June 13, 2012

Talk about a letdown. At this morning's hearing before the Senate Banking Committee, J.P. Morgan's chief executive Jamie Dimon didn't add much information about the credit derivatives trade but did shed more light on why the bank changed it’s Value-at-Risk (VaR) Model.

In fact, the charismatic Dimon never mentioned the words "London Whale," the nickname for trader Bruno Iksil, who reportedly executed the controversial trades, though one of the senators did mention it.

When questioned by Sen. Richard Shelby as to whether the chief investment office (CIO) was supposed to hedge or earn a profit, Dimon said the CIO unit invests money and earns income. He explained that the purpose of the synethetic credit portfolio was to earn a lot of money if there was a crisis.

"I consider that a hedge," said Dimon.

He repeated that the $350 billion portfolio was conservatively run, but that the synthetic credit portfolio, which was a small portion of the larger portfolio, "had morphed into something else, which I cannot defend." An apologetic Dimon, also said, "We won't do it again."

But when Dimon was asked about the London Whale and investors talking about strange movements in the swap indexes, and the size of those transactions, he declined to respond, noting that it could hurt shareholders.

As for concerns raised about why JPMorgan changed the CIO's VaR model, and was that done to disguise the losses on the derivatives, Dimon told lawmakers that models are updated all the time. Specifically, sometime in 2011, the CIO had asked to update their models partially due to the new risk capital weighted rules under Basel III. Dimon said the past could not predict the future, and so models had to be updated to reflect liquidity, concentrations and concerns about Europe. The change had to be approved by the bank’s model review group and "did effectively increase the amount of risk this unit was able to take," he said.

On April 13th, the day of the call, Dimon dismissed concerns over the large trades by the London Whale "as a tempest in a teapot." On that day, he said, "We were unaware that the updated model may have contributed to the problem. When we found out, we went back to the old model."

As for why the CIO's risks got out of control, Dimon didn't explain what happened in the market though he did admit there was a problem with the unit’s risk controls. He said there was need for more granular risk limits.

The rest of the hearing went off on tangents about Dodd-Frank, Volcker Rule and bunch of other issues, such as America’s fiscal cliff. On the latter, Volcker advised senators to do something like Simpson-Bowles debt-reduction before the election.

While there were a few testy exchanges, especially one in which the bank was accused benefiting from TARP money and the AIG bailout, overall it was a love-fest for Jamie Dimon.

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Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in ...