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Dimon Conquers Senate Banking Panel, With Members' Help

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WASHINGTON — He came, he saw, he conquered.

Jamie Dimon, the chairman and chief executive of JPMorgan Chase (JPM) easily won a Senate Banking Committee hearing on Wednesday probing the more than $2 billion loss at his firm, signaling that his star status on Capitol Hill remains relatively unchanged despite ongoing questions about the unusual trades.

But it wasn't much of a fight.

Far from facing tough questions from skeptical lawmakers, Dimon's inquisitors — with a few notable exceptions — lobbed a series of softballs. Some senators seemed almost obsequious to the JPMorgan chief, dismissing his own admissions of fault and seeking his advice on ways to reform existing regulations.

"We can hardly sit in judgment of your losing $2 billion," said Sen. Jim DeMint, R-S.C. "We lose twice that every day here in Washington… It's comforting to know that even with a $2 billion loss in a trade, your company still had a $19 billion profit."

Later, DeMint asked Dimon for help.

"I'm really honestly looking for some ideas as we look over the next year and hopefully in a position where we can make some positive changes," said DeMint, referring to the possibility that the GOP could win control of the Senate in the November elections.

Although Senate Democrats had more to gain from challenging Dimon in an effort to bolster their defense of the Dodd-Frank Act, most demurred. Sen. Charles Schumer, D-N.Y., sought Dimon's input as "somebody who knows the financial industry," on whether other firms engage in the same types of activities that got JPMorgan into trouble. But he did so while seemingly going out of his way to praise the bank.

"What frightens most people about what happened is not the effect on JPMorgan," Schumer said. "It's a large institution, well capitalized and the shareholders lost, but the taxpayers and customers didn't."

The parade of easy questions brought disdain from political observers and many in the media.

"Schumer is basically asking Dimon for advice on regulation now," tweeted John Carney, who runs the NetNet blog for CNBC. "It's regulatory capture happening right before our eyes."

As for the man himself, Dimon appeared sure and confident — in essence, like he usually does. Perhaps the strongest signal that he had his mojo back was his extended, passionate defense of mega-banks, which have come under increasing fire because they can be hard to manage and to regulate.

"There is a place for large companies and for small companies," Dimon said. "We bank some of the largest global multinationals in America and around the world. We can bank companies in 40 different countries. We do trade finance. We give intra-day lines of billions of dollars to some of the biggest companies. We can do $5 billion revolvers or raise money for America's Fortune 100 companies in a day or two when they needed to do something."

"These are services they need," Dimon continued. "They buy them because they need them. They don't buy them because we want them to buy them."

Dimon did allow that there are some negatives to size. "You know, greed, arrogance, hubris, lack of attention to detail," he said.

But even that admission was deflated later when Dimon asserted that small institutions can be plagued by the same problems, and Republican Sen. Jerry Moran turned the statement about arrogance and hubris into a laugh line about the U.S. Senate.

Although Dimon voiced contrition for the trades that led to the losses — as well as his initial dismissive reaction to early media reports on the trades — he said the bank learned important lessons from the breakdown in risk management.

Asked by Banking Committee Chairman Tim Johnson, D-.S.D., whether JPMorgan will claw back pay from traders, managers and executives who were involved in the losses, Dimon said the bank probably will.

"It would be inappropriate to make those decisions before you finish your final review, [but] you can expect we'll take proper corrective action," Dimon said. "And I would say it's likely, though this is subject to board, but it's likely there'll be claw backs."

There were a few tough questions brought, coincidentally or not, by lawmakers that have received little or no campaign donations from the banking giant - Democratic Sens. Robert Menendez and Jeff Merkley.

Menendez seized onto Dimon's statement that the trades began as a hedge but morphed into something else, saying: "What did it morph into? Russian roulette?"

Dimon replied: "It morphed into something I can't justify. It was just too risky for our company."

Menendez, D-N.J., also pressed Dimon on his opposition to a capital surcharge for the biggest banks.

Under the Basel III framework, all banks must hold at least 7% capital by 2019, but the largest institutions must hold an additional 1% to 2.5% more. JPMorgan currently holds 8.2% Tier 1 common capital, which is well over the current requirement but below the eventual 9.5% that is likely to be required.

Dimon, who last year called Basel III "anti-American," explained those comments Wednesday by saying, "I was talking about … things which were being skewed against American banks."

Merkley, one of the authors of the Volcker Rule's ban on proprietary trading, threw Dimon a curveball by first asking him about whether his bank could have survived the crisis of 2008 and 2009 without any government assistance.

Dimon shot back: "I think you were misinformed," before noting that top government officials asked his bank to take bailout funds.

Merkley also pressed Dimon on the bank's trading strategy, citing reports that Dimon had encouraged the risky trading strategy at JPMorgan's Chief Investment Office. "That sounds like operating a hedge fund," Merkley said.

"Here are the facts," Dimon replied. "We have $350 billion of assets in CIO. The average rating is AA-plus. The average maturity has a duration of three years, not 20 or 30. The average yield is 2.7%. Those characteristics are of a very conservative portfolio."

Several GOP senators argued that higher capital standards, rather than the prescriptive regulations enshrined in the Dodd-Frank Act, are the best way to guard against unexpected losses in the banking system.

Dimon agreed, but batted away suggestions that banking regulators should have caught the errant trades. Dimon said regulators relied on data provided by JPMorgan, which was faulty.

"You have to give regulators realistic objectives," Dimon said. "I don't think they could stop something like this from happening."

Dimon also stood firm on his view that the Volcker Rule, which allows hedging but not proprietary trading, is unworkable. He said that he doesn't know whether JPMorgan's risky trades, after they morphed from hedges, would have been allowed, largely because the rule is still being written, and is so complex.

"Some have said that it's not possible to distinguish between proprietary trading and hedging," said Sen. Mike Crapo, teeing up the argument for Dimon.

Dimon agreed: "I think it's going to be very hard to make a bright line distinction between proprietary trading and hedging because you could look at almost anything we do and call it one or the other."

Despite his opposition to key parts of the Dodd-Frank Act, Dimon repeatedly stated that he does not oppose all parts of the law. He cited in particular certain efforts in the legislation to end the "too big to fail" phenomenon.

"We have to allow our big institutions to fail," Dimon said. Referring to orderly resolution authority, he added: "I call it bankruptcy for big dumb banks. I think when you have bankruptcy, I'd have claw backs, I'd fire the management, I'd fire the board, I'd wipe out the equity and then unsecured only recover whatever they recover like a normal bankruptcy."

The JPMorgan chief also endorsed living wills that institutions must write to detail how they can be unwound. Dimon said his own bank's living will remains in draft form, but is being circulated with the Federal Deposit Insurance Corp. and the Federal Reserve Board.

Dimon is scheduled to testify again about the trading losses on Tuesday, June 19, before the House Financial Services Committee.

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Comments (5)
Frankly I don't know why the Senate felt the need to stick their nose in this issue in the first place. As stated, the mistake didn't cost taxpayers or deposits one dime--just stockholders--and Dimon has to answer to the stockholders every year.
Posted by raninb | Wednesday, June 13 2012 at 5:49PM ET
The entire JPM trading loss episode has been bizarre. As Raninb notes, there's a huge political outcry about what is largely a private matter. Then the day of reckoning arrives, Dimon heads to the Hill, and the members of the Senate Banking Committee act like a bunch of kindergarteners parallel playing--one asks about Montana farmers, another poses fawning questions about how to prevent future crises and a third wants to know about foreclosed-upon homeowners...all off in their own little la-la worlds. Neil Weinberg, Editor in Chief, American Banker.
Posted by Neil Weinberg | Wednesday, June 13 2012 at 6:00PM ET
What a travesty. After allowing Jon Corzine to successfully invoke the Sgt. Schultz defense for misusing and/or losing over a billion dollars of customer money, Congress allowed Jamie Dimon to invoke the 'Oops' defense for disguising a high-risk proprietary trading operation as risk management hedging, concealing the operation from resident examiners, deceiving investors about the severity of gambling losses and only coming clean after the operation was exposed by Bloomberg News.

It was interesting to watch as the usually glib Mr. Dimon almost choked on the word 'nefarious,' but had no problem with words like greed, arrogance and hubris.

Piercing the myth that Chase did not need saving from the big bank-caused financial crisis, Sen Menendez reminded Mr. Dimon that the fortress balance sheet he touts so often was protected by a moat filled with $25 billion in bailout funds and $450 billion in loans from the Fed.
Posted by jim_wells | Thursday, June 14 2012 at 8:13AM ET
DeMint should be impeached. i am so sick and tired a partician politics. cant wait for the revolution.
Posted by hengyou | Thursday, June 14 2012 at 8:30AM ET
Of course! When compared to regulators who allowed banks to lend to Greece leveraging their equity 62.5 to 1 Dimon has to stand out as a true genius in risk management.
Posted by Per Kurowski | Thursday, June 14 2012 at 2:05PM ET
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