Everyone in Washington is talking about JPMorgan Chase's botched hedge. Everyone, that is, but the federal regulators who actually know what's going on.
The Office of the Comptroller of the Currency has timidly — and only upon request — provided a 20-word statement assuring the seven people who bothered to ask that JPMorgan remains safe and sound.
Is that really the best the agency can do? Spit in the wind while the Securities and Exchange Commission vows to get to the bottom of who knew what when, while the Federal Bureau of Investigation threatens criminal prosecutions, while the Commodity Futures Trading Commission uses it as leverage to get its way on the Volcker Rule, while senators cite the losses as evidence that the largest banks to are too big to manage and should be broken up?
I realize the JPMorgan mess occurred just as the agency was going through a transition. News of the London Whale trades broke April 6; Tom Curry took over as comptroller on April 9. The story exploded on May 10 when CEO Jamie Dimon held a conference call to eat some crow and concede losses would top $2 billion.
I also realize federal regulators take pride in never talking about specific firms. Of course no one wants the government to give away a company's proprietary secrets, but there does come a time when federal regulators need to step in as the voice of reason.
Now is one of those times.
How do I know? Consider this May 15 tweet by a New York Times reporter: "This story also ran in the Times three years ago, only we called the company AIG rather than JPM."
Really? One of the best-managed, most respected and heavily regulated banks in the world is simply a repeat of an insurance company run amok and disgraced by accounting scandals and self-dealing?
While I can't know for sure, JPMorgan's losses seem to reflect risk management gone awry at a single unit versus a companywide breakdown. And while in absolute terms a $2 billion-plus loss is a lot of money, in relative terms JPMorgan lost the equivalent of one one-thousandth of its assets.
The comptroller's office is uniquely positioned to know just how serious — how pervasive or how isolated — JPMorgan's risk management problems are. The agency has 70 examiners inside the company and those people are supported by many more at the OCC's headquarters.
"At a minimum, they should make a statement that describes what they are doing and provide people with some degree of comfort about what's happening," one former senior regulator told me.
This is about more than the health of one company. It's about confidence in the government's ability to police the industry.
And yet, a May 22 Financial Times story critical of the OCC, "U.S. Regulator Under Fire for JPMorgan Oversight," elicited little more than this from the agency: "The OCC is prohibited from releasing, and commenting on, proprietary information related to the supervision of specific institutions."
It's no wonder so few people believe the federal agencies are up to the job of overseeing giant firms. So I called the OCC on Tuesday and asked spokesman Bryan Hubbard to discuss why the agency has so little to say about the biggest thing happening in banking. He first repeated the line about how this is an earnings event, not something that will sink the company. OK, that's fine. But when pressed for more, he said: "It's important for people to know the OCC is examining the bank's activities and is in continuous dialogue with bank personnel and other regulators. In addition, our examiners are evaluating risk management strategies and practices in place at the other large banks."
Hmmm. Isn't that what the OCC does as a matter of course?
Clearly, the agency does not want to say something that turns out to be wrong. I get that, and Hubbard acknowledged as much, writing in a follow-up email: "Regulators must be careful not to rush to judgment and beware of making statements before having all of the relevant facts when serious events occur. I recognize that transparency plays an important role in the preserving confidence in our financial system, but haste at the expense of accuracy can be counterproductive."
Fair enough. But there are indirect means of getting a message out, including through members of Congress. Regulators have been briefing members and their staff about JPMorgan, and so far all the news that has leaked from those meetings has made the OCC look bad. But it doesn't have to be that way, does it? Couldn't the OCC — with the huge caveat that it is still gathering all the facts — convincingly describe the oversight and operations of JPMorgan as strong and under control? Wouldn't that go a long way toward calming markets and the public? Wouldn't that be a good thing?
But maybe the OCC isn't doing that because it is unsure of its own oversight. Eventually it is going to have to answer some tough questions, including: What role did the OCC play a role in detecting or curbing the losses? Did it approve of the model changes JPMorgan says uncovered the losses? Did it insist on a parallel run of both models to expose gaps? How much did it know about the bank's corporate investment office? Had it examined the unit recently, compared it against similar units inside other large banks? Had it questioned why its chief, Ina Drew, made $14 million in 2011? (As Joe Nocera's May 14 column pointed out: "Wall Street executives who make $14 million are not risk managers. They are risk takers — big ones.")
And what is the OCC doing now? Is it taking a look at the investment units at other banks? Is it requiring any reverse stress testing to gauge just what might go wrong?
No one expects the OCC's examiners to prevent banks from sustaining losses. But supervisors across the agencies got new tools after the 2008 crisis to beef up both the intensity and intrusiveness of the examination and monitoring process, especially when it comes to systemically important firms like JPMorgan.
The OCC should tell us how it is using those tools.
"Did supervisors — using their new, improved techniques and their multidisciplinary, on-site teams of economists and capital and financial markets experts — identify these emerging losses, and the related risk management deficiencies, early enough to get management to take timely action to limit the losses and contain the adverse spillover to the broader financial system?" Rich Spillenkothen, the former head of supervision at the Federal Reserve Board, asked in an email to me.
"Without more facts, we don't know if supervisors were asleep at the wheel, or if, in fact, they were on top of these developments and actively working to address them and limit the damage."
He added, "The effectiveness of ongoing supervision in this particular incident is a public policy question of immense importance."
The Senate Banking Committee plans to hold a hearing on these questions June 6. Comptroller Curry is scheduled to testify. Let's hope he provides forthright and convincing answers, and let's hope it's not too late to matter.