?I approve.? With the discovery of those two words that Jamie Dimon, the chairman and C.E.O. of JPMorgan Chase, wrote in an email on January 23, 2012, the most prominent banker on Wall Street has been directly tied to the burgeoning ?London Whale? trading scandal, which has returned to the headlines in sensational fashion. In a hearing in Washington Friday, the scandal took another twist, with a senior government official asserting that, in the months leading up to the bank losing billions of dollars, Dimon ordered his underlings not to give the bank?s regulators information they had requested.
The escalation in the scandal started with Thursday?s publication of a three-hundred page report by a Senate subcommittee, which said Dimon not only signed off on a strategy that understated the risks being taken by the bank?s traders, including Bruno Iksil, a derivatives trader known as the Whale, who worked out of the bank?s tower at Canary Wharf in east London. After Iksil?s losses were revealed, last April, the report said, Dimon misled investors and the public about their nature.
On Friday, the Times reported that a criminal probe of the Whale affair by the Justice Department and the F.B.I. has reached an advanced stage. While the Times report says Dimon isn?t himself suspected of any wrongdoing, there can be no doubt that his career is on the line. For years now, he has been Wall Street?s untouchable: the magazine-cover star who, when many of his rivals were crashing and burning during the financial crisis, guided his bank through it all, mostly unharmed. He?s been invited to the White House (several times); Warren Buffett said he would be an excellent Treasury Secretary; he?s even been (largely) forgiven for whining about people criticizing bankers and their humungous pay packages.
But he won?t necessarily get through this one. If the feds were to indict any senior JPMorgan executives on charges arising from the Whale?s trades, which generated more than six billion dollars in losses, Dimon?s position could rapidly become untenable.
In a statement on Thursday, a spokeswoman for JPMorgan said: ?While we have repeatedly acknowledged significant mistakes, our senior management acted in good faith and never had any intent to mislead anyone.? That didn?t put an end to it: not nearly. Following the release of its report, the Permanent SubCommittee on Investigations held a lengthy hearing Friday. One of the first witnesses, Ina Drew, the bank?s former chief investment officer, who lost her job as a result of the Whale scandal, put the blame squarely on the bank?s London office:
Since my departure I have learned of the deceptive conduct by members of the London team, and I was, and remain, deeply disappointed and saddened to learn of such conduct and the extent to which the London team let me, and the Company, down.
Senator Carl Levin, for one, isn?t buying that story. As early as January of last year, he pointed out in his opening statement, the trading book of the Chief Investment Office, the division of JPMorgan that Iksil worked for, and which Drew oversaw, grew so large that it breached the risk guidelines established for the entire bank. ?That four-day breach was reported to top bank officials, including C.E.O. Jamie Dimon, who personally approved a temporary limit increase, and voil?, the breach was ended,? Levin said in his opening statement.
It was in okaying the temporary increase in risk-taking that Dimon sent the fateful e-mail, which has now turned up. At first glance, the strategy he approved was designed to reduce the dangers to the bank rather than increase them. While the temporary rise in risk limits was in effect, the bank?s traders and their supervisors were meant to bring down the level of risk, which is usually accomplished by selling off positions in the market. But rather than doing this, the Chief Investment Office merely changed the mathematical model it used to measure the risks attached to its portfolio, a sleight of hand that?on paper, anyway?lowered the estimate of its potential losses by fifty per cent.
According to Levin, that was just the beginning of the deception and negligence on the bank?s part. ?JPMorgan executives ignored a series of alarms that went off as the bank?s Chief Investment Office breached one risk limit after another,? he said. ?Rather than ratchet back the risk, JPMorgan personnel challenged and re-engineered the risk controls to silence the alarms. It is difficult to imagine how the American people can trust major Wall Street banks to prudently manage derivatives risk when bank personnel can readily game or ignore the risk controls meant to prevent financial disaster and taxpayer bailouts.?
Even when news of Iksil?s losses started to leak out, in April last year, JPMorgan ?misinformed regulators and the public,? Levin went on, and he said Dimon was one of those who did the misleading. All along, JPMorgan has said Iksil?s trades were ?hedges??investments designed to offset risks being taken elsewhere in the bank?rather than speculative punts. But the Senate investigators, who examined more than ninety thousand documents and conducted more than fifty interviews, couldn?t identify the assets that Iksil?s trades were supposed to be hedging, or how his trades were meant to reduce risk. In fact, rather than taking their cue from exposures elsewhere in the bank, Iksil and his colleagues ?doubled down? on their own losses in March of last year, acquiring another forty billion dollars worth of credit derivatives.
And yet, Levin noted, ?As late as May 10, bank C.E.O. Jamie Dimon repeatedly described the synthetic credit trades as hedges made to offset risk, despite information showing the portfolio was not functioning as a hedge. The bank also neglected to tell investors the bad news that the derivatives portfolio had broken through multiple risk limits, losses had piled up, and the head of the portfolio had put management of the portfolio into ?crisis mode.??
If all that wasn?t bad enough for Dimon?s reputation, one of the witnesses at the meeting, Scott Waterhouse, a senior regulator at the Office of the Comptroller of the Currency, recalled how, at a meeting in late 2011, just months before the trading scandal blew up, Dimon berated Douglas Braunstein, Chase?s Chief Financial Officer, for giving regular profit and loss reports to the O.C.C. Here, courtesy of the Huffington Post, is part of what Waterhouse said:
Levin: So apparently he [Dimon] had decided to stop the reports?
Waterhouse: I took it that way, yes, sir.
Levin: So he would be the one to restore the flow?
Waterhouse: Yes, sir.
Levin: Did he raise his voice?
Waterhouse: He did.
It isn?t just Levin, a longtime bugbear of Wall Street, who is making life uncomfortable for Dimon. The investigative report was a bipartisan one, and it was issued under the name of John McCain, the ranking Republican on the committee, as well as Levin. In his opening statement at yesterday?s hearing, McCain criticized ?top officials? at JPMorgan for permitting the bank?s traders to breach its risk limits, and he singled out Dimon for describing the furor over the Whale?s losses as a ?tempest in a teapot.? ?The truth of the matter is that six billion dollars, some of which is federally insured, is an inexcusable amount of money to be gambled away on risky bets,? McCain said. And he went on: ??Let me be clear: JPMorgan completely disregarded risk limits and stonewalled federal regulators.?
As long as JPMorgan?s share price doesn?t suffer too much?yesterday it closed down about a dollar?Dimon can probably survive being excoriated in Congress. But with the Justice Department eager to show it isn?t a Wall Street patsy, the prospect of criminal charges can?t be dismissed. Over the coming weeks, the bank?s high-priced lawyers will be desperately trying to persuade the feds that Ina Drew was right when she suggested that any deliberate deception, if there was some, was confined to Chase?s London office. For Dimon, the former golden boy, everything depends on this story holding up.
Jamie Dimon arrives at an investors meeting at company headquarters in New York, on February 26, 2013. JPMorgan Chase & Co., the biggest U.S. bank, expects headcount to decline by about four thousand in 2013 as Dimon targets mortgage operations for cuts. Photograph by Victor J. Blue/Bloomberg/Getty.
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