WASHINGTON: When bank regulators wanted daily profit and loss statements from JPMorgan Chase’s investment division, the bank initially refused.
When examiners issued recommendations the bank didn’t like, executives yelled and called the federal officials “stupid.”
At one point, the top brass at the prestigious bank ambushed a junior bank examiner, becoming “loud and combative” when he disclosed disputed results of an exam.
Those incidents are part of a rare and detailed look into the interactions between Washington regulators and Wall Street, described in congressional testimonies on Friday and a Senate report on a massive trading loss at JPMorgan. The documents and testimonies show a dynamic: Executives at the nation’s largest bank at times bullied federal examiners. The examiners at times gave in. In a six-hour hearing Friday, top officials at the Office of the Comptroller of the Currency, which regulates the biggest banks, came under fire from lawmakers for tolerating impudent behaviour by JPMorgan executives.
“We had a $157bn high-risk derivatives portfolio here that the OCC hardly knew existed. And that strikes me as being a hidden financial risk. Is that the way the OCC views it?” questioned Sen Carl Levin, who chairs the Permanent Subcommittee on Investigations, which issued the report on the Wall Street giant’s $6.2bn trading blunder. “I would view it that way, yes, sir,” answered Scott Waterhouse, the primary OCC official in charge of JPMorgan.
“Now, is this something that — that OCC has to or is expected to have to ferret out, or is this something that the banks are supposed to disclose?” Levin shot back.
Waterhouse responded: “The responsibility would lie first and foremost with management... And then... we ought to be informed, receive the regular reports, and understand the risks as they transpire.”
But that’s not what happened.
The Senate report, released on Thursday, revealed that JPMorgan hid losses for several months, ignored internal controls and manipulated documents. Lawmakers also hammered bank executives at the hearing for withholding information about the nature of the portfolio. Bankers took the brunt of the barrage of questions from Levin and others, but regulators did not escape his scrutiny.
There are some 70 staff members from the OCC stationed inside JPMorgan, not to mention the 40 examiners from the Federal Reserve. These federal officials police departments that pose the greatest risks, yet they failed to act as the bank’s investment office made increasingly large and volatile bets.
Waterhouse acknowledged that he did not consider the trading portfolio to be high risk until April of last year, when The Wall Street Journal published an article about the losses.
The Senate report accused JPMorgan executives of using subterfuge to prevent regulators from becoming alarmed by the mushrooming portfolio. Lawmakers, nevertheless, insist regulators should have kept a closer watch on the JPMorgan unit, rather than periodically reviewing its activities.
WP-BLOOMBERG
