(MoneyWatch) The finger-pointing was on full display Friday as Senators cast a harsh light on JPMorgan Chase's (JPM) disastrous derivatives trades last year that cost the financial giant at least $6.2 billion. And although bank CEO Jamie Dimon was not in attendance at the hearing, some of them pointed squarely at him.
Sen. Carl Levin opened a vigorous grilling of the bankers JPMorgan did dispatch -- vice chairman Douglas Braunstein and Michael Cavanagh, co-head of the corporate and investment bank -- a day after the Senate Permanent subcommittee on Investigations released a report into the trades that accused the company of manipulating its reporting and stonewalling federal regulators. The Michigan Democrat began by describing a bank that, despite its reputation for prudence, doubled down on risks only to cover up its losses to the public and avoid safeguards meant to control excessive risk.
"JPMorgan executives ignored a series of alarms that went off as the bank's Chief Investment Office breached one risk limit after another," Levin 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."
Braunstein, formerly the bank's chief financial officer, revealed that Jamie Dimon had ordered a halt to reporting on some of the disastrous trades to the bank's regulator, the Office of the Comptroller of the Currency. He said Dimon did so because of worries that the OCC wasn't treating their data with sufficient confidentiality, a claim senators found hard to swallow.
For the general public, the losses from the trades debacle is another example of why the largest banks -- widely held, publicly traded companies that take deposits from ordinary Americans -- are now feared more than ever: They continue to derive profits and take sometimes huge losses by taking enormous risks that expose shareholders and taxpayers to large losses.
The witnesses gave for the most part pained performances. Former Chief Investment Officer Ina Drew, long held as one of the most respected people on Wall Street, blamed the London-based JPMorgan trading operation and the people working under her who were overseeing it. Cavanagh, widely viewed as a potential successor to Dimon as CEO, blamed Drew and her office, beginning his remarks with the observation that the bank had cleaned up its act, in part by accepting her resignation and firing some of her crew.
Accusations also were indirectly leveled by lower-ranking JPMorgan personnel. Bruno Iksil, the trader nicknamed the "London Whale" whose massive trades led to the company's losses, was cited in the subcommittee's report saying he couldn't believe his bosses were continuing with the positions, saying at one point, "I can't keep this going." His remarks seemed to suggest that people above him were calling the shots, not a rogue trader keeping them in the dark.
Much of the hearing centered on JPMorgan's efforts to change how they marked the value of its losing trades and how the firm characterized those trades in the early days after they were revealed to the public. Levin provided the committee with charts showing how, while the underlying trades hadn't changed, the bank had changed its risk models so the losses seemed far smaller than they were.
Also coming in for some ancillary damage was JPMorgan's auditor, PriceWaterhouseCoopers. After all, how derivative-related losses are recorded is partly an accounting issue, and the big accounting firms have a dreary history of enabling large companies and institutions as they manipulated valuations on derivatives. The demise of Arthur Anderson because of its work in the Enron debacle is a case in point. In the present case, Cavanagh quickly established the support of his bank's auditors for the fast and fluid changes the bank made to hide its losses from shareholders and regulators.
"Who is your auditor?" Levin asked.
"PriceWaterhouse," Cavanagh said.
"They approved shifting the pricing practices?" Levin asked.
"Yes," replied Cavanagh.
Then there were the banking regulators who missed any possible indications of a crisis. Even if the bank was withholding information, should the OCC have been able to spot troubles in these trades, and should they have allowed the bank to stonewall them? Levin, along with Sen. John McCain, R-Ariz., both hammered on the point that JPMorgan, allegedly under orders from Dimon, stopped providing the Office of the Comptroller of the Currency with timely reports on the company's losing trades.
" It seems to me remarkable that you're required to make reports to regulators and you just decide not to give a report," McCain said to Braunstein. "It's kind of a testimony to the lack of action on the part of regulators."
OCC chief Thomas Curry said the agency missed the losses because of the bank's lack of disclosure. "There were red flags that we failed to notice and act upon," he said. "However, once we became aware of the potential scope of the problem, we quickly took actions."
The regulator agency has long been regarded as one of the most passive of banking regulators. At one point, Drew suggested that regulators there, despite the withholding of information apparently ordered by Dimon, were well aware of the magnitude of trading losses facing the bank. Levin expressed disbelief during that exchange.
The Levin report's indictment of the OCC for its seeming failure to oversee JPMorgan Chase echoes allegations against other bank supervisors in the years leading up to the housing crash. In a 2011 report on the financial crisis, the Permanent subcommittee blasted the Office of Thrift Supervision, which regulates savings and loans, for its incestuous relationship with Washington Mutual. WaMu, the industry's largest thrift, collapsed in 2008 after incurring massive mortgage-related losses, a meltdown the panel blamed in part on the OTS.
"The agency's failure to restrain WaMu's unsafe lending practices stemmed in part from an OTS regulatory culture that viewed its thrifts as "constituents," relied on bank management to correct identified problems with minimal regulatory intervention, and expressed reluctance to interfere with even unsound lending and securitization practices. OTS displayed an unusual amount of deference to WaMu's management," the report said.
In addition to McCain and Levin, the only other Senator questioning Drew was Sen. Ron Johnson, R-Wis., who used the opportunity to argue that "too big to fail" banks remain a problem.
Johnson also used his brief appearance to argue that the trading debacle is proof that the 2010 Dodd-Frank financial reform law doesn't work, a favorite criticism of Wall Street supporters who want even less regulation. Yet had one of the key components of the law been in place -- derivatives exchanges -- the bank may have found it more difficult to fudge the value of the derivatives involved in the "Whale" trades. More broadly, two-thirds of the rules needed to implement Dodd-Frank remain unwritten, making it hard to gauge the full impact of the law.