J.P. Morgan's Dimon in congressional cross-hairs
WASHINGTON (MarketWatch) -- J.P. Morgan Chase Chief Executive Jamie Dimon on Wednesday defended the U.S. banking sector and the big bank's risk management team, responding to a much-anticipated and sometimes heated interrogation from lawmakers over a $2 billion-plus derivatives trading loss at the financial institution's U.K. trading unit.
Dimon also was optimistic about the U.S. banking sector, responding to concerns raised by Democrats that another less well capitalized institution might conduct the same risky trades and have a collateral impact on a more fragile economic system.
"Banks are better capitalized, they have more liquidity, there is more transparency, their boards are more engaged, risk committees are more engaged," Dimon said.
"This risk-committee took this company through the most difficult financial crisis of all time with flying colors," he told lawmakers in a Senate Banking Committee hearing. "The risk committee did a great job, this is a flaw that I would completely blame on management, certainly not the risk committee."
Wall Street evidentially liked what it heard, as the big bank's stock price ended 1.5% higher. In a written statement released late Tuesday, Dimon told lawmakers he expected the lender to produce a "solidly profitable" quarter as he apologized again for the blowup at the bank's chief investment unit.
Democrats argued that the J.P. Morgan (JPM) miss-step makes the case for implementing a tough Volcker rule, which seeks to limit banks' speculative trades, while Republicans insisted that the regulation could limit a bank's ability to hedge its risk.
Republicans asked Dimon questions indicating that they supported existing system where big banks have both investment and commercial banking units, adding that higher capital buffers at financial institutions is the only way to prevent future crises.
"The single best way to protect taxpayers from bailouts is to ensure that banks are properly capitalized," Sen. Richard Shelby, the top Republican on the panel, said.
Sen. Bob Corker, Republican of Tennessee, raised concerns about efforts by a few on Capitol Hill to break up the banks, asking Dimon about the benefits of being a big banking organization.
In response, Dimon said that there is a place for big banks. "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 do intra-day finance of billions of dollars to some of the biggest companies," he said.
A number of Democratic questions centered around the global reach of J.P. Morgan Chase and how the massive trading losses were conducted out of the firm's London investment office -- partly by a trader, Bruno Michel Iksil, dubbed "the London whale" for his large positions in credit derivatives.
Dimon responded to a grilling from Sen. Sherrod Brown, Democrat of Ohio, who insisted that the trading problems and lack of oversight of the big bank's London office all demonstrates to him that "too-big-to-fail" banks are too-big-to-manage and should be broken up. He's got legislation to do that, but so far it hasn't gained much traction on Capitol Hill.
Brown argued that there was a lack of oversight by the bank's regulator, the Office of the Comptroller of the Currency, which only has five people in its London office.
Dimon said he didn't know if having only five people in the London office was a problem for regulation, but that it was not realistic for regulators to stop "something like this" from happening.
He said that since "we were misinformed about losses" at the London office of the bank "we probably misinformed them [the OCC]."
A number of Democratic lawmakers raised concerns about whether the bank financially incetivized its traders to take dangerous risks. Dimon says that it "is likely" that when the J.P. Morgan board finishes its review of the losses that there will be clawbacks of compensation paid to chief investment office traders involved in the unit losses.
Democrats also brought attention to the $25 billion taxpayer bailout injected into J.P. Morgan Chase during the height of the financial crisis, financial assistance Dimon argued the bank didn't need.
Sen. Jeff Merkley, the Democrat from Oregon, who is a co-author of the legislation that created the Volcker rule to limit speculative trading by big banks, battled with Dimon over
Dimon disagreed, saying that if AIG had failed the New York institution would have only suffered direct losses of $1 billion to $2 billion. However, Merkley argued that analysts contend that the AIG bailout benefited J.P. Morgan "enormously."
As expected, outside observers disagreed about the impact of the trades. Elizabeth Warren, a U.S. Democratic Senate candidate for Massachusetts and former chief of the Congressional Oversight Panel for the bank bailouts, said the trades indicated to her that new legislation is necessary to separate hedge funds and risky investment from ordinary banking.
"Banking should be boring," she said.
However, Chamber of Commerce chief Tom Donohue said he worried that regulators are over-reacting and that Washington may be transforming the banking sector into overly-regulated utility system.
"If we don't have any risk, we can't have any reward," Donohue said.