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.

The report recommends that the OCC continue to rebuild its relationship with the bank beyond the actions it has already taken, which include numerous supervisory letters requiring action, a cease-and-desist order and a downgrade of the bank's management rating.

"The OCC tolerated resistance by JPMorgan Chase to regulatory requests and failed to establish a regulatory relationship that mandated the bank's prompt cooperation with OCC oversight efforts," the report says, while noting that the "new Comptroller appears to be taking actions to correct that fundamental oversight problem."

It adds: "The question is whether the OCC can recalibrate its regulatory relationship to achieve effective oversight, not only with JPMorgan Chase, but also other large financial institutions."

In a statement, the OCC said it is still reviewing the subcommittee's report and that it is "very disappointed that the bank misinformed the OCC, which hampered our supervisory efforts."

The agency also acknowledged it could have done more to oversee the problematic trades, and that it has subsequently stepped up its supervisory efforts.

"We have taken specific steps to improve our supervisory process across the large complex financial institutions we supervise," the OCC said.

During the briefing, Levin added that the investigation's findings underscored the need for a "strongly enforced" ban on proprietary trading, which he pushed to have included in the Dodd-Frank reform law. Regulators are working to finalize the Volcker rule sometime later this year, and committee members may press witnesses Friday on the differences between hedging and proprietary trading, and why the synthetic credit portfolio was considered the former. (This distinction troubled regulators as well. One OCC examiner, for example, called the portfolio a "make believe voodoo magic 'composite hedge,'" in a May 2012 internal email, according to the report.)

"If they're going to claim that trades are a hedge they've got to be able to identify what is being hedged against, what are the assets that are being hedged and what is the proof that it is a hedge," Levin said. "So that is a very important part of the legislative language and so in that regard we're going to work hard for a final rule that does not allow the kind of manipulation and the kind of concoctions that were created here by the bank to be accepted in the name of hedging."

Beyond tough words for regulators, the report largely focuses on the role of traders and executives within JPMorgan, especially within the CIO, and its multiple failures in risk management and proper disclosure.

"Our investigation shows how a portfolio of synthetic credit derivatives, purchased in massive quantities with complex trading strategies created a runaway train that barreled through every risk warning, lost more than $6 billion," Levin said at Thursday's briefing. "That runaway train also exposed daunting vulnerabilities in the U.S. financial system related to high-risk derivatives trading by federally insured banks."

He added that the investigation also raises questions about whether the bank is "too big to manage," given its size and the complexity of its operations.

"There is evidence that clearly it was not managed properly. There's all kinds of evidence that losses were being hidden, that there was mismarking going on. All kinds of evidence. Most of that did not get right to the top where it should have been," said Levin. "It got to supervisory levels and should have been acted on, but it did not get, so far as we can tell, to the very top. And that means there is evidence that this is just too big to manage or was mismanaged. It's one or the other."

Despite those management failures, the panel chairman said he didn't ask Jamie Dimon, the bank's chief executive, to attend the hearing because the discussion will focus on those directly involved in the trading mess.

Levin downplayed Dimon's involvement in the bank's trading morass, including receiving dozens of emails, though the report does cite one incident where the banker "raised his voice in anger" with another executive after the bank resumed sending daily profit and loss data for its investment bank to regulators.

"We're going to first hear from the people who had the most to do with these events and had the most knowledge. That's the first step we're going to take. If there are any additional steps that need to be taken we'll take them after we hear from people who have the most information," Levin said, leaving the door open for more hearings and actions, as necessary.

He added that the panel has the discretion to make referrals for criminal proceedings to the Justice Department, but said those determinations would be made after Friday's hearing.

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