JPMorgan: The House that Jamie Built Looks Much Like the House That Sandy Built

By Pam Martens: March 15, 2013 

Jamie Dimon Testifying at Senate Banking Hearing June 13, 2012

Much of the investing public, and I would venture many members of the research team at the Senate’s Permanent Subcommittee on Investigations that compiled the 307 page report on JPMorgan’s $6.2 billion in losses from the London Whale trade, are unaware that the company’s Chairman and CEO, Jamie Dimon, learned at the knee of the mastermind of too-big-to-fail – former Citigroup Chairman and CEO, Sandy Weill. From 1982 to 1998, Dimon was Weill’s first lieutenant, rising to the rank of President of Citigroup. 

Carl Levin, Chairman of the Subcommittee, released the stunning investigative report yesterday and, throughout, the level of arrogance toward regulators, the dishonesty and dissembling on earnings calls, the hiding of losses, and the specter of the imperial CEO conjured up images of the downfall of Citigroup and Weill’s role in creating the culture than burned down the house. It felt, alarmingly, like Dimon had exported the culture of Citigroup to JPMorgan Chase.  

Pretty much everything that Dimon led us to believe about this year-long saga has been debunked by the Senate’s investigation. Far from being some rogue-traders in London, the report informs us that “…the whale trades were not the acts of rogue traders, but involved some of the bank’s most senior managers. Previously undisclosed emails and memoranda showed that the CIO [Chief Investment Office] traders kept their superiors informed of their trading strategies.” 

When Dimon testified before the Senate Banking Committee on June 13, 2012, he portrayed the portfolio of the Chief Investment Office (CIO) as a conservative one, telling members it consisted of  “Treasuries, agencies, mortgage-backed securities, high quality securities, corporate debt and other domestic and overseas assets.” From the Senate’s report, we now learn that it also included $22 billion in a credit index of junk bonds. 

In the same appearance before the Senate on June 13, Dimon characterized the massive trading of the Chief Investment Office and its inexplicable foray into the world of synthetic credit derivatives as a means of hedging the bank’s overall risks. Dimon stated: “While CIO’s primary purpose is to invest excess liabilities and manage long-term interest rate and currency exposure, it also maintains a smaller synthetic credit portfolio whose original intent was to protect – or ‘hedge’ – the company against a systemic event, like the financial crisis or Eurozone situation.” 

In an April 13, 2012 earnings call with analysts, after news of the outsized bets appeared in the media, Dimon also portrayed the synthetic credit derivatives as a “hedge,” stating: “It’s a complete tempest in a teapot. Every bank has a major portfolio. In those portfolios, you make investments that you think are wise, that offset your exposures. Obviously, it’s a big portfolio. … But at the end of the day, that’s our job, is to invest that portfolio wisely and intelligently to – over a long period of time to earn income and to offset other exposures we have.” 

Dimon’s story made no sense from the very beginning. JPMorgan Chase is a bank that makes loans to some of the largest corporations in the world. How does one hedge exposure to corporate loans by taking on exposure to more corporate loans in a credit index? As it turns out, this story was also bogus.

According to the Senate report: “The Subcommittee staff asked JPMorgan Chase’s officials to reconcile how the SCP [Synthetic Credit Portfolio] could simultaneously be both ‘long,’ and serve as a hedge in 2012, when the bank itself was ‘long.’ If the SCP had the same overall long exposure as the bank overall, the SCP would lose money when the bank lost money, instead of offsetting the bank’s losses. The Chief Risk Officer for the firm, John Hogan, and his deputy, Ashley Bacon, conceded that they could not reconcile the SCP holding a long position and also functioning as a hedge for the bank. Similarly, John Wilmot, the Chief Financial Officer of the CIO, was unable to do so. Joseph Bonocore, the former Chief Financial Officer for the CIO and the former Treasurer for JPMorgan Chase, stated that he did not believe the book could both be long and maintain a hedge against losses in a credit crisis.” 

Even the bank examiner from the Office of the Comptroller of the Currency (OCC) did not believe this portfolio was a hedge. According to the report, in a May 2012 internal email, he called it a “make believe voodoo magic ‘composite hedge.’ ” 

If the massive credit derivatives portfolio, which ballooned from $51 billion to $157 billion in the first quarter of 2012, was not a hedge, then it follows that JPMorgan was misleading its regulators about the fact that it had a proprietary trading group taking massive bets with insured deposits of the bank and functioning off the radar screen in London – the very thing the Dodd-Frank financial reform legislation was supposed to have outlawed under the Volcker Rule. The report seems to agree, stating: “Mr. Dimon has not acknowledged that what the SCP morphed into was a high risk proprietary trading operation.” 

In Dimon’s testimony to the Senate Banking Committee on June 13, 2012, he appeared to attempt to justify his delayed reporting to the public on the mounting losses in the Chief Investment Office by suggesting that the traders thought the losses were “anomalies” and the position would return to profitability. Dimon stated before the Committee: “When the positions began to experience losses in March and early April, they [the traders] incorrectly concluded that those losses were the result of anomalous and temporary market movements, and therefore were likely to reverse themselves.” 

In fact, the key London trader, Bruno Iksil, who was nicknamed the London Whale for the market dominating bets, knew the position was doomed as early as March and said so in a phone exchange. (The U.K. regulator, the Financial Services Authority, tapes phone calls between traders and the Senate obtained those tapes.) 

From the Senate report as to what occurred on March 23, 2012: 

The SCP book, which was essentially frozen in place on March 23, continued to incur losses throughout the trading day. Mr. Iksil informed Mr. Martin-Artajo that the SCP losses that day were huge, between $300 and $600 million, depending upon whether the CIO used the midpoint or ‘best’ prices available in the daily price range (bid-ask spread): “I reckon we have today a loss of 300M USING THE BEST BID ASKS and approximately 600m from the mids.” 

Using instant messaging, Mr. Iksil asked Mr. Grout to find out from Mr. Martin-Artajo what level of losses to report for the day. Mr. Iksil characterized the huge losses as “hopeless,” predicted “they are going to trash/destroy us,” and “you don’t lose 500 M[illion] without consequences,” concluding that he no longer knew what marks to use: 

Mr. Iksil: “It is over/it is hopeless now. … I tell you, they are going to trash/destroy us. … [T]onight you’ll have at least [$]600m[illion], BID ASK, MID. BID ASK, YOU HAVE [$]300M[illion] AT LEAST… it is everywhere/all over the place. we are dead i tell you.” 

By the time JPMorgan stopped reporting the extent of the losses to the public last year, they had grown to $6.2 billion.

Today, the Senate’s Permanent  Subcommittee on Investigations will take up the investigation again at 9:30 a.m., taking testimony from various JPMorgan personnel involved in the matter as well as representatives from one of its many regulators, the Office of Comptroller of the Currency. Jamie Dimon will not be testifying. That may be a good thing, given his past distortions.   

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