June 13, 2012

While the silver-haired CEO of JPMorgan Chase doesn’t exactly throw himself at the mercy of the Senate committee, he does give his side of the spectacularly bad $2 billion bet that may blossom to $3 or $4 or $5 billion dollars once the dust settles.

Here's what the poster boy for gutting the Volcker Rule will say this morning:

What Went Wrong?

We believe now that a series of events led to the difficulties in the synthetic credit portfolio. Among them:

  • CIO’s strategy for reducing the synthetic credit portfolio was poorly conceived and vetted. The strategy was not carefully analyzed or subjected to rigorous stress testing within CIO and was not reviewed outside CIO.

  • In hindsight, CIO’s traders did not have the requisite understanding of the risks they took. When the positions began to experience losses in March and early April, they incorrectly concluded that those losses were the result of anomalous and temporary market movements, and therefore were likely to reverse themselves.

  • The risk limits for the synthetic credit portfolio should have been specific to the portfolio and much more granular, i.e., only allowing lower limits on each specific risk being taken.

  • Personnel in key control roles in CIO were in transition and risk control functions were generally ineffective in challenging the judgment of CIO’s trading personnel. Risk committee structures and processes in CIO were not as formal or robust as they should have been.

  • CIO, particularly the synthetic credit portfolio, should have gotten more scrutiny from both senior management and the firmwide risk control function.

    Steps Taken

    In response to this incident, we have taken a number of important actions to guard against any recurrence.

  • We have appointed new leadership for CIO, including Matt Zames, a world class risk manager, as the Head of CIO. We have also installed a new CIO Chief Risk Officer, Chief Financial Officer, Global Controller and head of Europe. This new team has already revamped CIO risk governance, instituted more granular limits across CIO and ensured that appropriate risk parameters are in place.

  • Importantly, our team has made real progress in aggressively analyzing, managing and reducing our risk going forward. While this does not reduce the losses already incurred and does not preclude future losses, it does reduce the probability and magnitude of future losses.

  • We also have established a new risk committee structure for CIO and our corporate sector.

  • We are also conducting an extensive review of this incident, led by Mike Cavanagh, who served as the company’s Chief Financial Officer during the financial crisis and is currently CEO of our Treasury & Securities Services business. The review, which is being assisted by our Legal Department and outside counsel, also includes the heads of our Risk, Finance, Human Resources and Audit groups. Our Board of Directors is independently overseeing and guiding these efforts, including any additional corrective actions.

  • When we make mistakes, we take them seriously and often are our own toughest critic. In the normal course of business, we apply lessons learned to the entire Firm. While we can never say we won’t make mistakes – in fact, we know we will - we do believe this to be an isolated event.
  • As any comic will tell you, Dimon closes big: "Last, I would like to say that in the face of these recent losses, we have come together as a Firm, acknowledged our mistakes, and committed ourselves to fixing them. We will learn from this incident and my conviction is that we will emerge from this moment a stronger, smarter, better company."

    What doesn’t the sleepy-eyed CEO say? "Please ignore our stupidly risky mistake and continue to consider killing almost all of Dodd-Frank and the Volcker Rule, mmkay?"

    Advanced Trading will follow Dimon's testimony throughout the day.

    ABOUT THE AUTHOR
    Phil Albinus is the former editor-in-chief of Advanced Trading. He has nearly two decades of journalism experience and has been covering financial technology and regulation for nine years. Before joining ...