Regulators Ignored JPMorgan Unit that Lost Billions
Monday, June 04, 2012
As Congress and the Executive branch investigate the recent trading disaster at the nation’s largest bank, JPMorgan Chase (JPM), many are asking what role bank regulators played in the debacle, expected to cost JPM between $2 billion and $7 billion. Although more than 100 federal bank regulators from the Federal Reserve and the Office of the Comptroller of the Currency were on site at JPMorgan’s Manhattan headquarters during the months when the firm engaged in the trades, the feds were unaware of the trades, much less of their scope or high risk. Why?
The preliminary answer appears to be a combination of deceit on the part of JPM and laxity on the part of the regulators. JPM’s chief investment office, which made the trades, actually has a mission of protecting the bank from the high risk activities of other units by engaging in lower risk trading, a practice known as hedging. In this sense, as the trades got riskier, the unit not only strayed from its stated purpose but acted counter to it. When rumors that the trades had begun to go south reached the senior New York Federal Reserve regulator at JPM, bank executives assured him there was no problem, and he apparently took the bankers at their word. Several weeks later, when JPM’s leadership belatedly admitted they had a huge problem on their hands, bank president Jamie Dimon still delayed telling regulators.
“The central question is why Jamie Dimon was able to so successfully convince both its regulators that there was nothing to see at the chief investment office,” Mark Williams, a finance professor at Boston University, who has also served as a Federal Bank examiner, told The New York Times. “To me, it suggests that he is too close to his regulators.” This is not surprising considering that Dimon is one of the nine members of the board of directors of the Federal Reserve Bank of New York.
Even if the Senate Banking Committee pushes a probe, the lead investigator will be Dwight Fettig, who used to lobby on behalf of JPMorgan Chase and whose former firm represented the American Bankers Association and the National Association of Mortgage Bankers.
To Learn More:
Bank Regulators Under Scrutiny in JPMorgan Loss (by Jessica Silver-Greenberg and Ben Protess, New York Times)
JPMorgan Was Warned About Lax Risk Controls (by Nelson D. Schwartz and Jessica Silver-Greenberg, New York Times)
Former JPMorgan Lobbyist Expected to Direct Senate Investigation of…JPMorgan (by Noel Brinkerhoff, AllGov)
Ominous Failure at “Too Big to Fail” JPMorgan Chase (by Matt Bewig, AllGov)
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