JPMorgan executives are scheduled today to get a grilling from the Senate's Permanent Subcommittee on Investigations (PSI) about the "London Whale" trading debacle last year, when a U.K.-based trader in the bank's chief investment office named Bruno Iksil amassed an impossibly large position on an obscure credit index, then saw the trade collapse around him, leaving him exposed with a $6 billion loss.
Last night, the PSI released its 300-page, subpoena-assisted investigation into the Whale's losses. It's not pretty. Among the committee's findings: JPMorgan's executives, including CEO Jamie Dimon, were actively manipulative at many points during Whale episode — massaging risk metrics, keeping regulators in the dark, and witholding critical information from investors.
Here are some of the biggest whoppers and misdirections in the report, many of which are sure to come up at today's hearing:
1. "We told you everything we knew!"
JPMorgan executives, including Dimon, have repeatedly said that they were open and honest in the process of discovering the Whale's losses — and that any misstatements they made were the result of incomplete information, not willful misdirection. But the PSI's report shows that with respect to at least one important metric — Value-at-Risk, or VaR — the bank wasn't telling all it knew. Specifically, it alleges that JPMorgan knew it was giving out bogus VaR numbers, calculated under an old and faulty model, even as it was claiming its numbers were accurate and its model was up to date. That allowed it to make a huge credit trade look like a medium-size hedge. From the report:
Near the end of January, the bank approved use of a new CIO Value-at-Risk (VaR) model that cut in half the [London Whale's structured credit portfolio]’s purported risk profile, but failed to disclose that VaR model change in its April 8-K filing, and omitted the reason for returning to the old model in its May 10-Q filing. JPMorgan Chase was aware of the importance of VaR risk analysis to investors, because when the media first raised questions about the whale trades, the bank explicitly referred analysts to the CIO’s VaR totals in its 2011 annual 10-K filing, filed on February 29, 2012. Yet, days later, on April 13, the bank's 8-K filing contained a misleading chart that listed the CIO’s first quarter VaR total as $67 million, only three million more than the prior quarter, without also disclosing that the new figure was the product of a new VaR model that calculated much lower VaR results for the CIO than the prior model. An analyst or investor relying on the disclosed VaRs for the end of 2011 and the first quarter of 2012 would likely have believed that the positions underlying those VaRs were similar, since the VaR totals were very similar. The change in the VaR methodology effectively masked the significant changes in the portfolio.
2. "We told regulators everything we knew!"
The PSI's report also shows convincing evidence that JPMorgan ran rings around one regulator that was supposed to be keeping tabs on its trading position: the Office of the Comptroller of the Currency, or OCC. JPMorgan told investors that they were being "fully transparent" about the Whale's trades with the OCC. The PSI report shows otherwise:
On the April 13, 2012 earnings call, [JPMorgan's then-CFO] Mr. Braunstein also said the following with respect to the CIO’s Synthetic Credit Portfolio: “And I would add that all those positions are fully transparent to the regulators. They review them, have access to them at any point in time, get the information on those positions on a regular and recurring basis as part of our normalized reporting.” This statement by Mr. Braunstein had no basis in fact. The bank never provided the OCC with “a regular and recurring” report on the Synthetic Credit Portfolio trading positions. In fact, it was not until a month later, on May 17, 2012, that in response to an OCC special request, the bank provided the agency for the first time with specific SCP position level data.
3. "I never approved of the VaR change!"
The most damaging bit of the PSI's report for Jamie Dimon (who will not appear at today's hearing, for some reason) is an e-mail he sent in January of 2012 that directly contradicts statements he made to the PSI in an earlier hearing about the change to the VaR model described in Whopper No. 1 above:
He also told the Subcommittee that he could not recall any details in connection with approving the VaR limit increase in January 2012. However, an email dated January 23, 2012, shows that both he and Mr. Hogan replied to the email requesting the limit increase by writing simply: “I approve.”
4. "The Whale was just hedging!"
JPMorgan has claimed that the CIO's trades were intended to hedge the bank's long-term credit risk in a safe, slow-moving way. In fact, the PSI claims, the Whale was acting like a casino gambler, tweaking his trades on a daily basis.
On the bank’s April 13 earnings call, Mr. Braunstein also stated that with regard to “managing” the stress loss positions of the Synthetic Credit Portfolio, “[a]ll of the decisions are made on a very long-term basis.” In fact, the CIO credit traders engaged in daily derivatives trading, and the bank conceded the SCP was “actively traded.”
5. "It's a complete tempest in a teapot!"
We already knew, of course, that Jamie Dimon was wrong when he called the London Whale's mounting trading losses a "complete tempest in a teapot" on a call with investors, analysts, and journalists last April. (He's admitted it was a dumb thing to say.) But the PSI alleges that Dimon actually knew more than he let on, and that the traders in JPMorgan's CIO were counting on Dimon's remarks to soothe the markets and make it easier for them to exit the trade safely. That makes the "tempest" line seem less like a naive statement and more like a strategic misdirection.
In the April 13 earnings call, in response to a question, Mr. Dimon dismissed media reports about the SCP as a “tempest in a teapot.” While he later apologized for that comment, his judgment likely was of importance to investors in the immediate aftermath of those media reports. The evidence also indicates that, when he made that statement, Mr. Dimon was already in possession of information about the SCP’s complex and sizeable portfolio, its sustained losses for three straight months, the exponential increase in those losses during March, and the difficulty of exiting the SCP’s positions.
Most of this ground has been trod before, but rarely in so comprehensive and damning a package as the PSI's report. Over and over again, JPMorgan has claimed that its flaw during the London Whale debacle was being stupid, not dishonest. Even yesterday, a bank spokeswoman told the Times, “While we have repeatedly acknowledged significant mistakes, our senior management acted in good faith and never had any intent to mislead anyone.”
But the PSI's report reads like a laundry list of deliberate deception and management errors on the bank's part, meaning that today's hearing is likely to be very uncomfortable for the JPMorgan executives who are being hauled in front of the committee. If you like seeing bankers squirm, head on over to C-SPAN for the live stream.