Why Levin's Whale Hearing May Hurt More Banks than JPM

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.

"I do not know, Senator. I had no part of reports being sent to any regulators. Certainly if I had known they weren't being sent, I would've considered that the wrong thing to do," said Drew, adding subsequently that the "risk and finance" organizations were in charge of dealing with regulators.

Weiland responded similarly.

"I don't know the people who were responsible for sending the reports to the regulators, the individual people. My understanding is that normally that's part of the finance function," he said.

Senior bank executives demonstrated arrogance toward OCC's involvement in data reporting.

Lawmakers bristled over the missing data the bank failed to provide regulators, suggesting that it wasn't up to the institution to decide what information to report.

During the hearing, Levin suggested the problem was due to the tone at the top set by Dimon. He pointed to a moment in 2011 when the bank stopped providing daily profit and loss data on its investment bank to the OCC. (The data was not related to the chief investment office and the London Whale trades, which occurred later.)

Douglas Braunstein, the bank's former chief financial officer, said that the order to withhold information came from Dimon himself because he had concerns about the confidentiality of the data.

"Prior to stopping the data, a number of regulators had had breaches in some of the information that we had shared with them," Braunstein said. "There had been mistaken losses of information. And so we wanted to ensure that prior to restarting the data that we had adequate controls in place to ensure that the data got to the regulators and only to the regulators."

That angered Sen. John McCain, R-Ariz., who said the bank could not just decide to forgo complying with regulations.

"Should we just decide… because we're concerned about something, we're not going to comply with regulations?" McCain asked. "Is that how JPMorgan works?"

It took two days for the OCC to notice the missing information. The first day, the agency assumed it was a technical error, according to Waterhouse. But it eventually had to go all the way to Braunstein to get the decision reversed. When it was, that angered Dimon, Waterhouse said.

"When Mr. Braunstein said that he had agreed to restore this report, that's when Mr. Dimon reacted angrily and said that it's Dimon's decision, not Braunstein's decision to do that," Waterhouse said.

Earlier in that conversation, Dimon told OCC officials they didn't even need the data.

"He was pressing me as to, 'Why would you need this information? What good is it? What do you use it for?' He said, 'I don't think you need this amount of detail. You can still do your supervision without it,'" Waterhouse said.

JPMorgan may face other penalties.

The 300-page report released by subcommittee on Thursday repeatedly claims that JPMorgan misled and withheld information from the OCC. During the hearing, Levin cited several examples.

For instance, in January of 2012, the OCC was told that it was winding down the portfolio that later resulted in massive losses. Instead, it "mushroomed or ballooned," Waterhouse said.

Drew said that the bank had intended to reduce the size of the portfolio, but that it effectively had to go up before it could go down.

"We had asked for, and received permission, to have a slightly higher capital number for the first quarter before then embarking on a rapid reduction from the second quarter forward," Drew said. "And things went terribly wrong, as we all know."

But Levin also pointed out that on April 16, 2012, the bank told regulators that losses from the trades stood at roughly $580 million, when it internally had already reported the estimates at $719 million. By the actual day of the meeting, the losses had actually climbed to $1.25 billion.

As a result of the new data the report contained, OCC officials are considering taking further action against the bank (It has already taken an enforcement action as well as other measures.)

"As we find out about this, and honestly as we go through your report, there's a lot of interesting information that we have to digest still," Waterhouse said.

He was quickly followed by Comptroller Thomas Curry, who added, "Senator, it is wholly unacceptable for an institution, its officers or employees to provide false or misleading information to the OCC and its examiners."

A spokeswoman for JPMorgan said bank officials never knowingly misled the OCC.

"We have made regrettable errors and overhauled our risk policies to correct these mistakes, but senior JPM executives always provided information to regulators and the public that they believed to be accurate," the spokeswoman said.

If JPMorgan messed up this badly, it is bad for other banks.

The investigation exposed numerous failures in oversight at various levels of management within the bank and by regulators trained to oversee it.

This is despite the fact that JPMorgan has a reputation for being one of the best run in the industry — begging the question of whether any organization of its size and complexity can be adequately managed and regulated.

Levin saw it as a need for more derivatives regulation.

"We have seen today a very disturbing picture, which raises questions not just about JPMorgan, but about derivatives in general, how they're valued, disclosed — and how they're disclosed or not disclosed; how they're managed to limit risk, or not managed to limit risk," Levin said.

Levin also gave a warning to Curry.

"Mr. Curry, you and your colleagues have a challenge to get America's biggest bank back on the straight and narrow and to keep our banks on the straight and narrow," he said.