JP Morgan Chase Bank Chief Executive Jamie Dimon Caught In $2 Billion Loss
Soon after lawmakers finished work on the nation’s new financial regulatory law, a team of JPMorgan Chase lobbyists descended on Washington. Their goal was to obtain special breaks that would allow banks to make big bets in their portfolios, including some of the types of trading that led to the $2 billion loss now rocking the bank. Several visits over months by the bank’s well-connected chief executive, Jamie Dimon, and his top aides were aimed at persuading regulators to create a loophole in the law, known as the Volcker Rule. The rule was designed by Congress to limit the very kind of proprietary trading that JPMorgan was seeking.
JPMorgan Sought Loophole on Risky Trading
By EDWARD WYATT, NY TIMES, May 12, 2012
WASHINGTON — Soon after lawmakers finished work on the nation’s new financial regulatory law, a team of JPMorgan Chase lobbyists descended on Washington. Their goal was to obtain special breaks that would allow banks to make big bets in their portfolios, including some of the types of trading that led to the $2 billion loss now rocking the bank.
Several visits over months by the bank’s well-connected chief executive, Jamie Dimon, and his top aides were aimed at persuading regulators to create a loophole in the law, known as the Volcker Rule. The rule was designed by Congress to limit the very kind of proprietary trading that JPMorgan was seeking.
Even after the official draft of the Volcker Rule regulations was released last October, JPMorgan and other banks continued their full-court press to avoid limits.
In early February, a group of JPMorgan executives met with Federal Reserve officials and warned that anything but a loose interpretation of the trading ban would hurt the bank’s hedging activities, according to a person with knowledge of the meeting. In the past, the bank argued that it needed to hedge risk stemming from its large retail banking business, but it has also said that it supported portions of the Volcker Rule.
In the February meeting was Ina Drew, the head of JPMorgan’s chief investment office, the unit that suffered the $2 billion loss.
JPMorgan officials declined to comment for this article. But in the company’s annual report, Mr. Dimon wrote: “If the intent of the Volcker Rule was to eliminate pure proprietary trading and to ensure that market making is done in a way that won’t jeopardize a financial institution, we agree.”
He added: “We, however, do disagree with some of the proposed specifics because we think they could have huge negative unintended consequences for American competitiveness and economic growth.”
JPMorgan wasn’t the only large institution making a special plea, but it stood out because of Mr. Dimon’s prominence as a skilled Washington operator and because of his bank’s nearly unblemished record during the financial crisis.
“JPMorgan was the one that made the strongest arguments to allow hedging, and specifically to allow this type of portfolio hedging,” said a former Treasury official who was present during the Dodd-Frank debates.
Those efforts produced “a big enough loophole that a Mack truck could drive right through it,” Senator Carl Levin, the Michigan Democrat who co-wrote the legislation that led to the Volcker Rule, said Friday after the disclosure of the JPMorgan loss.
The loophole is known as portfolio hedging, a strategy that essentially allows banks to view an investment portfolio as a whole and take actions to offset the risks of the entire portfolio. That contrasts with the traditional definition of hedging, which matches an individual security or trading position with an inversely related investment — so when one goes up, the other goes down.
Portfolio hedging “is a license to do pretty much anything,” Mr. Levin said. He and Senator Jeff Merkley, an Oregon Democrat who worked on the law with Mr. Levin, sent a letter to regulators in February, making clear that hedging on that scale was not their intention.
“There is no statutory basis to support the proposed portfolio hedging language,” they wrote, “nor is there anything in the legislative history to suggest that it should be allowed.”
While the banks lobbied furiously, they were in some ways pushing on an open door. Officials at the Treasury Department and the Federal Reserve, the main overseer of the banks, as well as the Comptroller of the Currency, also wanted a loose set of restrictions, according to people who took part in the drafting of the Volcker Rule who spoke on the condition of anonymity because no regulatory agencies would officially talk about the rule on Friday.
The Fed and the Treasury’s views prevailed in the face of opposition from both the Securities and Exchange Commission and the Commodity Futures Trading Commission, which regulate markets and companies’ reporting of their financial positions. Both commissions and the Federal Deposit Insurance Corporation, which insures bank deposits, pushed for tighter restrictions, the people said.
Even some of those who have said the Volcker Rule is fatally flawed agree that, in its current form, the rule would have allowed JPMorgan Chase to do what it did.
“Would the Dodd-Frank law have stopped this?” asked Peter J. Wallison, a fellow in financial policy studies at the American Enterprise Institute, who has been a consistent critic of the postfinancial crisis reforms. “No,” he answered. “Dodd-Frank specifically allows hedging and market-making transactions.”
The Volcker Rule was not intended to offer such a broad exemption to the ban on proprietary trading. People involved with the drafting of the Dodd-Frank law itself say that the authors fought repeatedly to tighten the language, in part to specifically exclude portfolio hedging.
In its earliest form, the Merkley-Levin amendment to the Dodd-Frank regulatory law said that any “risk-mitigating hedging activity” — or hedging positions that reduced a bank’s risk — would be allowed. Through several drafts, that exception was steadily narrowed. The final law permitted only hedges tied to specific investments.
But when the proposed rules were released in October 2011, more than a year after Dodd-Frank went into effect, the exemptions were much broader, and allowing a bank to use hedging techniques in a portfolio was included as a potential loophole.
The drafters recognized that the exemption could be a potential problem. In soliciting comments from bankers, they specifically asked if portfolio hedging created “the potential for abuse of the hedging exemption” or make it too difficult to tell whether certain bets are hedging or prohibited trading.
Paul A. Volcker thinks there is a potential for abuse. Mr. Volcker, the former Federal Reserve chairman whose advocacy for the proprietary trading ban was so fierce that his name was attached to it, told a Congressional hearing this year that with hundreds of trillions of dollars of derivatives being traded, “you have to wonder whether they’re all directed toward some explicit protection against some explicit risk.”
Mr. Dimon said on Thursday that JPMorgan’s “synthetic credit portfolio,” an amalgam of derivatives and hedging bets that blew up in recent weeks, was part of “a strategy to hedge the firm’s overall credit exposure.” But “Volcker allows that,” he said.
That was not the intent of the law, said Phil Angelides, who headed the Financial Crisis Inquiry Commission. “I think the regulators need to go back and sharpen their pencils,” Mr. Angelides said. “The intent of the law was to stop insured depositories from doing propriety trading with this kind of risk profile.” And whatever JPMorgan calls it, “it sure looks like proprietary trading, which Dodd-Frank was designed to stop insured depositories from engaging in.”
Annie Lowrey contributed reporting from Washington and Ben Protess from Chicago.
Boss of Voldermort trader who lost $2bn at JP Morgan earns $14m a year as credit agencies give bank bleak outlook
By LYLE BRENNAN, Daily Mail
PUBLISHED: 05:45 EST, 11 May 2012 | UPDATED: 12:18 EST, 12 May 2012
Ina Drew oversaw JP Morgan office where huge losses were made
French-born, British-based Bruno Michel Iksil believed to be responsible
Dubbed the 'London Whale', be bragged 'he could walk on water'
Believed to be part of Chief Investment Office at heart of bank's losses
$14billion wiped from JP Morgan's value after shares slump 9.3 per cent
Embarrassment as CEO Jamie Dimon says the bank, which came out of the 2008 financial crisis relatively unscathed, has made 'egregious mistakes'
Shares in British banks fall: Barclays, RBS and Lloyds all hit
The boss of the British-based trader thought to have cost one of the world's biggest banks $2billion in trading losses was herself paid $14million last year.
Ina Drew, 54, is considered one of the most powerful women on Wall Street and has been at the head of JP Morgan Chase's London-based Chief Investment Office since February 2005.
Regarded as a key lieutenant of chief executive Jamie Dimon, she was effectively in charge of Bruno Michel Iksil, the Frenchman nicknamed 'Voldemort' and 'the London Whale'.
She received a cash bonus of $4.7m, a share award of $7.1m, options worth $1.5 million and a base salary of $750,000, according to regulatory filings by the bank.
The bank's ‘black hole’ - equivalent to £1.2billion - was revealed during its second quarter amid fears Mr Iksil's trades could cost JP Morgan a further £750 million in the coming months.
Shares in the bank dropped by 9.3 per cent yesterday as U.S. and British regulators launched investigations into the losses.
The verdict from credit agencies has been grim, with Fitch knocking JP Morgan down a rating and Standard & Poor's putting the bank on a negative outlook.
The slump knocked $14bn off the bank's equity value in what the Dow Jones index showed to have been the stock market's worst week of the year so far.
Fellow finance giants Morgan Stanley and Goldman Sachs also suffered as investors predicted the impact would spread.
JP Morgan is America's largest bank, holding £1.43trillion in outstanding loans and other assets, and employs 240,000 people in 60 countries.
This week it emerged that Mr Iksil works under Ms Drew in the corporation's Chief Investment Office, where his job was reportedly supposed to oversee mitigating risk.
RBS boss: Life is not about money (and this from a man who pockets £1.2m a year)
JP Morgan facing investigation by regulators over its £1.2bn trading loss which spooked world markets
ALEX BRUMMER: JP Morgan's Dimon joins the hall of shame
CEO Jamie Dimon, who admitted JP Morgan had made 'egregious mistakes', issued a statement claiming that the bank had hit trouble.
He said: ‘In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored.
‘The portfolio has proved to be riskier, more volatile and less effective as an economic hedge than we thought. There are many errors, sloppiness and bad judgment.
‘It puts egg on our face and we deserve any criticism we get.’
Mr Dimon spoke as U.S. regulator the Securities and Exchange Commission prepared to look into how changes in the way JP Morgan calculates risk might have obscured the potential for these trades to do such colossal damage.
Yet despite the accusations levelled at Mr Iksil, there has been no suggestion that his trading tactics broke any rules.
The Daily Mail has learned that the trader, a father of four in his mid-forties, has been living and working in London for the past seven years.
In his Bloomberg trading profile he talks of being able to ‘walk on water’ being ‘humble’ but in the City he has been nicknamed ‘Lord Voldemort ‘ - after Harry Potter’s nemesis - along with the names ‘London Whale’ and ‘White Whale.’
He was given the ‘Voldemort’ nickname because he was seen as such a ‘scary and powerful’ force in the City. One trader explained: ‘It was a play on the Harry Potter theme when people were frightened of Lord Voldemort and his powers and referred to him as ‘’He Who Must Not Be Named".'
In reality, according to friends and family, Mr Iksil is not a ‘larger than life figure.’ He rents a flat in Earls Court, West London, where he stays from Monday until Thursday.
He then returns to Paris for a long weekend where he spends time with his wife Karen and the couple’s four children.
Last night his sister - 41-year-old Sandrine Iksil - who lives in Leicester and works for a software company in Leamington Spa, Warwickshire, told the Daily Mail: ‘Bruno rarely talks about his work and if you met him you would not think he is a trader in the City.
‘He is very quiet and is a family man. He does not own a flash sports car and his main hobby would be cooking. He enjoys being in the kitchen. He certainly has never talked to me about his work.
‘He also insists on getting home each weekend to be with his wife and children. He works from home on Fridays.
‘I last saw him at Easter when he came to visit with his wife and children. They are just a normal family.’
Mr Iksil’s family originally hails from Russia before his ancestors settled in France.
The dark-haired trader is reported to have earned has earned about $100million (£62.2million) a year for JP Morgan’s Chief Investment Office in recent years. Mr Iksil joined JP Morgan in 2005 having previously worked at the French investment bank Natixis (KN) from 1999 to 2003. He originally graduated in engineering from the Ecole Centrale in Paris. JP Morgan said yesterday they had informed the UK’s Financial Services Authority (FSA) of their situation.
TRADERS WHO BET THEIR BANKS... AND LOST
U.S. bank Allfirst currency trader John Rusnack pleaded guilty to $691million fraud in 2002 - and was jailed for seven-and-a-half years.
Toshihide Iguchi, a former car dealer, lost more than $1billion at Japanese bank Daiwa in fraudulent trading over an 11-year period from 1984 onwards.
The Bank of Credit and Commerce International (BCCI) was seized by regulators in 1991 after auditors reported huge losses from illegal loans to corporate insiders and trades. It collapsed with $16billion debts and 250,000 savers lost money.
Japan's Sumitomo Corporation trader Yasuo Hamanaka lost his firm $2.6billion in unrecorded copper market trades and was jailed for eight years in 1996.
British trader Nick Leeson single-handedly destroyed 233-year-old Barings Bank in 1995 by making losses and setting up a secret account to hide them. He was jailed for six-and-a-half years.
Jamie Dimon's SNAFU: JPMorgan's Other Derivatives' Losses
Dimon, praised after financial crisis, suddenly finds himself with a $2 billion black eye
By Associated Press, Updated: Saturday, May 12, 3:21 PM
NEW YORK — The reputation that Jamie Dimon honed for decades on Wall Street has been severely damaged in a matter of days.
In the 1980s and 1990s, he was the protege of banking industry legend Sanford Weill. In the early 2000s, he took over Bank One, an institution few believed was fixable, and restored it to a profit.
And in 2008 and 2009, at JPMorgan Chase, Dimon built a fortress strong enough to stay profitable during the financial crisis.
His zeal for cost-cutting and perceived mastery of risk did more than keep JPMorgan strong enough to bail out two failing competitors, Bear Stearns and Washington Mutual. It gave him a kind of street cred during the post-crisis years, when he lashed out at regulators who sought to rein in banks, and Occupy Wall Street protesters who raged against them.
Now all that is on the line.
Dimon had to face stock analysts and reporters on Thursday and confess to a “flawed, complex, poorly reviewed, poorly executed and poorly monitored” trading strategy that lost a surprise $2 billion.
The revelation caused traders to shave almost 10 percent off JPMorgan’s stock price the following day and brought a shower of complaints from industry observers and lawmakers who said banks needed tighter scrutiny.
Making the black eye worse for Dimon, the loss came in derivatives trading, the complex financial maneuvering that — on a much greater scale — led to large losses and dissolved banks during the financial crisis.
Dimon “staked so much of his reputation on creating this perception of being the ultimate, infallible risk manager,” said Simon Johnson, a former chief economist of the International Monetary Fund who is now a professor at MIT. “And along comes this huge mistake.”
Dimon, 56, grew up in the Queens borough of New York City, the grandson of a Greek immigrant. His father was a stockbroker who worked for many years at Merrill Lynch.
After college and business school, Dimon turned down an offer from the venerable investment bank Goldman Sachs. Weill had been Dimon’s father’s boss at a previous job and recruited the younger Dimon to American Express.
Weill became Dimon’s mentor. When Weill left American Express in 1986, Dimon followed him to Commercial Credit Co., a sleepy finance firm that catered to middle-class clients.
Weill went on to buy a host of companies, including Smith Barney and Travelers, and Dimon led some of those divisions. The empire-building culminated when Travelers merged with Citicorp to form Citigroup in 1998, the largest U.S. bank at that time.
Dimon was the heir apparent but had started to clash with Weill. Weill was insecure about Dimon’s growing assertiveness, and Dimon often showed his temper in meetings. Weill fired Dimon in 1998.
Dimon spent time reading biographies of statesmen and took up boxing lessons to let off steam. In 2000, he became CEO of Bank One, a Chicago bank that was losing money. By 2003, he had turned the bank around, and in 2004 it merged with JPMorgan Chase. Dimon became CEO of JPMorgan in 2006.
By that time, Dimon had lived through several industry crises, including the savings and loan meltdown of the late 1980s, a Russian debt default in 1998 and the dot-com stock bust of the early 2000s.
Dimon was not the man responsible for any of those, of course, as he is for the $2 billion error.
His admission of the mistake this week left some analysts asking whether his grip is slipping, and the bank’s more than $2 trillion in assets have become too big for him to manage.
More likely, some other analysts said, it is a statement about how, three and a half years after the crisis, banks still conduct impossibly complex trades that are difficult to track.
“If even Jamie gets it wrong managing a $2 trillion bank, what does it say about banks where management is far inferior?” said Mike Mayo, a bank analyst at the brokerage CLSA and author of the book “Exile on Wall Street.”
Just a few weeks ago, while answering questions from stock analysts, Dimon dismissed media reports of big market-moving trades by JPMorgan as a “complete tempest in a teapot.”
He admitted Thursday that he should have been paying better attention. Asked to what, he first said trading losses then said, “There was some stuff in the newspaper and a bunch of other stuff.”
Dimon’s signature trait has been cost-cutting, an attribute that helped the banks he led squirrel cash away. At Bank One, after finding out how many newspaper subscriptions the bank paid for, he is reported to have told an executive: “You’re a businessman; pay for your own Wall Street Journal.”
That low tolerance for profligacy kept the banks he managed strong enough to weather any crisis. Now, Dimon says the trade that was conducted is so complex that the losses could easily get worse.
JPMorgan’s $2 billion loss was caused by trades that were meant to hedge, or protect, the bank from trading losses that could occur in the investments of the bank’s corporate treasury.
The amount of the loss was small for an institution of JPMorgan’s size — it cleared $19 billion in profit last year — but will hurt its second-quarter earnings and was an embarrassment. It rattled the industry, too. Other bank stocks fell as much as 4 percent Friday.
“It puts egg on our face, and we deserve any criticism we get,” Dimon said at a hastily convened conference call with investors to reveal the losses.
During the crisis in 2008, Dimon drew wide praise for keeping his bank healthy, including from President Barack Obama and billionaire investor Warren Buffett. One biographical book that was released soon after the financial crisis was titled “Last Man Standing.”
In the years since, other Wall Street bankers and CEOs have cowered as the public backlash against bankers and their bonuses has grown. But Dimon, who made $23 million last year, according to an Associated Press calculation, used his stature to become the most outspoken banking CEO.
He attacked any obstacle that came in his way or his company’s — especially regulations aimed at stopping banks from taking the kinds of risks that precipitated the financial crisis. Dimon viewed them as impediments to the bank’s ability to make a profit.
He did not even spare the Federal Reserve chairman, Ben Bernanke, or one of his iconic predecessors, Paul Volcker. At times, his outspokenness took on a swagger that raised eyebrows.
At a public forum last year, Dimon pointedly challenged Bernanke to defend his regulatory drive, which he said was going to slow down the U.S. economic recovery.
Earlier this year, Dimon said in a Fox Business Network interview: “Paul Volcker, by his own admission, has said he doesn’t understand capital markets. ... He has proven that to me.”
One of the most respected Fed chiefs, Volcker has championed a law that restricts banks from trading with their own money.
Since Thursday, Dimon has contended the trades in question were meant to manage the bank’s financial risk, not turn a profit, and thus would not be subject to the so-called Volcker rule.
Outside analysts have been more skeptical, and the mistake has breathed energy into the push to toughen financial regulations. Dimon did say that he should have been paying closer attention.
“We know we were sloppy. We know we were stupid. We know there was bad judgment,” he told NBC News on Friday in an interview to air Sunday on “Meet the Press.”
He said he did not know whether laws had been broken and invited regulators to look into the matter. “But we intend to fix it and learn from it and be a better company when it’s done,” he added.
Most analysts gave Dimon kudos for coming clean on the trading loss, but few disagreed that his reputation had taken a severe hit.
Said Nancy Bush, longtime bank analyst at NAB research, and contributing editor at SNL Financial: “Jamie certainly cannot be standard-bearer for the banking industry anymore.”