JPMorgan Faulted on Controls and Disclosure in Trading Loss

JPMorgan Chase ignored internal controls and manipulated documents, while its influential chief executive, Jamie Dimon, withheld some information from regulators as the nation’s biggest bank racked up trading losses last year, a new Senate report says.

The findings by Senate investigators shed new light on the multi-billion-dollar trading blunder, which has claimed the jobs of some top executives and prompted investigations by authorities. The 300-page report, released a day before a Senate subcommittee plans to question bank executives and regulators in a hearing, will escalate the debate in Washington over regulating Wall Street.

Mr. Dimon, whose reputation as anastute manger of risk has so far been only dented by the trading losses, comes under much harsher criticism from the Senate investigators. The chief executive blessed changes to an internal alarm system that underestimated losses, seemingly contradicting his earlier statements to lawmakers, according to the report. Mr. Dimon is also accused of withholding from regulators details about the bank’s daily losses â€" and then raising “his voice in anger” at a deputy who later turned over the information.

While some people briefed on the matter whether the outburst actually happened, the alleged incident illustrates a broader problem at JPMorgan: After emerging from the financial crisis in far better shape than rivals, the bank saw itself as being above its regulators. The bank was so filled with hubris, Senate investigators said, that an executive once screamed at its examiners and called them “stupid.”

The report, citing some of the same private documents that F.B.I. agents are now poring over, highlighted how JPMorgan managers “pressured” traders to low ball losses by $660 million, a previously undisclosed figure, and then played down the problems to authorities.

The trader known as the London Whale, who carried out the derivatives trades at the center of the bank’s losses told a colleague last year that the bank’s estimated losses were “getting idiotic,” according to a transcript of their phone conversation cited by the subcommittee. The trader, Bruno Iksil, added that “I can’t keep this going” and he didn’t know where his boss “wants to stop.”
Federal investigators, seeking Mr. Iksil’s side of the story, now expect to visit the trader in his native France, according to people briefed on the investigation.

The breakowns â€" at both the bank and at its regulators like the Office of the Comptroller of the Currency ¬ could galvanize support for new curbs on Wall Street trading. Using its investigation to take a broad swipe at financial risk-taking, the subcommittee depicted JPMorgan’s losses as emblematic of a dark market desperate for sunlight.

“Our investigation opens a window into the hidden world of high stakes derivatives trading by a major bank,” said Senator Carl Levin, the Michigan Democrat who runs the subcommittee. Calling the bank’s trading strategy a “runaway train that barreled through every risk warning,” he ! argued th! at the bank “exposed daunting vulnerabilities” in the financial system.

A spokeswoman for the bank said on Thursday: “While we have repeatedly acknowledged significant mistakes, our senior management acted in good faith and never had any intent to mislead anyone.”

In outlining possible policy fixes to prevent another blowup, Mr. Levin on Thursday called for new rules that would force banks to strengthen their methods for valuing their trades. He also urged regulators to finalize the so-called Volcker rule, which would prevent banks from making such bets with their own money.

JPMorgan, the subcommittee noted, “mischaracterized high risk trading as hedging,” or mitigating risk, a strategy that is allowed under the Volcker rule. The bank’s chief financial officer, Douglas Braunstein, told analyss in April that the position “is consistent” with a proposed version of the Volcker rule, a conclusion that the subcommittee dismissed as false. One regulator wrote in a May 2012 internal e-mail that the position was a “make believe voodoo magic ‘composite hedge.’”

As traders within the chief investment office assembled increasingly complex
bets, JPMorgan ignored its own risk alarms according to the subcommittee. In the first four months of 2012 alone, the report found, the chief investment office breached five of its critical risk controls more than 330 times. .

Instead of scaling back the risk, though, JPMorgan altered its value-at-risk measure in January 2012, enabling the traders to continue building the outsize wagers, the subcommittee found. Trading that would have exceeded risk controls “continuously” under the old model was permitted, the report said. The more generous model, though, showed “no breach at all from January 30 until May 2012, the report said.

The ! subcommittee’s report provides further detail about what Mr. Dimon knew about the changed alarm system. Mr. Dimon told the subcommittee he couldn’t “recall any details in connection with approving the VaR limit increase,” the report said. But, Mr. Dimon personally authorized JPMorgan to temporarily increase its value-at-risk metric, writing in a January 2012 email, “I approve.”