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JPMorgan Report Piles Pressure on Dimon in Too-Big Debate

*from www.bloomberg.com, Mar. 15, 2013 (To view original article click here.)

Take Away #1: Efforts by JP Morgan Chase & Co. (JPM) to hide trading losses were outlined in a 301- page report by the Senate Permanent Subcommittee on Investigations.

Key Facts and Figures:

  • JPMorgan lost more than $6.2 billion over nine months last year in a derivatives bet on companies’ creditworthiness.
  • Bloomberg first reported on April 5 that U.K. Trader Bruno Iksil, had built an illiquid book of derivatives in the chief investment office.
  • The book of derivatives built was so large that it was distorting credit indexes.
  • The Senate report cited Bloomberg stories published last year disclosing that Dimon had transformed the CIO in the past five-years.
  • Dimon transformed the CIO from a conservative investment operation into a much larger, high-risk trading profit center, and exempted the office from rigorous scrutiny.

Take Away #2: After nine months of investigation, the panel concluded that JPMorgan had “a trading operation that piled on risk, ignored limits on risk taking, hid losses, dodged oversight, and misinformed the public,” said Carl Levin.

Key Facts and Figures:

  • Carl Levin and his team combed through 90,000 documents and interviewed dozens of current and former executives.
  • Former Chief Investment officer Ina Drew will testify today in her first public appearance since resigning in May four days after the bank disclosed the initial trading losses.
  • U.S. lawmakers have pushed banks to halt so-called proprietary trading, and regulators are weighing tightening exemptions for hedging.
  • A panel of British lawmakers urged regulators to “bear down” on prop trading and renew the case for an outright ban within three years.

Take Away #3: JPMorgan regarded as one of the best-managed banks in the world acknowledges mistakes.

Key Facts and Figures:

  • The bank has “repeatedly acknowledged mistakes” in handling the loss, Mark Kornblau, a spokesperson for the bank, said in an e-mail.
  • “Our senior management acted in good faith and never had any intent to mislead anyone,” Kornblau said.
  • “The bank cooperated with the investigation and has already identified many of the issues cited in the report,” Kornblau said.
  • “We have taken significant steps to remediate these issues and to learn from them,” Kornblau said.

Take Away #4: The derivative bets “caused regulators to rethink capital needs” for banks with large trading operations and could lead to more heat on the “too-big-to-fail”, “too-big-to-jail”, “too-big-to-manage” theme.

Key Facts and Figures:

  • John McCain said, the report offers a “shameful demonstration” of what goes on at federally insured banks, saying JPMorgan and other banks are not “too big to fail” or “too big to jail.”
  • “Too big to fail has been put back on the table — not providing risk data, misleading shareholders — this suggests that breaking up the banks is a viable idea,” said Mark T. Williams, a former Federal Reserve bank examiner.

Take Away #5: The report and recommendations, issued jointly by the committee’s Democrats and Republicans, may increase pressure to tighten exemptions in the draft Volcker rule.

Key Facts and Figures:

  • Tightened exemptions on the draft Volcker rule would restrict the kinds of trades permitted by banks holding deposits insured by taxpayers.
  • Banks have lobbied against the Volcker rule, arguing that it will restrict market-making and other standard practices.
  • “We’re going to work very hard for a final rule that does not allow the kind of manipulation, the kind of concoctions that were created here by the bank to be accepted in the name of hedging,” Carl Levin said.

Take Away #6: Trader Bruno Iksil, known as the ‘London Whale’ said there was no hope as the book continued to grow more and more monstrous.

Key Facts and Figures:

  • As losses ballooned, Iksil faced increasing pressure from manager Javier Martin-Artajo to report a higher value of his portfolio.
  • Iksil reported higher values by marking it aggressively when compared with market prices.
  • “I can’t keep this going”, said Iksil in discussing a price adjustment that the report said was apparently requested by Martin-Artajo.
  • The change would have valued the portfolio $400 million above market prices, the report said.
  • “I don’t know where he wants to stop, but it’s getting idiotic,” Iksil said.

Take Away #7: Iksil’s book breached all five of the CIO’s internal risk measures, and with increasing frequency, which led to model changes.

Key Facts and Figures:

  • From January through April, Iksil’s book continued to breach internal risk measure, totaling more than 330 violations, the report said.
  • According to the report, instead of investigating the cause, traders, managers, and executives criticized the metrics as inaccurate.
  • Citing the metrics as inaccurate, they pushed for model changes that would portray credit derivative trading activities as less risky, the report said.
  • On Jan. 30, 2012, the bank began using a new formula for so-called value at risk that cut Iksil’s estimated possible losses by about half.
  • He had breached the synthetic credit portfolio or SCP limit under the prior model.
  • The new VaR model ended the SCP breach and also freed the CIO traders to add tens of billions of dollars in new credit derivatives to the portfolio.
  • The addition of new credit derivatives to the portfolio which, despite the supposedly lowered risk, led to additional massive losses.
  • The model was later scrapped.

Take Away #8: Executives ignored other risk measures as well, dismissing a Feb. 2012 internal report projecting Iksil’s portfolio could incur a yearly loss of $6.3 billion.

Key Facts and Figures:

  • Chief risk officer at the time, Pete Weiland dismissed the analysis in the internal report as “garbage”.
  • Ina Drew also doubted the accuracy of the internal report, the investigation found.
  • By the time Drew did believe it, “it was too late” the Senate report said.

Take Away #9: The report could ratchet up pressure on CEO Jamie Dimon to surrender his role as chairman.

Key Facts and Figures:

  • “This big trading loss reinforces the need for independence. It’s kind of hard to argue at this point that JPM would’ve been worse off if they had a separate chairman,” said Mark T. Williams, former Federal Reserve bank examiner.
  • The CIO group emailed a presentation to Dimon and others on April 11 that showed the credit bets were no longer working to protect against losses.
  • JPMorgan executives made no mention of the presentation on an April 13 earnings call or that Iksil had already lost more than $1 billion.
  • Dimon that day dismissed early press accounts of possible losses in Iksil’s book as a “tempest in a teapot”.
  • Braunstein told investors the company was “very comfortable” with the positions.
  • Dimon “clearly can’t be both chairman and CEO,” said Josh Rosner , an analyst with independent research firm Graham Fisher & Co. in New York.

Take Away #10: The credit bets JPMorgan claimed to be hedges protecting losses called “Voodoo Magic” by the Office of the Comptroller of Currency.

Key Facts and Figures:

  • Senate investigators said they found little evidence showing what the bets would have protected against.
  • Dimon told senators last year that the wagers were intended to cushion losses on other holdings in the event of a credit crisis.
  • Ina Drew said the credit derivatives were intended to hedge JPMorgan’s entire balance sheet.

Take Away #11: Statements and regulatory filings by the bank “raise questions about the timeliness, completeness and accuracy of information” given to investors.

Key Facts and Figures:

  • The Securities and Exchange Commission has been conducting its own investigation of the bank’s losses.
  • The evidence suggests the bank “initially mischaracterized or omitted mention” of the portfolio’s problems.
  • The bank “likely understood the market would move against it if even more of those facts were known,” the report says.

Take Away #12: The bank clawed back compensation.

Key Facts and Figures:

  • Macris, the trader behind the expansion into credit trading at the office, was awarded $31.8 million in the two years before the firm racked up losses.
  • Drew, the former chief investment officer who lost her job over the bad trades, got $29 million for those two years.
  • The committee wrote, “They were compensated at levels that were at the top range of, or better than, the best investment bank employees.
  • Iksil, Macris, and Martin-Artajo were all forced out of their jobs.
  • The bank said it clawed back the maximum amount permitted under its employment policies with them, or about two years of compensation.
  • The bank canceled outstanding incentive compensation and obtained payment of previous awards.
  • Drew forfeited about two years’ pay and Dimon’s pay for 2012 was cut about 50% after an internal review found him partly responsible.

Take Away #13: JPMorgan executives to testify before the Senate Panel.

Key Facts and Figures:

  • Braunstein, who stepped down as CFO and is still at the bank will join Ina Drew before the panel today.
  • Ashley Bacon, JPMorgan’s acting chief risk officer, and Michael Cavanagh, who led the internal review of the losses and is now co-CEO for the corporate and investment bank, also are scheduled to testify.
  • The report showed that on April 5, in responding to early press inquiries about Iksil’s trades, Joe Evangelisti, JPMorgan’s top spokesman, sent Dimon and other executives a list of talking points he wanted to make.
  • A revised list that took into account their feedback changed the statement, “we cooperate closely with our regulators, who are fully aware of our hedging activities” by removing the word “fully,” the report said.

*To view original article from www.bloomberg.com click here.

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