The losses resulted from an attempt to reduce risk. One option for the CIO would have been to reduce overall exposure. Instead, the unit attempted to increase the hedges. Dimon contends that the purpose of the unit was to hedge, but they actually ended up taking on additional risk because traders didn’t understand the risks.
This loss really was a drop in the bucket. The firm lost no customer or client money, and the quarter for the bank will still shows a profit.
The loss was an isolated event. A lot of critics have jumped on it, of course, but J.P. Morgan still has shown a $7 billion unrealized profit from the CIO unit over the last three years.
Oversight by senior members of the bank was not robust enough. CIO traders did not understand the risks of what they were doing. Dimon and other key personnel should have more closely scrutinized the strategy and the trades.
The problem has been identified and steps have been taken to address it. The bank has appointed a new head for the CIO unit. A new risk committee structure has been implemented. An extensive firm-wide review is being conducted.
People should keep things in perspective. J.P. Morgan is a market leader. The bank has more than $30 billion of loan loss reserves. Basel I Tier 1common ratio is 10.4%. Basel III is 8.2% and rising. The balance sheet is a fortress and can easily handle this loss. Fed stress tests determined that J.P. Morgan could handle an $80 billion loss and still maintain an adequate capital cushion.
Republicans used this testimony as an opportunity to re-litigate Dodd Frank and financial regulation. In response to a question from Sen. Corker, Dimon said he didn’t know if Dodd-Frank made the financial system safer. He said higher capital and liquidity requirements were good, but taken as a whole, it’s unclear if the law will prevent industry catastrophes.
Being a large, complex institution is necessary. Dimon said that if J.P. Morgan didn’t provide the services they did, others would. Large corporations need things such as large intra-day loans that can only be provided by large international financial institutions. If American institutions aren’t allowed to do it, overseas banks would.
Regulations are hurting lending. Dimon is okay with high capital requirements, but not knowing what the ultimate requirement will be and when it must be implemented causes too much confusion for the banks. The inevitable result is reduced lending.
The Volcker Rule is unnecessary. Dimon has said this before, and he reiterated it. The Volcker Rule would be difficult to implement and, even so, it hasn’t been written yet so Dimon said he didn’t know exactly what it would be and if it would ban these types of trades.
J.P. Morgan may clawback bonuses for those let go from the unit. The bank has never done a clawback, but they are investigating doing it in this case. Dimon favors the idea.
The best regulations would be simple, strong, and clean. In response to a question from Sen. DeMint, Dimon said regulations are necessary, but are not currently effective. Current regulations lack clarity and make it difficult for banks to effectively carry out their mission.
High capital requirements are the best regulatory tool to protect against loss. What protected J.P. Morgan in regards to this mistake is the strong balance sheet. That’s what a fortress balance sheet is intended to do, and that’s what it did do.
Sen. Merkley isn’t the brightest tool in the shed. I suspect he’s not alone in not understanding the financial crisis. It’s very clear that J.P. Morgan did not need TARP, but Sen. Merkley insisted that J.P. Morgan would have gone under if not for TARP and the AIG bailout. When Dimon attempted to explain it to him and said the senator was “misninformed.” Merkley said they should just agree to disagree, which was laughable.
The hearing was only peripherally about the trading loss. The fact is that most of the Senators didn’t fully understand the specifics of what they were questioning about. The hearing, as most hearings do, turned into a show. Dimon clearly had an intellectual advantage over most of the senators, so when one did challenge him, as Sen. Merkley did, the questioner ended up looking foolish. J.P. Morgan is a market leader and Jamie Dimon is one of the best CEOs in the country. Ultimately, the hearings gave Dimon a platform to demonstrate that.
Disclosure: No position