Related in Opinion
-
Room for Debate: How Did This Happen? (May 21, 2012)
Roughly 40 examiners from the Federal Reserve Bank of New York and 70 staff members from the Office of the Comptroller of the Currency
are embedded in the nation’s largest bank. They are typically assigned
to the departments undertaking the greatest risks, like the structured
products trading desk. Even as the chief investment office swelled in
size and made increasingly large bets, regulators did not put any
examiners in the unit’s offices in London or New York, according
to current and former regulators who spoke only on condition of
anonymity.
Senior JPMorgan executives assured the bank’s watchdogs after the
financial crisis that the chief investment office, with hundreds of
billions in investments, was not taking risks that would be a cause for
concern, people briefed on the matter said. Just weeks before the
trading losses became public, bank officials also dismissed the worry of
a senior New York Fed examiner about the mounting size of the bets,
according to current Fed officials.
The lapses have raised questions about who, if anyone, was policing the
chief investment office and whether regulators were sufficiently
independent. Instead of putting the JPMorgan unit under regular watch,
the comptroller’s office and the Fed chose to examine it periodically.
The bank pushback also suggests that JPMorgan had sway over its
regulators, an influence that several said was enhanced by the bank’s
charismatic chief executive, Jamie Dimon, long considered Washington’s favorite banker.
Now, as regulators scramble to determine whether the chief investment
office took inappropriate risks, some former Fed officials are asking
whether the investigation should be spearheaded by the New York Fed,
where Mr. Dimon has a seat on the board. Some lawmakers and former
regulators also have reservations about the comptroller’s office, which
is investigating the trade and was the primary regulator for JPMorgan’s
chief investment unit.
“The central question is why Jamie Dimon was able to so successfully
convince both its regulators that there was nothing to see at the chief
investment office,” said Mark Williams, a professor of finance at Boston
University, who also served as a Federal Reserve Bank examiner in
Boston and San Francisco. “To me, it suggests that he is too close to
his regulators.”
Regulators, for their part, say they cannot micromanage a bank or outlaw
its risk taking and did not bow to bank pressure when assigning
examiners. William C. Dudley, president of the New York Fed, has said
that JPMorgan’s losses did not pose a threat to the bank’s viability. In
a statement on Friday, the comptroller of the currency, Thomas J.
Curry, said, “I am committed to ensuring this agency provides strong
supervision for all of the institutions we oversee.”
Regulators are not typically stationed at divisions like JPMorgan’s
chief investment office, which are known as Treasury units. The units
hedge risk and invest extra money on hand, and tend to make short-term
investments. But JPMorgan’s office, with a portfolio of nearly $400
billion, had become a profit center that made large bets and recorded $5
billion in profit over the three years through 2011.
Officials of JPMorgan declined to comment on its relationships with regulators.
Long before the recent trading blunder, JPMorgan had a pattern of
pushing back on regulators, according to more than a dozen current and
former regulators interviewed for this article. That resistance
increased after Mr. Dimon steered JPMorgan through the financial crisis
in better shape than virtually all its rivals.
“JPMorgan has been screaming bloody murder about not needing regulators
hovering, especially in their London office,” said a former examiner
embedded at the bank, adding, in reference to Mr. Dimon, “But he was
trusted because he had done so well through the turmoil.”
Even now, executives at JPMorgan disagree with some regulators over how
quickly the bank should unwind the soured trade, according to people
briefed on the negotiations. JPMorgan would like to be done with the bad
bet that has resulted in at least $3 billion in losses already, but
senior executives argue it is a delicate process, especially as traders
and hedge funds on the opposite side of the trade seize on the fact that
JPMorgan is under pressure to exit the position.
Scores of
federal regulators are stationed inside JPMorgan Chase’s Manhattan
headquarters, but none of them were assigned to the powerful unit that
recently disclosed a multibillion trading loss.
Related in Opinion
-
Room for Debate: How Did This Happen? (May 21, 2012)
Roughly 40 examiners from the Federal Reserve Bank of New York and 70 staff members from the Office of the Comptroller of the Currency
are embedded in the nation’s largest bank. They are typically assigned
to the departments undertaking the greatest risks, like the structured
products trading desk. Even as the chief investment office swelled in
size and made increasingly large bets, regulators did not put any
examiners in the unit’s offices in London or New York, according
to current and former regulators who spoke only on condition of
anonymity.
Senior JPMorgan executives assured the bank’s watchdogs after the
financial crisis that the chief investment office, with hundreds of
billions in investments, was not taking risks that would be a cause for
concern, people briefed on the matter said. Just weeks before the
trading losses became public, bank officials also dismissed the worry of
a senior New York Fed examiner about the mounting size of the bets,
according to current Fed officials.
The lapses have raised questions about who, if anyone, was policing the
chief investment office and whether regulators were sufficiently
independent. Instead of putting the JPMorgan unit under regular watch,
the comptroller’s office and the Fed chose to examine it periodically.
The bank pushback also suggests that JPMorgan had sway over its
regulators, an influence that several said was enhanced by the bank’s
charismatic chief executive, Jamie Dimon, long considered Washington’s favorite banker.
Now, as regulators scramble to determine whether the chief investment
office took inappropriate risks, some former Fed officials are asking
whether the investigation should be spearheaded by the New York Fed,
where Mr. Dimon has a seat on the board. Some lawmakers and former
regulators also have reservations about the comptroller’s office, which
is investigating the trade and was the primary regulator for JPMorgan’s
chief investment unit.
“The central question is why Jamie Dimon was able to so successfully
convince both its regulators that there was nothing to see at the chief
investment office,” said Mark Williams, a professor of finance at Boston
University, who also served as a Federal Reserve Bank examiner in
Boston and San Francisco. “To me, it suggests that he is too close to
his regulators.”
Regulators, for their part, say they cannot micromanage a bank or outlaw
its risk taking and did not bow to bank pressure when assigning
examiners. William C. Dudley, president of the New York Fed, has said
that JPMorgan’s losses did not pose a threat to the bank’s viability. In
a statement on Friday, the comptroller of the currency, Thomas J.
Curry, said, “I am committed to ensuring this agency provides strong
supervision for all of the institutions we oversee.”
Regulators are not typically stationed at divisions like JPMorgan’s
chief investment office, which are known as Treasury units. The units
hedge risk and invest extra money on hand, and tend to make short-term
investments. But JPMorgan’s office, with a portfolio of nearly $400
billion, had become a profit center that made large bets and recorded $5
billion in profit over the three years through 2011.
Officials of JPMorgan declined to comment on its relationships with regulators.
Long before the recent trading blunder, JPMorgan had a pattern of
pushing back on regulators, according to more than a dozen current and
former regulators interviewed for this article. That resistance
increased after Mr. Dimon steered JPMorgan through the financial crisis
in better shape than virtually all its rivals.
“JPMorgan has been screaming bloody murder about not needing regulators
hovering, especially in their London office,” said a former examiner
embedded at the bank, adding, in reference to Mr. Dimon, “But he was
trusted because he had done so well through the turmoil.”
Even now, executives at JPMorgan disagree with some regulators over how
quickly the bank should unwind the soured trade, according to people
briefed on the negotiations. JPMorgan would like to be done with the bad
bet that has resulted in at least $3 billion in losses already, but
senior executives argue it is a delicate process, especially as traders
and hedge funds on the opposite side of the trade seize on the fact that
JPMorgan is under pressure to exit the position.
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