JP Morgan Facing Increasing Scrutiny
JP Morgan has been the subject of a Congressional investigation seeking to discover how the multibillion-dollar trading losses managed to occur at all, much less remain undetected and unreported for as long as they did. Jamie Dimon, the Chief Executive, was questioned about his approval of an internal system which underestimated losses, which was contradictory with statements he had made to lawmakers in the past. He was also accused of withholding information from regulators as the losses were growing daily.
The investigation, which is ongoing, has involved already uncovered substantial indicators of prevalent misconduct. The report highlights how managers with JP Morgan were pressuring traders to estimate the losses as much smaller than they actually were, to the tune of $660 million, while simultaneously minimizing the situation to regulators. In fact, for a period in 2012, JP Morgan completely ceased to provide profit and loss reports to the comptroller from the investment banking side. According to the subcommittee report, Mr. Dimon had chosen to stop sending the reports because he believed that the reports were giving out too much information.
At other times, it appears officials of the bank outright lied, according to Senate investigators. JP Morgan officials told the comptroller’s office in January 2012 that it intended to reduce the size of the complex trading strategy and thereby reduce the exposure. Instead, JP Morgan actually increased its positions and increased its exposure. All told, the Senate investigation determined that JP Morgan breached 5 of its critical risk controls over 330 times within the first few months of 2012 alone. However, instead of addressing the growing risk, the bank decided to change how it measured the risks, which enabled the traders to continue to build larger and higher risk positions.
This investigation comes on the heels of the bank being downgraded by the Office of the Comptroller of the Currency in July. The comptroller office rates the management of an institution, indicating whether or not that bank needs higher scrutiny in the oversight. Prior to this downgrade, JP Morgan was a “2”, indicating that it had “satisfactory management.” It then fell to a 3, indicating that it “needs improvement.” The office cited “lax governance and oversight” as well as other supervisory and oversight failures and deficiencies in giving the downgrade. Specifically, the OCC has noted that JP Morgan management and board of directors had failed to ensure that the London office which permitted the $6 billion losses to occur was being properly supervised and that there were sufficient risk management controls to even attempt to prevent losses such as what actually occurred.
As a result of these issues, JP Morgan is supposedly taking new corrective measures. For one, they are forming a new board compliance committee specifically to work on the corrections being required by regulators. It is also looking to add someone to the board of directors with a strong compliance background. Whatever corrections JP Morgan does eventually make as a result of these findings, the total fallout has still yet to be seen.