(USA Today)-- The nation's largest bank hid high-risk derivatives trading that ran up $6.2 billion in losses by inflating trade values, dodging federal regulators, and misinforming investors and the public about the dicey strategy, a scathing new congressional report charges.
The so-called London Whale trades in early 2012 by JPMorgan Chase were so large that they roiled world credit markets, despite bank CEO Jamie Dimon's initial and since withdrawn dismissal of the losses as a "tempest in a teapot," the Senate Permanent Subcommittee on Investigations reported Thursday in a 301-page analysis that disclosed new details of the financial debacle.
The bank's use of federally insured deposits for at least part of the risky trades reprised some of the questionable financial practices that led to the national recession, the report concluded. The bank said Thursday "while we have repeatedly acknowledged significant mistakes, our senior management acted in good faith and never had any intent to mislead anyone."
MORE: Highlights of JPMorgan Chase e-mails
The Senate panel is scheduled to question several current and former JPMorgan Chase officials, along with federal regulators, at a Capitol Hill hearing Friday. Four bank employees deeply involved in the trading ducked Senate subpoenas by arguing they lived outside the U.S. Nonetheless, the bipartisan report, based on bank personnel interviews, internal documents, e-mails and other electronic records, concluded that the bank and its Chief Investment Office:
• Gambled billions of dollars in hidden "high-risk, complex, short-term trading strategies" by London-based traders from the bank's Synthetic Credit Portfolio. The strategy and trading were known by several bank managers, but were only fully disclosed to federal regulators in the Office of Comptroller of the Currency after the massive losses drew news media attention.
"I am going to be hauled over the coals. ... (Y)ou don't lose 500 M(illion) without consequences," bank trader Bruno Iksil wrote in a March 2012 instant message after a day of heavy losses. He was among the four who declined subpoenas.
• Claimed at times that the strategy functioned as a hedge against credit risks - even though the bank failed to identify the assets being hedged or show how the trading lowered, rather than increased, risk. Although a Dimon e-mail requested a report to document the hedging claim, the subcommittee "found no evidence this analysis was completed."
• Hid more than $660 million in preliminary losses for months in 2012 by overstating the value of credit derivatives and "ignoring red flags that the values were inaccurate."
• Breached all five of the major risk limits on the trading - and then raised the limits and disregarded red flags to continue the strategy. Bank managers were aware of the breaches "but allowed them to continue, lifted the limits, or altered the risk measures after being told that the risk results were 'too conservative,' not 'sensible,' or 'garbage.' "
• Misinformed investors, the public and policymakers about the risk and total losses after the disastrous trading became public. The strategy forced JPMorgan Chase to reduce and restate first-quarter earnings last year. It ultimately led to a 50% cut in Dimon's 2012 pay, reducing his annual compensation to $11.5 million.
The Senate panel called for tougher oversight of bank-based derivative trading, including procedures used to gauge prices and costs of executed trades. The report concluded that the Office of Comptroller of the Currency failed to spot the risky strategy and rein in the bank even though it had approximately 65 examiners and related personnel physically located at JPMorgan Chase.
Until 2012, the OCC "had very little understanding of the strategies, size, or risk profile" involved in the derivatives trades, the report concluded. That was due "primarily to a lack of disclosure" by JPMorgan Chase about when the trading strategy "was established, when it delivered unexpected revenues, or when it began to increase in size and risk in 2011," the report said.
The OCC didn't catch some red flags, including a tenfold growth in risky trading volume in 2011, the subcommittee report said. But the regulators at the same time coped with what they told investigators was strong push-back from Ina Drew, then JPMorgan's chief investment officer, in response to a 2011 regulatory report that cited some needed corrections.
The OCC told Senate investigators Drew complained that the agency was trying to "destroy" JPMorgan Chase's business. According to the report, regulators quoted her as saying "that investment decisions are made with the full understanding of executive management including Jamie Dimon." The report adds, "She said that everyone knows that is going on and there is little need for more limits, controls, or reports."
OCC examiner Elwyn Wong characterized the bank's purported anti-risk hedging strategy as a "make believe voodoo magic 'composite hedge' " in a May 18, 2012, e-mail. But that came after media reports brought the financial debacle to light.
"The bottom line is that the bank did not disclose and the OCC did not learn of the extent and associated risks ... until media reports on April 6, 2012, described the book's outsized credit derivative holdings," the report concluded.
JPMorgan Chase "piled on risk, ignored limits on risk-taking, hid losses, dodged oversight and misled the public," said Sen. Carl Levin, D-Mich., the subcommittee chairman. The bank's London trading office created a "runaway train that barreled through every risk warning," he said.
Sen. John McCain, R-Ariz., the panel's ranking minority member, added that the findings documented "a shameful demonstration of a federally insured bank taking substantial risks and gambling away billions of dollars on ill-advised traders while regulators were asleep at the switch."
Congress approved the Dodd-Frank Act financial reforms in 2010 in part with the aim of preventing risky trading by large banks that could threaten the domestic and global economy. Part of the law, known as the Volcker Rule, was included in an effort to prevent banks from engaging in proprietary trading with federally insured deposits.
But after missing earlier deadlines for completing Volcker Rule provisions, U.S. financial regulators are still working on finalizing specifics.