WASHINGTON — A Senate probe into the JPMorgan Chase "London Whale" trading debacle provides a harsh critique of the firm's actions, but also raises critical questions about the regulators trained to police it.
The Permanent Subcommittee on Investigations, chaired by Sen. Carl Levin, D-Mich., issued a scathing report Thursday that examines the rise and fall of the bank's synthetic credit portfolio within its chief investment office.
The more than 300-page bipartisan report documents repeated examples of troubled risk-taking behavior, attempts to hide the massive losses and problematic regulatory oversight. Its release precedes a hearing scheduled for Friday, where lawmakers are expected to grill current and former executives and regulators about the decisions leading up to the multi-billion dollar trading losses disclosed last spring.
"There are many, many failures here by JPMorgan, some of which I believe are serious and indeed egregious. But there are also shortfalls, serious shortfalls in oversight by the Office of the Comptroller of the Currency," Levin said at a press briefing on Thursday.
The failures in oversight at the OCC come at a difficult time for the agency, amidst reports that it's working to beef up enforcement and shed its image of being too cozy with banks. The report notes that Comptroller Thomas Curry, who's spearheaded that effort, took office just days after the media first began writing about the JPMorgan losses in April 2012.
Drawing the line between where regulators failed to provide sufficient oversight and where the bank misled those efforts or withheld critical information remains a difficult task, and could prove a key topic of discussion at tomorrow's hearing.
"The JPMorgan Chase whale trades demonstrate how much more difficult effective regulatory oversight is when a bank fails to provide routine, transparent performance data about the operation of a large derivatives portfolio, its related trades, and its daily booked values," the report says. "JPMorgan Chase's ability to dodge effective OCC oversight of the multi-billion-dollar Synthetic Credit Portfolio until massive trades, mounting losses, and media reports exposed its activities, demonstrates that bank regulators need to conduct more aggressive oversight with their existing tools and develop more effective tools to detect and stop unsafe and unsound derivatives trading."
The report notes that regulators first caught wind of the losses and the depth of the bank's activities from those early press reports last April, though officials have said that even then they were not fully briefed about the trading losses.
"On April 6, 2012, when media reports unmasked the role of JPMorgan Chase in the whale trades, the OCC told the subcommittee that it was surprised to read about them and immediately directed inquiries to the bank to obtain more information," the report says. "The OCC told the subcommittee that it initially received such limited data about the trades and such blanket reassurances from the bank about them that, by the end of April, the OCC considered the matter closed."
The bank went on to disclose a portion of its losses in May, finalizing its first quarter earnings at the time and then restating them again in July to include additional losses. In December 2012, the bank reported that the portfolio lost $6.2 billion over the year and had been dismantled.
The panel's investigation also revealed that regulators failed to ask key questions about the growth of the portfolio in the years leading up to the losses, including when the bank reported that the portfolio had breached the chief investment office's stress limits in 2011, and when it later reported a surprising $400 million gain.