[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

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


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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

                              ----------                              

                        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?

                              ----------                              


                        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.