JPMorgan Chase & Co (NYSE:JPM) Chairman Jamie Dimon floated unscathed through a hearing Wednesday of the Senate Banking Committee meant to examine how his bank incurred a massive loss in the credit-default swaps derivatives market.
The losses, which are believed to be at least $2 billion, were supposed to be part of a hedging effort that would lower other bank risks.
Dimon's main comments to Congress toed the party line that the action at the bank's chief investment office were a legitimate hedge that grew unwieldy after February.
What it morphed into I will not try to defend. It violated common sense, Dimon told the panel.
But beyond that, the financier pushed back against the idea that more regulation would have helped prevent this type of issue in the future.
Despite various interest groups' published scathing, probing questions they would have liked to see Dimon asked prior to the hearing, most lawmakers stuck to polite, even superficial, queries.
Philosophically, Sen. Bob Corker, the junior Republican senator from Tennessee, presented the most solid challenge to Dimon, asking Can you share with the committee what the benefit to society of these kinds of institutions is?
We live in a complex financial ecosystem. There's a place for large companies and small companies. We can raise a huge amount of money for the top Fortune 500 companies in a matter of days. We are the biggest banker to banks, Dimon replied.
His customers buy [our financial products] because they need them. They don't buy them because we want them to buy them.
Sen. Sherrod Brown, the senior Democratic senator from Ohio, echoed Corker's sentiment, asking Dimon several wonky questions that focused on the relationship between the bank and its regulators to conclude that too-big-to-fail banks are perhaps too big to manage and too big to regulate.
Here is a sample of senators' questions and Dimon's responses
Did you personally approve the CIO's trading strategy?
I was aware of it, but I did not approve it.
Why were you so definitive in dismissing the situation earlier in the year as a tempest in a teapot?
When I made that statement, I was dead wrong. Under no event did it look like it would be getting nearly as bad as it did.
What was the deal with the value-at-risk model, which was supposed to issue red flags when something was going wrong and was scrapped after the debacle?
On April 13, we were still unaware that the model was contributing to the problem. In hindsight, the old model was more accurate than the new model.
We don't run the business on models. Those are just one input.
Why did the people in charge of monitoring risk at the CIO's office fail?
That risk committee itself wasn't independent and wasn't independent-minded enough.
The risk committee reviews a lot of issues. ... I think it would have been hard for them to capture this if management didn't capture it.
In the rest of the company, we have those disciplines in place; we didn't have it here.
Did the compensation scheme set up for the CIO's office contribute to setting up the trading unit for this kind of event?
I don't believe that the compensation made this problem worse.
Will bonuses be clawed back then?
It's likely there will be clawbacks.
How can you justify that the positions initially taken -- that later resulted in a mammoth loss -- were a hedge and not a bet on the markets?
This particular portfolio was supposed to earn a lot of revenue if there was a crisis. I consider that a hedge.
I think it's going to be very hard to make a bright-line distinction between proprietary trading and hedging.
Would the Volcker rule have stopped this kind of event from occurring?
I don't know what the Volcker rule is. It hasn't been written yet.
But later: The real important part of the Volcker rule isn't portfolio hedging -- it's market-making. We don't want to throw the baby out with the bath water.
Has the regulatory regime instituted since 2007 made our banking system safer?
I don't know.
I think a lot of the things that caused the problems [in 2008] don't exist anymore. And that's because of markets, not because of regulation.
What has JPMorgan done to make sure this doesn't happen again?
A thorough review of every single thing that has happened.