Senate Investigators Are Nobodys's Patsies, As They Reconstruct Events of London Whale Trading Scandal.  

[ by Howard Haykin ]

Jamie Dimon's email on 1/23/12 conveyed the message, "I approve," directly linking the JPMorgan Chase Chairman and CEO with the London Whale trading scandal.  Nearly 14 months later, senior JPMorgan officials and government regulators were invited to testify on the subject before the Senate Permanent Sub-Committee on Investigations, chaired by Carl Levin.  Another twist in the case came from a senior government official who asserted at the hearing that, in the months leading up to the billions in bank trading losses, Mr. Dimon ordered his underlings not to give the bank’s regulators information they had requested.

Sub-Committee's 300-Page Report on its Investigation.    Ahead of the hearing, the Sub-Committee released its 300-page report on its investigation into the London Whale Trading case -  [C-I Note: Notwithstanding the fact that JPMorgan conducted it own in-house investigation.  The Senate report contained disclosures not found in JPM's internal report, that helped to escalate the scandal.]   It said Dimon signed off on a strategy that understated the risks being taken by the bank’s traders - including the London Whale himself, Bruno Iksil, a derivatives trader worked in the London office.  The report goes on to say that after Iksil’s losses were revealed last April, Dimon misled investors and the public about their nature.

The Criminal Probe that Becomes Dimon's 'Waterloo'.   On Friday, the Times reported on an investigation by the Justice Department and FBI had reached an advanced stage. Dimon isn’t himself suspected of any wrongdoing, but there can be no doubt that his career is on the line.  He's no longer shielded by his reputation as Wall Street’s untouchable - the magazine-cover star who, when many of his rivals crashed and burned during the financial crisis, guided his bank through it all, mostly unharmed.  But he won’t necessarily get through this one.

The first break in Dimon's JPMorgan Chase dynasty could happen if and when the feds were to indict any senior JPMorgan executives on charges arising from the Whale’s trades, that generated $6.2 billion in losses,  At that point, Dimon’s position could rapidly become untenable.

Last Thursday, a JPM spokesperson said:  “While we have repeatedly acknowledged significant mistakes, our senior management acted in good faith and never had any intent to mislead anyone.” That didn’t provide any "brownie points" at the Senate Hearings.  

One of its first witnesses, Ina Drew, ... the bank’s former CIO, who lost her job as a result of the Whale scandal, put the blame squarely on the bank’s London office:  "Since my departure I have learned of the deceptive conduct by members of the London team, and I was, and remain, deeply disappointed and saddened to learn of such conduct and the extent to which the London team let me, and the Company, down."

Senator Carl Levin, wasn't biting.  The Senator pointed out that as early as January 2012 the trading book of the Chief Investment Office grew so large that it breached the risk guidelines established for the entire bank.  “That 4-day breach was reported to top bank officials, including CEO Jamie Dimon, who personally approved a temporary limit increase, and voilà, the breach was ended,” Levin said in his opening statement.  And that was when Dimon issued the above-noted 'approval' email.

Bank Temporarily Increases Risk.   Typically, a temporary increase in risk-taking such as the one Dimon issued in January 2012, is intended to enable traders to bring down the level of risk - by selling off positions in the market.  However, the traders and supervisors in the Chief Investment Office merely changed the mathematical model it used to measure the risks attached to its portfolio, a sleight of hand that—on paper, anyway—lowered the estimate of its potential losses by 50%.

Levin saw that as just the beginning of the deception and negligence on the bank’s part:  “JPMorgan executives ignored a series of alarms that went off as the bank’s Chief Investment Office breached one risk limit after another.  Rather than ratchet back the risk, JPMorgan personnel challenged and re-engineered the risk controls to silence the alarms. It is difficult to imagine how the American people can trust major Wall Street banks to prudently manage derivatives risk when bank personnel can readily game or ignore the risk controls meant to prevent financial disaster and taxpayer bailouts.”

News of the Whales Losses Leak Out, And Iksil Still 'Doubles Down.'  In April 2012, news of Iksil’s losses started leaking out.  Yet, according to Levin, rather than "come clean," the bank "misinformed regulators and the public,” with Dimon helping to do the misleading.  Levin referred to bank statements that the CIO trades were hedges - designed to offset risks being taken elsewhere in the bank.  Senate investigators, however, after examining over 90,000 documents and conducting over 50 interviews, couldn’t identify the assets that Iksil’s trades were supposed to be hedging, or how his trades were meant to reduce risk.  In fact, Iksil and his colleagues “doubled down” on their own losses in March of last year, acquiring another $40 billion worth of credit derivatives.

Levin continued:  “As late as May 10, bank CEO Jamie Dimon repeatedly described the synthetic credit trades as hedges made to offset risk, despite information showing the portfolio was not functioning as a hedge. The bank also neglected to tell investors the bad news that the derivatives portfolio had broken through multiple risk limits, losses had piled up, and the head of the portfolio had put management of the portfolio into ‘crisis mode.’”

Dimon Explicitly Demonstrates Intent to Stonewall Government.   A witnesses at the Senate meeting, Scott Waterhouse - a senior regulator at the Office of the Comptroller of the Currenc - recalled how, back in late 2011, just months before the trading scandal blew up, Dimon berated Chase CFO Douglas Braunstein for giving regular profit and loss reports to the OCC.  Here, courtesy of the Huffington Post, is part of what Waterhouse said:

Levin: So apparently he [Dimon] had decided to stop the reports?
Waterhouse: I took it that way, yes, sir.
Levin: So he would be the one to restore the flow?
Waterhouse: Yes, sir.
Levin: Did he raise his voice?
Waterhouse: He did.

Wrap Up.    It's critical to understand that the Senate Sub-Committee investigative report was prepared on a bipartisan level - issued under the name of John McCain, the ranking Republican on the committee, as well as Levin. In his opening statement at yesterday’s hearing, McCain criticized “top officials” at JPMorgan for permitting the bank’s traders to breach its risk limits, and he singled out Dimon for describing the furor over the Whale’s losses as a “tempest in a teapot.” “The truth of the matter is that six billion dollars, some of which is federally insured, is an inexcusable amount of money to be gambled away on risky bets,” McCain said. And he went on: ““Let me be clear: JPMorgan completely disregarded risk limits and stonewalled federal regulators.”

As long as JPMorgan’s share price doesn’t suffer too much—yesterday it closed down about a dollar—Dimon can probably survive being excoriated in Congress. But with the Justice Department eager to show it isn’t a Wall Street patsy, the prospect of criminal charges can’t be dismissed. Over the coming weeks, the bank’s high-priced lawyers will be desperately trying to persuade the feds that Ina Drew was right when she suggested that any deliberate deception, if there was some, was confined to Chase’s London office. For Dimon, the former golden boy, everything depends on this story holding up.
 

For further details, go to:   [ The New Yorker, 3/16/13 ].