow up and give you more specific
detail.
Senator Wicker. OK. Well, I think that is probably what we
need to do.
Would the Volcker Rule--I think you also said you did not
really know what the Volcker Rule is.
Mr. Dimon. Yes.
Senator Wicker. Boy, if you do not, we do not either. But I
think you know how it is being drafted, and as it is currently
drafted, how would that have affected the CIO's ability to do
that hedging in 2008 and prevent several billion dollars' worth
of losses?
Mr. Dimon. I think you are allowed to portfolio hedge under
the current construction of Volcker. I think you should be
allowed to. What it morphed into, I do not know what the
current rule would do. I think we should just step back for 1
second. I think the Senators will agree with me. The really
important part about the Volcker Rule is not portfolio hedging.
It is the ability to actively make markets. It is the ability
to actively raise capital for companies and clients and
investors. And we have the widest, best, deepest, and most
transparent capital markets in the world. The capital markets
of America are part of the great American economic business
engine. We have the best in the world.
We had some problems. We should recognize we have the best.
We do not want to throw the baby out with the bath water. How
does it benefit you all that we have the best capital markets?
The cost of buying or selling a share of stock is a tenth of
what it was years ago. The cost of doing a corporate bond is a
tenth of what it was years ago. The cost of doing an interest
rate swap is a tenth what it was years ago. The benefit is
anyone, investors who buy or sell securities, does it at a
cheaper price, which means they--so Fidelity or PIMCO, the
people they invest for, are doing things cheaper. That is a
good thing for them. It also allows corporations to issue debt
cheaper and quicker. So when a large corporation wants to issue
$5 billion, it can be done in a day around the world. They get
a better deal at a cheaper price than they otherwise would have
gotten.
The liquidity in the markets keep the spread low and
benefits both investors and issuers. But secondary markets and
the primary markets are directly related. If the costs are low
here, if consumers and investors are educated about companies--
and we spend, you know, $1 billion a year educating people
about companies--then these issuers can do it. Remember, the
investor is not Fidelity. It is the person that Fidelity is
investing for. And those are retirees, mothers, veterans, State
and municipal plans. It is a good thing.
The Volcker Rule, when it came out, has so many pieces to
it, all we have been urging people is do not think of it as
binary more or less; think of it as traffic laws. Some cars
should go 65, some should not. Some streets should be
different; some lights should be bright. Things should be done
right.
We have the widest, deepest, and best capital markets in
the world. It would be a shame to shed that out of anger or
something like that.
And, remember, all these securities are different. If we
are going to make markets in liquid securities, we need to own
that for a while. We cannot turn them over very quickly. We
need to buy securities in anticipation of investor demand. We
need to buy securities from you that we may not be able to sell
tomorrow but you want to sell right now, and you are our
client, and we make a little bit of money every time it
happens. Not a lot. We do not take a lot of speculation in
these areas.
So all we would ask when it comes to Volcker is go through
the detail to make sure we get it right, that we end up with
the widest, best, deepest capital markets in the world. I do
not want to be sitting here in 20 years trying to figure out
why it is elsewhere.
Senator Wicker. Thank you. I hope you can appreciate that I
only have 5 minutes.
[Laughter.]
Senator Wicker. And it is doubtful----
Mr. Dimon. I have been waiting to say it. I am sorry. I
took up your 5 minutes.
Senator Wicker. It is doubtful I will get a second round
here. I think you told Senator Corker that the financial system
is safer today and you cannot say that Dodd-Frank has helped at
all. But I think then you went on to say that actually the
regulation regime is not necessarily stronger today, but it is
more complex and you do not really know what the jurisdiction
is. Have I paraphrased your testimony correctly?
Mr. Dimon. I think some of the things of Dodd-Frank and
other things made it safer, but the most important thing was
higher capital, higher liquidity, better risk management, and a
lot of the things that caused the problem do not exist anymore.
And that was not because of regulations. That was because of
markets, like off-balance-sheet vehicles and subprime
mortgages.
Senator Wicker. And you said something else that really
sort of caught me by surprise, and that was this testimony
about that nobody got all the parties in a room with people in
your industry--Democrats, Republicans, and folks affected--and
talked about what was needed and what really needed to be
fixed. Did I hear you correctly there?
Mr. Dimon. Yes.
Senator Wicker. Did you volunteer to be part of that
conversation?
Mr. Dimon. Yes. I and lots of other folks will do whatever
you want. We will even get apartments down here. Let us go
through in detail. We spoke to lots of people, so a lot of
people are interested, and our folks did a lot of analysis and
research. But, you know, it lacked, I think, the real
collaboratives that should have taken place. I do not know if
it was it was in a rush. I know the anger led to that. But I
think it would have been better had there been more
collaboration and at the end of the day we could all shake
hands, new system in place, and move forward.
Senator Wicker. And I am going to follow up with a question
for the record, but let me ask this question about the living
will. Are you telling this Committee that JPMorgan Chase has a
living will that has been approved by Government regulators?
Mr. Dimon. No. It has been drafted and circulated and given
to some of the regulators. They will be responding to this. I
think it will take several iterations to get it right. And they
have to coordinate it with foreign entities, so it is going to
take a little bit of time.
Senator Wicker. Thank you.
Chairman Johnson. Senator Merkley.
Senator Merkley. Thank you very much, Mr. Chair, and thank
you for coming before the Committee, Mr. Dimon.
In 2008 and 2009, your company benefited from half a
trillion dollars in low-cost Federal loans; $25 billion in TARP
loans, of TARP funds; untold billions indirectly through the
bailout of AIG that helped address your massive exposure in
repurchase agreements and derivatives.
With all of that in mind, wouldn't JPMorgan have gone down
without the massive Federal intervention, both directly and
indirectly, in 2008 or 2009?
Mr. Dimon. I think you were misinformed, and I think that
misinformation is leading to a lot of the problems we are
having today. JPMorgan took TARP because we were asked to by
the Secretary of the Treasury of the United States of America,
with the FDIC in the room; the head of the New York Fed, Tim
Geithner; the Chairman of the Federal Reserve, Ben Bernanke. We
did not at that point need TARP. We were asked to because we
were told, I think correctly so, that if the nine banks there--
and some may have needed it--take this TARP, we can get it to
all these other banks and stop the system from going down. We
did not----
Senator Merkley. I am going to cut you----
Mr. Dimon. We did not borrow from the Federal Reserve
except when they asked us to. They said, ``Please use these
facilities because it makes it easier for other people to do
it.''
Senator Merkley. We would all like to be asked----
Mr. Dimon. And we were not bailed out by AIG. OK? If AIG
itself--we would have had a direct loss of maybe $1 billion or
$2 billion when AIG went down, and we would have been OK.
Senator Merkley. Then you have a difference of opinion with
many analysts of the situation who felt the AIG bailout did
benefit you enormously. And I am not going to carry that
argument----
Mr. Dimon. Well, they are factually----
Senator Merkley. Sir----
Mr. Dimon. They are factually wrong.
Senator Merkley. Sir, this is not your hearing. I am asking
you to respond to questions. And I also only have 5 minutes. So
let us agree to disagree, but I think that many analysts would
reach the conclusion that if you would apply that Old Testament
justice in 2008 and 2009, JPMorgan would have been gone down
and you would have been out of a job. And it goes to the
enormous frustration of how many companies in the history of
the planet have been offered half a trillion dollars in low
interest rate loans? Not many. But the basic concept behind the
Volcker firewall is that banks are in the lending business, not
in the hedge fund business.
Do you share that kind of basic philosophical orientation?
Mr. Dimon. We are not in the hedge fund business.
Senator Merkley. OK. Well, I wanted to turn to the
Bloomberg report of a few days ago, and it reports that Jamie
Dimon ``created the CIO, elevated Drew from treasurer to chief
investment officer, had her report directly to him [and]
encouraged her department, which had invested mostly previously
in Government-backed securities, to seek profit by speculating
on higher-yielding assets such as credit derivatives, according
to [more than] half a dozen former executives of the company.''
That sounds like operating a hedge fund and doing so at
your direction with Government-insured deposits.
Mr. Dimon. Senator, here are the facts: We have $350
billion of assets in CIO. The average rating is AA-plus. The
average maturity has a duration of 3 years, not 20 or 30. The
average yield is 2.7 percent. Those characteristics are of a
very conservative portfolio.
One of the other Senators mentioned--and in addition to
that, we have $150 billion sitting in central banks around the
world. The other Senator just pointed out that we do not make
enough loans. Less loans to deposits is considered
conservative, not aggressive.
Senator Merkley. So you would disagree----
Mr. Dimon. In this other area, yes, I think there is a
legitimate complaint, debtor credit, yes.
Senator Merkley. OK. So David Olsen, former head of credit
trading, said, ``We want to ramp up the ability to generate
profit for the firm. This is Jamie's new vision for the
company.'' But you would fundamentally disagree that that was
your instruction in building the CIO unit?
Mr. Dimon. I do not believe everything I read. I hope you
do not either.
Senator Merkley. You disagree?
Mr. Dimon. I do not know what he means, but I would have to
have more details of the conversation.
Senator Merkley. OK. Well, here is the general picture
which emerges: It is one in which the assets in the CIO were
expanded dramatically fivefold over a 4-year period. Numerous
executives of your firm testified that at your personal
direction they were to invest in higher-yielding assets rather
than traditional Government-backed securities. And yet when
those bets go bad, instead of taking responsibility for it, you
blame it on the unit that you set up. Shouldn't you take
personal responsibility since they were following the game plan
that you personally laid out?
Mr. Dimon. The $350 billion portfolio is conservative and
has an unrealized gain of $7 or $8 billion. I have already said
the synthetic credit, that is why I am here. We made a mistake.
I am absolutely responsible. The buck stops with me.
Senator Merkley. The heart of the Volcker Rule addresses
liquidity management and says that the funds that are in
between loans, if you will, should be invested in either
Treasuries or Government-backed instruments. Taking those same
deposits and putting them into high-risk investments and credit
derivatives is a fundamentally different strategy than laid out
in the Volcker Rule. Therefore, I am puzzled by your comment
early on that you are not sure whether or not the vision laid
out by the Volcker firewall between hedge funds and banking
would have prevented the type of operation that you set up in
London.
Mr. Dimon. The $350 billion was very conservatively done
and I--and is allowed under Volcker, and you want us to have a
nice conservative portfolio. I have already confessed to the
sins of the synthetic credit side. We will not do something
like that again.
It does not stop us from doing the good stuff, the 350 we
are making into $700 billion of loans. We are doing what a bank
is supposed to do. We do it every single day.
Senator Merkley. So I hear from what you are saying that
your game plan going forward is when you have surplus deposits
and you are managing them, you are going to return to the
strategy of relatively safe, relatively liquid investments
rather than operating, if you will, in the derivatives world.
Mr. Dimon. The current strategy is relatively safe and
relative liquid.
Senator Merkley. Thank you very much.
Mr. Dimon. You are very welcome.
Chairman Johnson. I understand that we have two votes
beginning at noon.
Mr. Dimon. Please take your time.
[Laughter.]
Chairman Johnson. Senator Vitter.
Senator Vitter. Thanks, Mr. Chairman. Thanks very much, Mr.
Dimon, for being here and for your testimony.
You made the statement, ``The answer is not more
regulation. It is smarter, stronger regulation.'' And I
absolutely strongly agree with that. And, unfortunately, I
think a lot of Dodd-Frank, most of Dodd-Frank has been more
regulation, which in many cases has been more confusing,
unhelpful regulation.
Another way I might put it is I think we need more systemic
changes, less micromanagement. And the big systemic changes
that are under discussion that impact what we are talking about
are capital requirements and the Volcker Rule, so I wanted to
explore that with you.
Capital requirements. I understood when you criticized
previously Basel III that at least part of the criticism was
higher capital requirements for bigger banks. Is that correct
or not?
Mr. Dimon. No, it was more about the details behind it.
When we went through the crisis, we had 7 percent Tier 1 Basel
capital. During the worst time ever, we bought Bear Stearns and
WaMu, and those capital ratios never went down. Today we have
10 percent Basel I, and all the new rules--now the new G-SIFI
will be at 14 percent Basel I. So there is an issue about how
much capital is enough. We never argued about having more
capital, and we have no problem at 10, 11, 12. But the
calculation should be done fairly and properly. Some of them I
think make it harder to have proper capital, and I particularly
have complaints about how the G-SIFI charges are being done.
Senator Vitter. In general, do you think bigger banks, very
big banks, should have clearly higher capital requirements?
Mr. Dimon. I would be fine with that, yes, in general.
Senator Vitter. And compared to the sort of 7-percent floor
for a bank as big as yours, where do you think that should be?
Mr. Dimon. I thought they should have--in my own opinion,
they should have come in and said, ``You all, if you are over a
certain size, you can have 8, and we will re-look at it down
the road, because 8 is plenty.'' And it does not create
confusion. People do not know what their real requirements are
yet because the rules are not in place. It takes years to come
in----
Senator Vitter. But your suggestion is just 8, and clearly
the requirements are beyond 8.
Mr. Dimon. If it were me, I would say just 8, and let the
regulators to have time, if they think that is the wrong
number, a couple years from now change it again. This is not a
once-in-a-lifetime change. What I was a little worried about
was we create what I call capital confusion. People do not know
what the capital is, where they are supposed to be, when they
are supposed to get there, and how they are going to be
evaluated. That is not conducive to lending. That is conducive
to people retaining their capital and reducing their balance
sheet.
Senator Vitter. Clearly, there are other folks who--for
instance, Switzerland is requiring, I think, 19 percent of
their two large banks. You think that is clearly overkill?
Mr. Dimon. Yes. The 19 is not comparable to my 10.
Senator Vitter. So what would be an apples-to-apples
comparison?
Mr. Dimon. It is much higher, but I do not remember the
number. But they have a different problem. Those banks dwarf
the size of those countries.
Senator Vitter. OK. The Volcker Rule, is there a true, real
version of the Volcker Rule that you think makes sense and
should be implemented?
Mr. Dimon. I think we are going to really struggle to get
it right because it was written to vaguely that it is going to
be hard for the regulators to actually come up with rules that
make it easy for market makers and easy for regulators.
Senator Vitter. Well, I guess I am not asking about----
Mr. Dimon. But if you said----
Senator Vitter. ----the current process. I am asking about
if we started with a blank sheet of paper, would you support a
properly designed but true version of the Volcker Rule? Or
would you say there should be no such----
Mr. Dimon. I thought it was unnecessary when it was added
on top of all the other stuff.
Senator Vitter. So you think it is basically unnecessary.
Mr. Dimon. I think it is unnecessary, and maybe there are
pieces that--if you said the intent is that we do not want
companies to take so much risk in their trading books that they
sink the company, I think there are ways to do that.
Senator Vitter. And what are the sort of----
Mr. Dimon. But I would not have tried to write the rule as
currently constructed. I think it is just too confusing.
Senator Vitter. What are sort of the systemic simple-
regulation ways to do that?
Mr. Dimon. This is against trading books. Proper capital,
proper liquidity. Make sure that most of it, as appropriate for
the product, is done with customers. Make sure that aged
inventory is turned over, proper risk measure, proper risk
controls.
Senator Vitter. OK. Well, again, I strongly endorse the
overall concept of not more regulation but smarter, stronger
regulation. I guess what I am concerned about, sort of like the
Dodd-Frank reaction to the crisis, I do not think the solution
is we are going to have really smart regulators this time
instead of just simply smart regulators before. We are going to
have more regulators. And, quite frankly, my concern about some
of your testimony about the Chase reaction is that I sort of
hear that tone in you all's reactions, well, we are going to be
smarter about it this time, we are going to get it right this
time, we are going to really bear down this time. And I am
wondering if there should not be a more systemic change within
the company to avoid this.
Mr. Dimon. I understand your point, yes.
Senator Vitter. Are there any more truly systemic changes
that have occurred in light of this incident?
Mr. Dimon. In our company?
Senator Vitter. Yes.
Mr. Dimon. No, I do not think--you know, we are going to
make sure that there are no other issues like this around the
company. But we operate in a risk business. I can never tell
you we are not going to make a mistake. I might be here----
Senator Vitter. No, I am not asking you to do that, but
have there been more broad-scale systemic changes within the
company directly in reaction to this incident?
Mr. Dimon. Just a thorough review of every single thing
that happened, and we do think it is isolated.
Senator Vitter. OK. Thank you.
Mr. Dimon. You are welcome.
Chairman Johnson. Staff tells me that they will hold up the
vote for a few minutes. Senator Hagan.
Senator Hagan. Thank you, Mr. Chairman. Thank you for
holding this hearing. Mr. Dimon, thank you for your forthright
testimony and answers to the questions.
I really want to talk in my first question about the
trades. I would like to get some perspective about the size of
the trade. We saw press reports about the London Whale and
investors talking about abnormal movements in swap indexes. How
could the position be so large without coming to the attention
of management, regulators, and shareholders?
Mr. Dimon. Yes, so, Senator, I am going to have to decline
to comment on some of that because my first job is to protect
my company and to manage, and I think disclosing certain things
could hurt my shareholder, and I do not want to be put in that
position.
I would say some of the information that was public was
accurate, some was not. It was a complex series of trades. It
was not just one single thing. And like I said, we are managing
that risk down. I can go through all the same reasons we should
have got it earlier, yes, it should never have gotten this
size.
Senator Hagan. Let me talk about VaR. In May, JPMorgan
changed how it calculated the amount of money that the firm's
Chief Investment Office could lose in a single day. Can you
discuss your rationale for making the changes to the Value at
Risk models?
Mr. Dimon. Right. So the old model had been effective I
think until about January 15th of this year. The new model was
put in place. On April 13th, we had no reason to believe the
new model was not better, nor did we realize the severity of
the problem we already had.
Shortly after that, which is why we went public, we find
that the 10-Q was going to be filed on May 4th, which we
delayed. We filed it on May 10th. Between the last weeks of
April and the first parts of May, we realized the problem we
had and the problem in the model. So when we filed the 10-Q on
May 10th, we corrected, we made announcements to correct the
prior announcements we made that were wrong, and we put the old
model back and said because it was, we thought, more accurate
than the new model. So we made that disclosure to our
shareholders to the best that we could.
Senator Hagan. Can you explain why the new model failed to
predict the magnitude of losses in this case?
Mr. Dimon. You know, I am going to have to give you more
detail later, but both these models back-test, and the back-
tested better than the old model, is what I believe. And so
these are statistical testing of how it would have--what would
have been more accurate looking back over the last year or the
last 2 years or the last 3 years. So I think I mentioned with
models that the future is not the past.
Senator Hagan. Right.
Mr. Dimon. Things change. Concentration, liquidity,
people's views about Europe, credit spreads, high-yield versus
investment grade, and the old model was better at predicting
some of the things that happened in April and May than the new
model.
Senator Hagan. Some of the banking regulators through their
participation on the Basel Committee are considering a move
from the VaR to ``expected shortfall'' models. Would a move to
expected shortfall provide regulators and investors more
information about the possible losses that a bank could
experience?
Mr. Dimon. I do not know because I do not know exactly if
we calculated that. Like I said, VaR is one measure. We also
look at a lot of stress tests. I think the expected default is
more about stress testing it, and I do think it is important
that people stress test properly. But managements cannot rely
on models to run businesses. They are one input. In addition to
that, there is judgment, knowledge, experience, and the general
fear you learn when you have survived for 56 years how badly
things can go wrong.
Senator Hagan. Thank you.
In your testimony you indicated that one of the reasons
that the Chief Investment Office started adding positions in
the synthetic credit portfolio was to reduce risk in
anticipation of Basel requirements. Can you explain why these
particular positions would be problematic under Basel?
Mr. Dimon. If I remember correctly, under Basel I the risk-
weight assets of the positions--I think it was around the
fourth quarter of 2011--were about $20 billion. Under Basel III
it was estimated to be something like $60 billion. So I think
we thought it was ineffective use of risk-weighted assets and
the intent was to bring that down over time.
Senator Hagan. Why didn't the other units at the bank
experience similar reductions in risk or similar issues
reducing that risk?
Mr. Dimon. There were other parts of the company that we
looked at the new Basel III and asked them to start to reduce
what I would call ineffective use of Basel III RWA. We still
have customers. You cannot always reduce it because sometimes
it is driven more by the customer than by our own decisions.
Senator Hagan. Thank you.
Thank you, Mr. Chairman.
Chairman Johnson. Senator Bennet.
Senator Bennet. Thank you, Mr. Chairman, and I would like
to thank you and the Ranking Member for holding this hearing.
Mr. Dimon, it is good to see you. Thanks for being here
today. And I am last. I suppose there is a second round. And
being last is no fun because everybody else has asked all the
questions before. Let me try, though.
First of all, I appreciated very much your response to
Senator Kohl's observations about the difficulty that borrowers
are having with the responsiveness from some of the largest
banks. I will take you up on your offer on behalf of Colorado
and say to anybody listening to this hearing, who may be
listening to it, if they would make the same generous offer, I
think all of us would appreciate it on behalf of the people
that we represent.
In your written testimony--and you said it again today, I
think--you said that while the CIO's 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 hedge or protect
the larger institutions.
Out of curiosity, I just wondered why those two functions
were in the same place. Is that something that you are thinking
about at all? I know that you hedge all across your lines of
business, but I just wondered why those were in the same place.
Mr. Dimon. It did not have to be, but in general, that unit
worried about interest rate exposure consolidated, foreign
currency exposure consolidated, and some of the credit exposure
consolidated. So it was a rational place to put it. There are
other parts of the company that hedge credit exposure.
Senator Bennet. As somebody who supports an exemption, a
hedging exemption, in the context of the Volcker Rule, which I
also support, it just raised in my mind the question of whether
having them in separate places might--because the purposes are
different, having them in separate places may have a useful
value in protecting.
The second question I had just about the trade--and then I
am going to move on to something entirely unrelated to this--is
you also made the observation in your written testimony that
the transaction could have been handled by unwinding, by
lessening the degree of exposure. Why wouldn't that have been
the thing to do? Why do you think the folks that made this
decision made this decision?
Mr. Dimon. What I am told is they thought what they were
doing was a more cost-efficient way to reduce the exposure and
maintain some of the hedge against fat tail events. That is
what I am told they were thinking at the time.
Senator Bennet. Cost-efficient in the sense that the fees
were less?
Mr. Dimon. That over time you would not spend as much money
getting rid of this than one way versus the other.
Senator Bennet. OK. Since you are here--and, again, Mr.
Chairman, with your indulgence, this is unrelated to the topic
at hand, but I think you are well aware of my concern about the
fiscal condition of this country. And I wonder if you could
take the last couple minutes of this time to talk about how you
see our relative position vis-a-vis Europe and other places,
the political risk of our not accomplishing what we need to do
on the fiscal side, and the upside if we could actually come
together in a comprehensive way to address the long-term fiscal
condition of the United States.
Mr. Dimon. So you are asking one citizen's opinion?
Senator Bennet. Yes.
Mr. Dimon. I would be happy to share it. Europe has serious
issues. There is a good reason for the European Union, for
political and monetary union, that is just very complex with 17
Nations, et cetera.
The United States has a serious issue. You never fix
serious problems unless you actually acknowledge that we have
one. And we have several, but, you know, the fiscal cliff I
will not go through. The one thing to keep in mind about the
fiscal cliff is it may not wait until December 31st. Markets
and businesses may start taking actions before that that create
a slowdown in the economy, which would be a bad thing. So I
personally would not be of the mind it is OK to wait until
after the election, until, you know, midnight, December 31st. I
think it would be better to do something now so we do not
create additional uncertainty among businesses and consumers.
We have to get our fiscal act in order. I mean, and it is
either going to be done to us, or we are going to do it
ourselves. There is a road map, which I like--not every piece,
and I am sure all of you would have your own opinion--and it is
called Simpson-Bowles. If we had dome something remotely like
Simpson-Bowles, in my opinion, you would have reduced
uncertainty about taxes; you would have increased confidence in
America; you would have shown a real fix of the long-term
fiscal problem. I think you would have had a more efficient tax
system and more effective tax system that is conducive to
economic growth. And, you know, I would urge everyone to
support getting something like that done.
The specifics, unfortunately--I know people are going to
argue about every single one--are not as important as getting
something like that done.
Senator Bennet. Thank you----
Mr. Dimon. And we missed an opportunity to do it. I do
think it helped cause a little downturn last year.
Senator Bennet. Thank you.
Thank you, Mr. Chairman.
Chairman Johnson. Senator Shelby has a very brief
observation to make.
Senator Shelby. Mr. Dimon, do you know of any bank that has
been well capitalized, well-regulated, and well-managed that
has failed?
Mr. Dimon. I do not, sir.
Senator Shelby. Are you aware of--I know you are aware that
we have closed about 500 banks in the last 3 or 4 years, and
just about every one of those banks failed because they were
inadequately capitalized--bad loans, so to speak. So would you
agree that there is no substitute for capital?
Mr. Dimon. There is no----
Senator Shelby. If you are running a financial institution,
you have got to have capital and it has got to be liquid.
Mr. Dimon. There is no substitute for capital. That is
correct, sir.
Senator Shelby. Thank you.
Chairman Johnson. Thank you, Mr. Dimon, for your testimony
and for being here with us today.
Mr. Dimon. Thank you.
Chairman Johnson. Today's hearing is a good reminder that
we cannot let down our guard and we must remain vigilant so
that we continue to have a strong and stable financial system.
Before we adjourn, I also want to provide Committee Members
a brief update on housing refinancing. Ranking Member Shelby
and I are continuing to discuss a way forward on housing
refinance legislation. We have worked together in the past
markups to keep amendments to those related to the underlying
bill, and I hope that my colleagues will agree to continue this
approach.
This hearing is adjourned.
[Whereupon, at 12:14 p.m., the hearing was adjourned.]
[Prepared statements and responses to written questions
supplied for the record follow:]
PREPARED STATEMENT OF CHAIRMAN TIM JOHNSON
I call this hearing to order. This hearing is part of the Banking
Committee's ongoing oversight of the massive trading loss announced by
JPMorgan Chase and the implications for risk management, bank
supervision, and the Wall Street Reform Act. Since the announcement of
the loss in early May, this Committee has heard from the OCC and the
Fed, which are the primary regulators for JPMorgan, as well as the SEC,
CFTC and other relevant officials to review and learn from these
events. Several Members of the Committee have asked to hear from Mr.
Dimon, and after due diligence conducted together by my staff and
Ranking Member Shelby's staff, I decided to invite Mr. Dimon.
Last week, the regulators informed the Committee that there was a
breakdown in the risk management involved with these trades, despite
the fact that the trades were reportedly designed to reduce the bank's
risk. As they continue to look into the matter, officials have assured
our Committee that the firm's solvency and the stability of our
financial system are not in jeopardy this time around. While this is
welcome news, questions remain that must be answered if we want our
largest banks to better manage their risks to maintain financial
stability, as I believe we do.
Today marks the 2-month anniversary of Mr. Dimon's ``tempest in a
teapot'' comments where he downplayed concerns from initial media
reports of the company's Chief Investment Office trades. We later
learned, however, it was an out-of-control trading strategy with little
to no risk controls that cost the company billions of dollars.
I have said before, no financial institution is immune from bad
judgment. In Mr. Dimon's own words, he later explained, ``We made a
terrible egregious mistake. There's almost no excuse for it . . . We
know we were sloppy. We know we were stupid. We know there was bad
judgment . . . [I]n hindsight, we took far too much risk. The strategy
we had was badly vetted. It was badly monitored. It should never have
happened.''
So what went wrong? For a bank renowned for its risk management,
where were the risk controls? How can a bank take on ``far too much
risk'' if the point of the trades was to reduce risk in the first
place? Or was the goal really to make money? Should any hedge result in
billions of dollars of net gains or losses, or should it be focused
solely on reducing a bank's risks? As the saying goes, you can't have
your cake and eat it too.
As for the policy implications, some of my colleagues complain that
Wall Street Reform micromanages the operation of large banks, and that
regulators cannot keep up with bank innovation. I disagree that less
supervision and less regulation will magically make the system less
risky. While risk cannot be eliminated from our economy, we can, and
must, demand that banks take risk management seriously and maintain
strong controls. We must also demand that regulators do their job well.
After all, banking is an important, but risk-filled business that needs
careful scrutiny and oversight so that mismanagement or unsafe and
unsound practices do not threaten the stability of our economy.
Some also suggest that capital is the silver bullet in financial
regulation. While capital does and must play an important role as a
backstop, we should not rely only on capital. Any well-capitalized bank
can fail and threaten financial stability if it is not well-managed or
well-regulated. Our financial system will be safer and stronger with
multiple and well-calibrated lines of defense, which Wall Street Reform
requires in addition to higher capital standards. We need our
regulators to finalize these Wall Street Reform rules, and Congress
should fund them with sufficient resources so they can effectively
monitor the financial system.
Again, it has been two months since he first publicly acknowledged
the trades, so I expect Mr. Dimon to be able to answer tough, but fair
questions today. A full accounting of these events will help this
Committee better understand the policy implications for a safer and
stronger financial system going forward.
______
PREPARED STATEMENT OF SENATOR MARK WARNER
I would like to thank the Chairman for holding this important
hearing so that the Senate can better understand what happened to cause
the loss of at least $2 billion, and possibly several times more than
that, at JPMorgan Chase. A family commitment prevents me from attending
this hearing in person, but I am submitting this statement and
questions for the record.
In the wake of the financial and economic crisis in 2008, which we
recently learned has cost American families two decades worth of
accumulated wealth, 40 percent of what they had pre-crisis, this loss
at JPMorgan Chase has reminded us of hard learned lessons.
Risk is an everyday feature of our financial system. As a result,
we must have a regulatory regime that determines what risks can be
undertaken by which financial institutions and markets and how we will
manage those risks.
This event has occurred in the middle of writing the rules for the
Dodd-Frank Act. I believe that we owe the American people to learn as
much as possible from this event, and let it inform how we finish that
rule writing process.
This episode demonstrates an extraordinary failure of risk
management. It is worth noting that this occurred at one of our
soundest banks. No one is happy about this episode, but we should be
pleased that JPMorgan Chase has the capital and capacity to deal with
this. JPMorgan Chase and markets are addressing this in an orderly way
that does not threaten the individual firm, other firms, or our
markets. That is a good sign.
From this and also from other hearings, and from the additional
work of regulators and experts, we must also understand how we can
improve risk management. We must understand how to protect individual
firms and the broader system from both the risks that we understand and
from unexpected shocks in the future.
I do not expect perfect answers because we cannot know the unknown.
But we should learn from large ``unexpected'' shocks of the past, and
we should know how much loss absorption and resilience individual
institutions have, including but not limited to capital.
______
PREPARED STATEMENT OF JAMES DIMON
Chairman of the Board, President, and Chief Executive Officer, JPMorgan
Chase & Co.
June 13, 2012
Chairman Johnson, Ranking Member Shelby, and Members of the
Committee, I am appearing today to discuss recent losses in a portfolio
held by JPMorgan Chase's Chief Investment Office (CIO). 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 nonprofits. These include deposit
accounts, loans, credit cards, mortgages, capital markets advice,
mutual funds, and other investments.
What Does the Chief Investment Office Do?
Like many banks, we have more deposits than loans--at quarter end,
we held 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. This portfolio serves as an important source of
liquidity and maintains an average rating of AA+. It also serves as an
important vehicle for managing the assets and liabilities of the
consolidated company. In short, the bulk of CIO's responsibility is to
manage an approximately $350 billion portfolio in a conservative
manner.
While CIO's 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 eurozone situation. Among the largest risks we have
as a bank are the potential credit losses we could incur from the loans
we make. The recent problems in CIO occurred in this separate area of
CIO's responsibility: the synthetic credit portfolio. This portfolio
was designed to generate modest returns in a benign credit environment
and more substantial returns in a stressed environment. And as the
financial crisis unfolded, the portfolio performed as expected,
producing income and gains to offset some of the credit losses we were
experiencing.
What Happened?
In December 2011, as part of a firmwide effort in anticipation of
new Basel capital requirements, we instructed CIO to reduce risk-
weighted assets and associated risk. To achieve this in the synthetic
credit portfolio, the CIO could have simply 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 risks.
This portfolio morphed into something that, rather than protect the
Firm, created new and potentially larger risks. As a result, we have
let a lot of people down, and we are sorry for it.
What Went Wrong?
We believe now that a series of events led to the difficulties in
the synthetic credit portfolio. Among them:
CIO's strategy for reducing the synthetic credit portfolio
was poorly conceived and vetted. The strategy was not carefully
analyzed or subjected to rigorous stress testing within CIO and
was not reviewed outside CIO.
In hindsight, CIO's traders did not have the requisite
understanding of the risks they took. When the positions began
to experience losses in March and early April, they incorrectly
concluded that those losses were the result of anomalous and
temporary market movements, and therefore were likely to
reverse themselves.
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.
Personnel in key control roles in CIO were in transition
and risk control functions were generally ineffective in
challenging the judgment of CIO's trading personnel. Risk
committee structures and processes in CIO were not as formal or
robust as they should have been.
CIO, particularly the synthetic credit portfolio, should
have gotten more scrutiny from both senior management and the
firmwide risk control function.
Steps Taken
In response to this incident, we have taken a number of important
actions to guard against any recurrence.
We have appointed new leadership for CIO, including Matt
Zames, a world class risk manager, as the Head of CIO. We have
also installed a new CIO Chief Risk Officer, Chief Financial
Officer, Global Controller and head of Europe. This new team
has already revamped CIO risk governance, instituted more
granular limits across CIO and ensured that appropriate risk
parameters are in place.
Importantly, our team has made real progress in
aggressively analyzing, managing and reducing our risk going
forward. While this does not reduce the losses already incurred
and does not preclude future losses, it does reduce the
probability and magnitude of future losses.
We also have established a new risk committee structure for
CIO and our corporate sector.
We are also conducting an extensive review of this
incident, led by Mike Cavanagh, who served as the company's
Chief Financial Officer during the financial crisis and is
currently CEO of our Treasury & Securities Services business.
The review, which is being assisted by our Legal Department and
outside counsel, also includes the heads of our Risk, Finance,
Human Resources and Audit groups. Our Board of Directors is
independently overseeing and guiding these efforts, including
any additional corrective actions.
When we make mistakes, we take them seriously and often are
our own toughest critic. In the normal course of business, we
apply lessons learned to the entire Firm. While we can never
say we won't make mistakes--in fact, we know we will--we do
believe this to be an isolated event.
Perspective
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
impacted by this 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 which remain far
in excess of regulatory capital standards. As of March 31, 2012, our
Basel I Tier 1 common ratio was 10.4 percent; our estimated Basel III
Tier 1 common ratio is at 8.2 percent--both among the highest levels in
the banking sector. \1\ We expect both of these numbers to be higher by
the end of the year.
---------------------------------------------------------------------------
\1\ On June 7th, the Federal Reserve Board issued proposed Basel
III rules, and we will be reviewing these ratios under the proposal.
---------------------------------------------------------------------------
All of our lines of business remain profitable and continue to
serve consumers and businesses. While there are still two 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 an
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 communities around the globe.
In just the first quarter of this year, we provided $62
billion of credit to consumers.
Over the same period we provided $116 billion of credit to
mid-sized companies that are the engine of growth for our
economy, up 16 percent year on year.
For America's largest companies, we raised or lent $368
billion of capital in the first quarter to help them build and
expand around the world.
We are one of the largest small business lenders and the
leading Small Business Administration lender in America,
providing $17 billion in credit to small businesses in 2011, up
70 percent year on year. In the first quarter, we provided over
$4 billion of credit to small businesses, up 35 percent year on
year.
Even in this difficult economy, we have hired thousands of
new employees across the country--over 61,000 since January
2008. We also have hired nearly 4,000 veterans over the past 2
years, in addition to the thousands of veterans who already
worked at our Firm. We founded the ``100,000 Jobs Mission''--a
partnership with 45 other companies to hire 100,000 veterans by
the year 2020.
Recently, we launched a groundbreaking and consumer-
friendly reloadable card--Chase Liquid--that offers customers
financial control and flexibility.
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 the
only bank willing to commit to lend $4 billion to the State of
California, $2 billion to the State of New Jersey, and $1
billion to the State of Illinois.
All of these activities come with risk. And just as we have
remained focused on serving our clients, we have also remained focused
on managing the risks of our business, particularly given today's
considerable global economic and financial volatility.
Last, 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 that we will emerge from this moment a stronger,
smarter, better company.
Thank you, and I'd welcome any questions you might have.
RESPONSES TO WRITTEN QUESTIONS OF
CHAIRMAN JOHNSON FROM JAMES DIMON
Q.1. You stated, in response to my question on risk controls at
the CJO, ``It did have its own risk committee. That risk
committee was supposed to properly overview and vet all the
risks. I think that risk committee itself, while independent,
was not independent-minded enough and should have challenged
more frequently and more rigorously this particular synthetic
credit portfolio.'' Please provide detail on the role of the
CIO risk committee and its reporting lines between CIO
management and senior JP Morgan management, as well as on the
role of the Board-level risk committee and its oversight over
division-level risk committees. What are you doing to ensure
that all risk committees play a more active role in oversight
of risk management, including that they are independently
verifying that the risk controls are working as intended?
A.1. The CIO Risk Committee operated to oversee CIO's risk
management practices. The Committee typically met on a
quarterly basis (monthly meetings were instituted in the first
quarter of 2012) and participants typically included CIO's CEO,
CRO, COO, Global CFO, regional CFOs and regional CIOs. The
Committee discussions included, among other things, market risk
limits, limits usage, new product initiatives and risk
policies.
As part of our remediation efforts, we have implemented a
stronger risk structure, including: (i) establishing more
robust committees to improve governance and controls (weekly
Investment Committee, weekly CIO Risk Committee, monthly
Business Control Committee and monthly CIO Valuation Governance
Forum); (ii) restructuring governance to ensure tighter
linkages between CIO, Corporate Treasury and other activities
in Corporate; and (iii) conducting Corporate Business Reviews
with the same structure and frequency as for client-facing
businesses. We believe these steps will ensure that risk
committees play a more active role in oversight of risk
management.
The Board-level Risk Policy Committee is responsible for
oversight of the CEO's and senior management's responsibilities
to assess and manage the corporation's credit risk, market
risk, interest rate risk, investment risk, liquidity risk and
reputational risk, and is also responsible for review of the
company's fiduciary and asset management activities. As part of
its oversight role, the Risk Policy Committee, among other
things, receives periodic presentations from CIO and the lines
of business addressing risk management issues, approves the
company's overall risk tolerance policy, and approves certain
firmwide risk policies.
Q.2. In response to my question on risk control review or lack
thereof, you speculated that there may have been ``a little bit
of complacency . . . and maybe overconfidence'' at the CIO. But
that perspective neglects the fact that good risk controls and
reviews should provide a check on complacency or
overconfidence. You also indicated that ``if we'd been paying a
little more attention to why there weren't more granular limits
here we could have actually caught this and stopped that.'' You
later stated before the House that `` the CIO, as a total, had
limits. But this unit didn't have its own, they used the CIO's
limits which they eventually hit.'' Please describe what you
mean by ``more granular limits''? Do you mean limits on
individual trading desks? What changes have you made, or will
you make, so that risk limits are well-calibrated for a wide
variety of activities and risks throughout your bank?
A.2. CIO had a number of risk limits (e.g., VaR, stress
testing, credit spreads, etc.) in place. There were not at the
time, however, metrics in place that were specific to the CIO's
Synthetic Credit Portfolio, which is where the investments that
resulted in losses were located. Furthermore, there were no
limits by size, asset type or type of risk for the Synthetic
Credit Portfolio during the relevant timeframe, there were
ongoing discussions about revising the limits structure in CIO
to include limits more specifically tailored to the Synthetic
Credit Portfolio and make other changes. The new structure,
however, was not implemented prior to the losses.
More specific limits for the Synthetic Credit Portfolio,
rather than limits for that portfolio being subsumed within the
aggregate CIO limits, are what Jamie Dimon was referring to
when he talked about ``more granular limits,'' and more
granular limits were in place for the credit derivatives desk
in the Investment Bank. In May, a number of new limits specific
to the CIO's Synthetic Credit Portfolio were put in place. We
have conducted a thorough review and reaffirmed market risk
limits throughout the firm. We have also conducted risk
assessment reviews across all lines of business to address Risk
Management findings from the review. Furthermore, we have
revised our Markets Risk Limits policy to require more rapid
escalation of limits excessions and have put in place
additional procedures to ensure that periodic limits reviews
are thorough and occurring on a regular basis. The various
committees addressed in the previous answer will also play an
active role in ensuring that risk management is appropriately
robust within CIO and throughout the firm.
Q.3. In response to my question on compensation, you stated
that the individuals in the CIO were paid based on ``their
performance, the unit's performance, the company's performance
. . .'' You also stated that ``it's likely there'll be claw
backs.'' You also said your company hasn't used claw backs. Why
hasn't your company utilized your claw back authority and do
you plan to use it more frequently going forward?
A.3. All CIO managers in London with responsibility for the
Synthetic Credit Portfolio have been separated from the firm.
None are receiving severance or 2012 incentive compensation. We
have made the decision to claw back compensation from each of
these individuals in the maximum permitted amount. The claw
backs represent approximately 2 years of total annual
compensation for each individual, including restricted stock
claw backs and stock option grant values.
Ina Drew has voluntarily given-up a significant amount of
her past compensation, which is equivalent to the maximum claw
back amount.
The Board of Directors has stated that for all other
individuals, 2012 performance-year compensation and claw backs,
if appropriate, will be determined in the ordinary course
considering, among other things, the following factors:
Company, unit and individual performance both on
absolute and relative basis.
Achievement of nonfinancial objectives.
Involvement in and responsibility for CIO matter.
More generally, we have had claw back provisions for some
time and have used them in the past in cases of misconduct.
More recently we strengthened our claw back provisions to
include conduct that causes material financial or reputational
harm and risk-related provisions for certain employees. We will
apply these provisions in the future as the situation warrants.
Q.4. You stated that the hedge became problematic because of
the ``way it was contrived between January, February, and
March'' and ``changed into something I cannot publicly
defend.'' When your company executes a trading strategy, what
do you know about how the strategy will play out in different
stressed scenarios? How can you prevent future hedges from
``changing'' into something problematic in the future?
A.4. For decades, JPMorgan Chase has emphasized the importance
of stress testing to identify risks in our portfolios. While we
attempt to construct varied scenarios in order to identify
potential risk, markets can be unpredictable and we may not
anticipate a given stress event. The best way to ensure that
hedges do not present unexpected risks is to construct them in
ways that are readily understood by both traders and risk
personnel, with sufficiently numerous and granular risk limits.
Q.5. In response to my question on the CIO's risk model, you
referred to an independent model review group, which was
responsible for the change in the model. Can you describe the
role of this group with respect to the company's risk
management and to whom the group reports? You further stated
that ``sometime in 2011, the CIO had asked to update their
models, partially to get them updated to be compliant with the
new Basel rules.'' Please describe why compliance with the new
Basel rules required changes in the firm's modeling. You also
stated that ``models are changed all the time, always being
adjusted.'' Please describe how frequently the models a re
changed and the process for notifying the regulators of these
changes. Has your company instituted any changes regarding the
independent model review group or the risk models the company
uses?
A.5. Our Model Review Group was and is imbedded in our Risk
function, with responsibility for reviewing models across the
enterprise. Under a capital rule proposed by the Federal
Reserve relating to market risk--the so-called Basel II.5
standard--the VaR model being utilized by CIO would not have
been compliant, as it failed to capture some risks that the
proposed rule required. As a result, in 2011, the CIO undertook
to upgrade its model, partially to get it updated to be
compliant with the new Basel rules. The proposed upgrade was
reviewed and approved by the Model Review Group.
Our company, like other banks, uses numerous models across
its various businesses for various risk management and
regulatory reporting purposes. These models are upgraded to
reflect better ways of measuring and managing risk, and those
changes are reviewed by our Model Review Group. These changes
are reported to and reviewed with the regulators.
In the course of our management review of the CIO losses,
we identified weaknesses in our model review policies and
practices and have instituted changes company-wide.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR REED
FROM JAMES DIMON
Q.1. In January, JPMorgan replaced the value-at-risk (VaR)
model for the Chief Investment Office's (CIO) synthetic credit
portfolio. It appears that the new model significantly
understated the risk exposure and the bank reverted to the
methodology used to calculate the CIO's VaR in 2011. One
benefit of a reduced risk exposure is a reduction in capital
held against the portfolio.
When was the decision made to adopt the new VaR model? What
were you told about the rationale for changing the VaR model?
How involved were you in the decision?
A.1. In 2011, the CIO undertook to upgrade its model, partially
to get it updated to be compliant with the new Basel rules.
Model reviews are done by an independent Model Review Group.
They started the process 6 months earlier and in January, they
did in fact put in a new model. We should note that models are
changed all the time, and are always being improved and
updated. Typically, Mr. Dimon is not involved in the decision
to implement or approve a new VaR model nor was he in this
case, until May 10, 2012, when we decided to switch back to the
old VaR model because we thought it was more accurate.
Q.2. When in January was the new VaR model adopted? When was
the 2011 model reinstated?
A.2. The new VaR model was adopted on January 30, 2012, for
purposes of the January 27, 2012, VaR calculation. Formal
approval came on February 2, 2012.
Q.3. What validation work was performed with respect to the new
VaR model?
A.3. Our Model Review Group reviewed the methodology of the
model and conducted limited back testing. As part of our
management review, we concluded that the approval and
implementation of the Synthetic Credit VaR model were
inadequate.
Between August and November 2011, CIO developed a new
Synthetic Credit VaR model to prepare for implementation of
Basel II.5. A review by the independent Model Review Group
between November 2011 and January 2012 focused primarily on
methodology and CIO-submitted test results. Our model review
policy and process presumed a robust operational and risk
infrastructure that exists in our client-facing businesses. In
addition, the Model Review Group relied on CIO to conduct
parallel testing and ensure operational stability.
CIO Risk Management played a passive role in model
development, approval, implementation and monitoring. They
relied on testing by the CIO front office prior to
implementation. CIO Risk Management insufficiently challenged
the VaR results generated by the front office prior to
approval. They had insufficient ownership, oversight, and post-
implementation monitoring of VaR operational environment.
Finally, the implementation of the model by CIO front
office suffered from operational challenges. Although a
correctly implemented model was expected to result in lower
VaR, errors in model implementation contributed to a further
lowering of VaR.
Q.4. Was the VaR model used to determine JPMorgan's regulatory
capital requirements?
A.4. The new VaR model was never used to calculate our
regulatory capital requirements. It was used as part of a pro
forma estimate of what our capital ratios would be under Basel
III, once adopted.
Q.5. Under the new VaR model, how much capital would JPMorgan
have been required to hold for the risk exposure in the CIO
portfolio? Under the 2011 model, how much capital would
JPMorgan have been required to hold on the CIO portfolio?
A.5. While CIO used the new VaR model for internal risk
purposes, it continued to use the original model for the
purpose of calculating capital and never calculated capital
using the new model.
Q.6. Who were the personnel in JPMorgan responsible for
developing the new CIO VaR model, including management and
business line staff? What were their roles relative to model
development and validation responsibilities?
A.6. Model development was conducted by front office
quantitative experts in CIO, whose primary duties consisted of
front office support through risk analytics. Their work was
reviewed by the independent Model Review Group.
Q.7. Were the traders in the CIO's London unit aware of the
model change? If so, when did they become aware of the change?
A.7. The traders were aware that a model change was in process
and that it was adopted at the end of January 2012.
Q.8. What was your understanding of the OCC's supervisory
activities at the CIO's London unit? Did you know that the OCC
did not have an examiner on site at the CIO's London unit?
A.8. Prior to April 2012, Mr. Dimon did not have any knowledge
of whether or not the OCC had an examiner on site at the CIOs'
London unit. Mr. Dimon generally understood that the OCC
periodically examines the various business units and parts of
the company.
It is our understanding that the OCC did not have any staff
members tasked specifically with overseeing the activities of
CIO on a full-time basis. Rather, the OCC assigned a number of
examiners to specific exams conducted on the activities of CIO.
Q.9. When did bank management first communicate with any member
of the board about the positions? Were potential losses
discussed? Were management oversight failures discussed? If so,
provide details.
A.9. In response to this question, please see the response to
Question 7 below from Senator Menendez, in answer to the
question ``When did you first brief JPMorgan's Board of
Directors about these trades? What did you tell them?''
------
RESPONSES TO WRITTEN QUESTIONS OF
SENATOR MENENDEZ FROM JAMES DIMON
Q.1. What level of capital do you consider adequate for
JPMorgan to hold considering the need to protect against
systemic risk and also fund loans? Do you still oppose 9.5
percent capital for the world's largest systemically
significant banks under Basel?
A.1. U.S. regulators have agreed with other supervisors,
through the Basel Committee on Banking Supervision's Basel III
process, to a dramatic increase in regulatory capital
requirements. JPMorgan Chase strongly supports the Basel III
capital requirements, and we believe that they will bring
additional stability to the financial system without causing
adverse consequences that outweigh these benefits. As discussed
below, it is a potential surcharge on Globally Systemically
Important Financial Institutions (G-SIFis) that may be a bridge
too far, and creates costs that risk exceeding the diminishing
benefits of higher capital requirements above Basel III
minimums.
As a frame of reference for how stringent capital standards
are at this point, our analysis shows that at the Basel III 7
percent minimum, the nine likely U.S. G-SIFI banks, in
aggregate, could absorb an instantaneous loss equal to 2 years
of their average losses during the financial crisis--$203
billion--and still maintain a 5 percent Tier 1 Common capital
ratio. (The 2-year time frame and 5 percent ratio were the
standards required by the Federal Reserve under CCAR. The
average 2 years of losses include losses both for the nine
banks and the institutions they acquired during the crisis.)
As another frame of reference for current capital levels,
consider that JPMorgan Chase entered the financial crisis with
a ratio of tier 1 common equity to risk-weighted assets of 7
percent under the applicable capital rules (Basel I). (In other
words, we held $7 in common stock or instruments of similar
quality for every $100 of loans or other assets we had at
risk.) Starting at that level, we were able to weather the
financial crisis, and to acquire both Bear Stearns and
Washington Mutual, and the chairman of Congress's Financial
Crisis Inquiry Commission has stated that JPMorgan Chase would
have survived the crisis without assistance.
With this in mind, note that the Basel III rules
effectively would require JPMorgan Chase to hold approximately
45 percent more capital than it did during the crisis. This is
because the new 7 percent tier 1 common equity minimum standard
under Basel III corresponds to more than 10 percent under its
Basel I predecessor requirement in effect in 2007, particularly
for banks having meaningful counterparty exposures and that are
engaged in trading activity. This includes, through an interim
measure called Basel II.5 that focuses on market risk--a 100
percent capital charge against high-risk securitization
structures, including certain high risk CDOs, which contributed
to losses in the recent crisis. It also includes a narrowing of
the definition of what instruments count as capital, which we
strongly support.
It is also worth noting that the results of the stress
tests included in the Federal Reserve's CCAR process
demonstrated that leading U.S. banks are appropriately
capitalized under highly adverse stress scenarios. The results
of the CCAR are particularly significant given their
methodology, which included a replay of the financial crisis
and recession over a 2-year stress period.
Nonetheless, we have generally been supportive of Basel III
and its higher requirements. We have been critical, however, of
a proposed 250 basis point capital surcharge on us and other
large banks, as we believe that the surcharge is not necessary
and will impose more costs than benefits on the financial
system and the economy as a whole.
Q.2. Did any of the top executives in the Chief Investment
Office have significant risk management experience?
A.2. Achilles Macris and Javier Martin-Artajo, both of whom had
supervisory responsibilities over the Synthetic Credit
Portfolio, were experienced traders whose roles included
managing market and credit risks.
Q.3. Did Ina Drew have any significant risk management
experience? What did that consist of?
A.3. Ina Drew was an experienced participant in the global
markets for approximately 30 years and as such had substantial
familiarity with management of market risk and credit risk.
Q.4. Do you agree that trading for purposes of making money
shouldn't be allowed in banks with deposits that are insured by
the Government?
A.4. Banks perform an essential role in the global markets as
market makers in providing liquidity to clients.
Q.5. It's been reported that you did not learn of the sizes of
these trades until around April 30th. Is that accurate?
A.5. Mr. Dimon learned some information about the trades before
April 13, 2012, but not all of the particulars. As time went
on, though, and in particular following losses in the portfolio
in late April, he dug deeper and learned more, including some
of the specific attributes and correlation characteristics of
the portfolio.
Q.6. On an April 13th call with analysts, you called concerns
about these trades ``a complete tempest in a teapot.'' If you
didn't completely review the positions until April 30th, then
what basis did you have for saying they were a ``tempest in a
teapot'' on April 13th? Did someone mislead you about them? Who
was that and what did they say?
A.6. Management had been looking into the issue prior to April
13, 2012. Based on information we received, including stress
testing that was conducted, we thought it was under control. A
lot of folks thought the losses experienced up to that point
were aberrational and would come back, which happens sometimes.
And so on April 13, 2012, Mr. Dimon genuinely did believe it
was a tempest in a teapot. But with that said, and as Mr. Dimon
has repeated many times, he was wrong.
Q.7. When did you first brief JPMorgan's Board of Directors
about these trades? What did you tell them?
A.7. On April 12, 2012, management discussed with the Audit
Committee, which consists of three members of the Board of
Directors, the recent news articles on CIO and first quarter
performance for the trading book that was subject of the press
reports.
On April 17, 2012, the Risk Policy Committee of the Board,
which consists of three other Board members, received a
presentation on CIO's activity and recent news reports. The
Risk Committee was briefed on an ongoing post mortem on the
trades.
On May 2, 2012, Ina Drew, the Chief Investment Officer,
gave a presentation to the Audit Committee on the hedging
losses being realized in CIO. She went through an analysis,
including the causes of the losses, control issues, lessons
learned and remediation efforts.
Prior to the May 10, 2012, special meeting of the Board of
Directors described in the next paragraphs, Mr. Dimon had
telephone conversations with several members of the Board,
during which he updated them on the CIO issue.
Mr. Dimon briefed our Board of Directors at a special
meeting on May 10, 2012, that we would be filing our quarterly
report on Form 10-Q with the SEC that day and that the Form 10-
Q would contain disclosure that in Corporate, net income
(excluding Private Equity results and litigation expense) for
the second quarter was currently estimated to be a loss of
approximately $800 million after tax. Prior guidance for
Corporate quarterly net income was approximately $200 million.
Mr. Dimon advised the Board that actual results for the second
quarter could be substantially different from the current
estimate and would depend on market levels and portfolio
actions related to investments held by the CIO, as well as
other activities in Corporate during the remainder of the
quarter.
Mr. Dimon told the Board at its May 10 meeting that since
March 31, 2012, CIO has had significant mark-to-market losses
in its Synthetic Credit Portfolio, and this portfolio has
proven to be riskier, more volatile and less effective as an
economic hedge than the Firm previously believed. On a before
tax basis, the losses were in the range of approximately $2
billion, and these had been partially offset by realized gains
in CIO's available for sale securities portfolio. Mr. Dimon
further advised the Board that reviews of what occurred in CIO
were underway, including by Audit, Legal, Compliance and Risk
Management. The Finn was in the process of repositioning CIO's
Synthetic Credit Portfolio and we had brought in talent from
the Investment Bank to help manage the positions. In managing
these positions, we would do so in a manner designed to
maximize economic value, and as a result net income in
Corporate was likely to be more volatile in future periods than
it has been in the past, and it could cost a further $1 billion
or more in the quarter and potentially additional losses in
future quarters.
Q.8. Why did JPMorgan change its accounting methods regarding
these trades?
A.8. We did not change our accounting methods with regard to
these trades. They were booked as mark-to-market assets
throughout this period. As we have disclosed, we did conclude
as a result of our management review that we should restate the
valuation of the Synthetic Credit Portfolio for purposes of
first quarter of 2012.
Q.9. Did this change in the metric lead to the understatement
of the risk to the bank?
A.9. As described above, we adopted a new VaR model for CIO
effective at the end of January 2012. We now believe that
weaknesses in this model caused it to understate the VaR of the
Synthetic Credit Portfolio. We abandoned use of this model for
purposes of first quarter 2012 reporting, and used the same
model we had employed throughout 2011. For purposes of the
second quarter of 2012, we have adopted a new model.
Q.10. Was that change disclosed to your agencies and investors
before May 1?
A.10. We assume you are referring to the change in the VaR
model. Yes, the change in the model was disclosed to our
regulators. Regular daily reports sent to the regulators in the
days leading up to the model change in January included
information that CIO was implementing a new model.
The change in the VaR model was not disclosed to investors
before May 1, 2012.
Q.11. Steven Rattner, formerly the head of the Auto Task Force,
said that these trading losses are ``small beer.'' Do you agree
with him?
A.11. We have taken this matter very seriously. We appointed a
Task Force to review the circumstances that gave rise to the
losses, and our Board named a Review Committee to oversee our
work. We have identified a number of key lessons and have
implemented a number of changes as a result. It is true,
however, that these trades did not impose losses on clients or
the deposit insurance funds, and that our other lines of
businesses, and the financial system, were not affected. We
also earned $4.9 billion and $5.0 billion in the first and
second quarters of this year, respectively, even after
accounting for the CIO trading losses. Our fortress balance
sheet and diversified business model ensured that we were able
to weather the losses while continuing to lend and otherwise
serve the needs of our clients.
Q.12. Did JPMorgan have adequate internal controls over these
trades?
A.12. We have determined that there were certain deficiencies
in CIO's internal controls over financial reporting at March
31, 2012. These deficiencies, which related to CIO's internal
controls over valuation of the Synthetic Credit Portfolio, were
substantially remediated by June 30, 2012.
Q.13. Did bank executives respond appropriately to the ``red
flags'' you pointed to regarding these trades?
A.13. As we have detailed in our management review, we were
slow to react to the losses in the portfolio. CIO risk
management did not deal with the issues in a timely manner as
they arose and did not escalate to firmwide risk early enough.
CIO management generally did not sufficiently question the
answers being given by traders in early April such that
firmwide management was not given the complete picture at an
early enough stage.
Q.14. What specific positions were you trying to hedge?
A.14. The Synthetic Credit Portfolio was intended to establish
positions that would generate revenue in a down credit market,
and offset anticipated losses in CIO's AFS portfolio and other
businesses.
Q.15. What process did your bank undertake to ensure that the
positions taken to hedge them were sufficiently correlated to
act as a real hedge and not just a bet?
A.15. Positions held by CIO were incorporated into our regular
stress testing, as well as the Federal Reserve's CCAR stress
test. These tests showed how these positions were expected to
behave, and thus the extent to which they were hedges, under
various economic and market shocks. In early 2012, however, the
Synthetic Credit Portfolio was increased in size and
complexity, and our risk measures were not sufficiently
granular to identify the heightened risk embedded in this
portfolio.
Q.16. Is it true that JPMorgan was considering taking a reserve
against these trades in 2010?
A.16. We are not aware of any discussion about taking reserves
against the Synthetic Credit Portfolio positions in 2010.
Q.17. Is your bank too big to manage? Are any banks too big to
manage?
A.17. We are not too big to manage. In this case, our fortress
balance sheet and diversified business model ensured that we
were able to weather the losses from CIO while continuing to
Lend and otherwise serve the needs of our clients.
Q.18. Is it possible that these types of trading losses could
put the bank at risk in the future despite your best efforts to
institute better risk management?
A.18. As noted above, we believe that while trading losses are
always possible, the significant capital and revenue strength
of our company makes us better able to withstand any such
losses than a less diversified or less well capitalized firm.
Q.19. How many OCC regulators were tasked with overseeing the
activities of the Chief Investment Office?
A.19. It is our understanding that the OCC did not have any
staff members specifically tasked with overseeing the
activities of CIO on a full-time basis. Rather, the OCC
assigned a number of examiners to specific exams conducted on
the activities of CIO.
Q.20. When did regulators first raise questions about the
London trades? Were they provided with all of the information
requested? Were they ever misled?
A.20. The regulators first raised questions about the London
trades in early April 2012 after news articles regarding the
London trader. On April 9, 2012, we met with members of the
staff of the Federal Reserve and the OCC to discuss the trades.
We believe we shared with our regulators the information they
requested.
Q.21. Your chief financial officer said on an investor call
that the bank's regulators were aware of the trades and
comfortable with them in mid-April 2012. What regulators were
aware of the trades? What did your bank do to specifically make
your regulators aware of these positions? What information did
you provide to those regulators? How did the regulators
communicate to the bank that they were ``comfortable''?
A.21. Our chief financial officer said that we were comfortable
with our positions and that the regulators were aware of the
positions. The Federal Reserve and the OCC received regular
risk reports on the CIO positions, some on a daily, weekly or
monthly basis. In addition, we met with representatives from
our Federal Reserve and OCC exam teams on April 9, 2012, to
discuss the trades.
Q.22. Why did you publicly go after Bloomberg for reporting
that these were risky trades?
A.22. Management had been looking into the issue prior to April
13, 2012. Based on information we received, including stress
testing that was conducted, we thought it was under control.
And so on April 13, 2012, Mr. Dimon genuinely did believe it
was a tempest in a teapot. But with that said, and as Mr. Dimon
has repeated many times, he was wrong.
Q.23. Your chief investment office has put money in corporate
bonds as opposed to less risky Treasury bonds, then used
derivatives to bet on directions of the market. That indicates
that the purpose of the unit, unlike at some of your
competitors, is to generate profit rather than protect the bank
from losses. Should the investment office be a profit center?
A.23. We do not agree with this characterization of the purpose
of the Chief Investment Office. CIO invests excess cash in a
variety of instruments. We believe it is appropriate for
corporate bonds to be among those investments.
Q.24. You have said you would consider claw backs for people
involved in the losses. Your proxy statement says that an
employee's pay will be clawed back if he or she ``engages in
conduct that causes material financial or reputational harm.''
Have you clawed back any of Ina Drew's previous income or that
of others in the group? If yes, how much? If not, why not?
Also, did you strike any financial arrangement with Ms. Drew as
part of her agreement to retire? Have you struck financial
deals with any of the other executives who are expected to
leave the firm by the end of the year? If so, please provide
the details and rationales for taking those actions.
A.24. As announced, CIO managers based in London with
responsibility for Synthetic Credit Portfolio have been
separated from the Firm without severance or 2012 incentives,
and the maximum permitted claw backs were invoked. Ina Drew
came forward voluntarily agreed to give up compensation
equivalent to the maximum claw back amount. We did not strike
any financial arrangement with Ina Drew as part of her
agreement to retire.
For others, 2012 performance-year compensation and claw
backs, if appropriate, will be determined in the ordinary
course.
Q.25. Do you think it's appropriate for bank executives to sit
on the regional Federal Reserve Boards that regulate those same
banks?
A.25. The regional Federal Reserve Boards basically meet and
talk about the economy. There are 12 Federal Reserve Boards,
and that information is put together and sent to Washington.
The Boards are more of an informational advisory group. Mr.
Dimon does not vote for the president of the Federal Reserve
Bank of New York, he does not get involved in supervisory
matters, and he cannot serve on the Audit Committee.
We think it makes sense for the Federal Reserve to hear the
views of bank representatives.
------
RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNER
FROM JAMES DIMON
Q.1. Did CIO, in its investments or through its hedging, take
on more risk than it was authorized to, and if so, did the
people taking that risk know that they were exceeding their
authority?
A.1. CIO had controls in place to manage and monitor its
portfolios, including numerous risk metrics and limits (e.g.,
VaR, stress testing, credit spreads, etc.). In certain
instances, these limits were exceeded by the investment
positions taken by CIO and the appropriate individuals were
informed accordingly, depending on the type of limit exceeded.
The policy governing market risk limits contemplated such
situations and provided for appropriate responses, including
managing the position to bring it within the limit or allowing
for a temporary increase in the limit under some circumstances.
In certain cases, however, the response to these notifications
may not have been as timely as it should have been. The new
policy we have implemented addresses this issue by requiring m
ore rapid escalation of limits excessions.
Q.2. If CIO took on more risk than it was supposed to, did the
person or people overseeing its operations know, or should they
have known, that it was taking on too much risk?
A.2. The answer to this question is very similar to the one
immediately above. CIO had controls in place to manage and
monitor its portfolios, including numerous risk metrics and
limits. In certain instances, these limits were exceeded by the
investment positions taken by CIO and the appropriate
individuals were informed accordingly, including the head of
CIO and risk management personnel where necessary. As noted
above, the risk policy contemplated such situations and
provided for appropriate responses, including managing the
position to bring it within the limit or allowing for a
temporary increase in the limit under some circumstances. In
certain cases, however, the response to these notifications may
not have been as timely as it should have been. Our new policy
addresses this issue by requiring more rapid escalation of
limits excessions.
Q.3. You have criticized the Volcker rule for requiring a
backward look at the intent of traders. In your own internal
review of what happened, do you feel comfortable that you are
able to look back and understand to your satisfaction what
people were thinking and why specific decisions were made? Have
your opinions on the value of better recording and tracking
intent, as required by the Volcker rule, been changed by this
event?
A.3. We have found it very difficult and labor-intensive to
reconstruct the intent of traders.
Q.4. Do you now believe it is possible for an individual or
firm to abuse the portfolio hedging exemption to evade the
Volcker rule, and if so, how do you think we can best prevent
that while still allowing firms to hedge the risks they
undertake in the normal course of business?
A.4. We continue to believe that portfolio hedging is an
important function that should not be prohibited by the Volcker
Rule. We also note that portfolio hedging through derivatives
will be subject, independent of the Volcker Rule, to
extraordinarily high capital requirements through Basel II.5
and Basel III.
Q.5. Mr. Dimon, Prince William County in Virginia is a location
that was especially hard hit by the subprime lending abuses
that took place and subsequent housing market declines. I have
been working with a group from that area called VOICE, and it
is my understanding that people from JPMorgan Chase have been
as well. Will JPMorgan Chase continue to work with VOICE and
the community in Price William to mitigate the damage that has
taken place in that community, and help to restore it?
A.5. JPMC has been actively engaged with VOICE since July 2011.
Since that time, we had several face-to-face meetings with the
organization and provided updates on our foreclosure prevention
efforts in Virginia and Prince William County. To further
assist borrowers, we conducted a cobranded 2-day outreach event
in Prince William County at which our Chase Homeownership
Center staff met face-to-face with borrowers and walked them
through the options available to them.
We have offered to provide training for VOICE counselors
and conduct ongoing pipeline reviews. Chase provided funding to
the VA Housing Finance Agency's Hispanic Committee for a HUD
counselor in the community.
We believe we share a common goal with VOICE--help
homeowners stay in their homes. We are committed to partnering
with and strengthening our relationship with community
organizations to work with homeowners and stabilize communities
in Virginia and Prince William County.