WASHINGTON — JPMorgan Chase & Co. chief executive Jamie Dimon will apologize Wednesday for his firm's massive trading loss, while also attempting to assure members of Congress that the episode was isolated and is now under control.
In written testimony to the Senate Banking Committee, which was released by the bank after the markets closed Tuesday, Dimon did not provide an updated estimate of the size of the losses. Last month, he pegged the loss at $2 billion, but said it could grow, and independent estimates of its size have grown to more than $4 billion.
"We have let a lot of people down, and we are sorry for it," Dimon said in the prepared testimony.
While he did not provide much new detail in his four-page testimony about what went wrong, Dimon acknowledged that senior management should have more closely scrutinized the bank's Chief Investment Office, which made the synthetic credit trades in question. He also stated the portfolio managed through that office should have had more specific risk limits.
"We will not make light of these losses, but they should be put into perspective," Dimon said. "We will lose some of our shareholders' money — and for that, we feel terrible — but no client, customer or taxpayer money was impacted by this incident."
"Our fortress balance sheet remains intact: as of quarter end, we held $190 billion in equity and well over $30 billion in loan loss reserves," he continued.
Dimon said the portfolio's problems began in December 2011, when the Chief Investment Office received instructions to reduce the bank's risk-weighted assets in anticipation of new Basel capital requirements.
"To achieve this in the synthetic credit portfolio, the CIO could have simply reduced its existing positions; instead, starting in-mid-January, it embarked on a complex strategy that entailed adding positions that it believed would offset the existing ones," Dimon said.
"This strategy, however, ended up creating a portfolio that was larger and ultimately resulted in even more complex and hard-to-manage risks. This portfolio morphed into something that, rather than protect the firm, created new and potentially larger risks."
"As a result, we have let a lot of people down, and we are sorry for it," he said.
Dimon said that the Chief Investment Office's strategy for reducing the portfolio was poorly conceived, and was not reviewed outside that office. He also said that the traders did not have enough understanding of the risks they took, and believed incorrectly that losses experienced in March and early April were likely to reverse themselves.
Dimon also blamed deficiencies in the investment office's risk controls, stating that personnel were "in transition," risk managers were "generally ineffective in challenging the judgment" of traders and risk control processes "were not as formal or robust as they should have been."
Since the losses, Dimon said, the bank has made personnel changes in the Chief Investment Office, established a new risk committee structure there, and is conducting an extensive review of the trading losses. The bank's board of directors is independently overseeing that review, he said
"Importantly, our team has made real progress in aggressively analyzing, managing and reducing our risk going forward. While this does not reduce the losses already incurred and does not preclude future losses, it does reduce the probability and magnitude of future losses," Dimon said.
"When we make mistakes, we take them seriously and often are our own toughest critic," he continued. "While we can never say we won't make mistakes — in fact, we know we will — we do believe this to be an isolated event."
Also Tuesday, Banking Committee Chairman Tim Johnson released excerpts of his opening statement for Wednesday's hearing.
In his remarks, the South Dakota Democrat criticized Dimon for his comments in April that the risky trades represented a "tempest in a teapot."
"We later learned," Johnson said, "it was an out-of-control trading strategy with little to no risk controls that cost the company billions of dollars."
"How can a bank take on 'far too much risk' if the point of the trades was to reduce risk in the first place? Or was the goal really to make money?" Johnson said in the excerpted remarks. "As the saying goes, you can't have your cake and eat it too."