WASHINGTON — On the surface, Sen. Carl Levin's grilling of current and former executives at JPMorgan Chase over the infamous London Whale trades was a deep dive into facts, e-mails, and disputes over responsibility concerning the more than $6 billion loss.
The Senate Permanent Subcommittee on Investigations hearing on Friday lasted more than six hours and covered a range of details, including whether bank officials purposely misled their regulator and chief executive Jamie Dimon's involvement in withholding key data.
But arguably its most important point was the overarching picture that emerged from the hearing: of a bank that didn't understand the risks it was taking and a regulator that couldn't keep up either. The hearing provided ample ammunition to critics that charge JPMorgan in particular — and large banks generally — are simply "too big to manage."
Following are key moments likely to help shape the debate over "too big to fail":
JPMorgan executives acknowledged a basic flaw in regulatory oversight.
For the most part, the hearing belonged to the indefatigable Levin, the subcommittee's chairman, who asked the vast majority of the questions. But Sen. Ron Johnson, R-Wis., asked a critical one to Ashley Bacon, JPMorgan's acting chief risk officer, when he inquired whether regulators were up to the task of overseeing such complex transactions.
"The answer is generally yes, but when something like this occurs and we didn't understand it ourselves, I think it makes it incredibly difficult for them to understand the details and the context," Bacon said.
The response is important because it shows a fundamental problem with supervisory oversight: regulators are sometimes only aware of a problem if the bank itself is attuned to it. The comment also feeds into criticism that big banks are overextended, unaware of where their own problems lie.
Scott Waterhouse, the examiner-in-charge of JPMorgan for the Office of the Comptroller of the Currency, said several times that the agency wasn't alert to the dangers of the bank's chief investment office because the institution didn't consider it high risk. As a result, neither the agency nor the bank was paying close attention to activities there.
"We spent most of our time focusing on what we considered to be the higher-risk activities," Waterhouse said.
Levin summed it up this way: "We had $157 billion high-risk derivatives portfolio here that the OCC hardly knew existed," he said. "And that strikes me as being a hidden financial risk."
Bank executives didn't know what was being reported to OCC, or who was supposed to do reporting.
The subcommittee focused on the bank's failure to send certain reports about the synthetic credit portfolio to the OCC as losses mounted, raising more questions about the company's management.
Levin pressed Ina Drew, the bank's former chief investment officer, and Peter Weiland, the former head of market risk in the CIO, about who was responsible for sending those reports, but neither could speak in detail about the data or who sent it.
"In the first quarter of 2012, the CIO stopped sending standard data to the OCC that might've alerted the agency to the portfolio's growth," Levin said. "For four key months, from January to April, the CIO did not send to the OCC its executive management report with its financial data… Is that true, Ms. Drew, those reports were not sent during those months? Is that true?"
Drew said she was unaware that the data wasn't being reported — and didn't know whose job it was to ensure that it was.
Even now - that's what the OCC is doing, and I fear that the FDIC is not far behind. It's "forest for the trees" syndrome for these agencies.