Senate Dems Sharply Criticize OCC's Handling of JPM Trades

WASHINGTON — In his first major test as comptroller, Thomas Curry took a public beating from Democratic senators Wednesday over his agency's handling of JPMorgan Chase's trading losses.

The unusual spectacle of an Obama administration appointee taking heavy flak from Democrats while their Republican colleagues were far less critical highlighted the particular difficulties of Curry's job.

A political independent, Curry must lead an agency that has a reputation as being close to the large banks it regulates, but many Democrats expect him to move the Office of the Comptroller of the Currency in the opposite direction. Making his seat Wednesday even more uncomfortable, Curry moved into the job less than two months ago, right around the time that the agency first became aware of JP Morgan's risky trading positions.

"Did the OCC screw up in allowing these JPMorgan trades to happen?" asked Democratic Sen. Robert Menendez.

The comptroller was not nearly as blunt in response, saying only that his agency is undergoing a self-critical review.

Democratic Sens. Jack Reed, Jeff Merkley and Sherrod Brown also led the charge against the OCC at the Senate Banking Committee's second of three hearings on the JPMorgan losses.

Also testifying were Federal Reserve Board Gov. Daniel Tarullo, Deputy Treasury Secretary Neal Wolin, Federal Deposit Insurance Corp. Chairman Martin Gruenberg, and Consumer Financial Protection Bureau Chairman Richard Cordray.

Under questioning from Reed, Curry said that his agency has five employees based in London, where the JPMorgan trades were made, where they supervise roughly half a dozen U.S. institutions that have global operations.

Curry said that the JPMorgan employees responsible for managing the London operation's risk were based in New York. But when pressed, he was unable to say whether the bank's New York employees had full authority to direct the London operation.

"One of the focuses of our review is to determine the accountability, the involvement of management in supervising the design of the risk management controls and their monitoring of it," Curry said.

Merkley, an author of the Volcker Rule, made the case that the JPMorgan's trades should not have been allowed under the rule's ban on proprietary trading — a view that the OCC continues to resist during its review of the bank's losses.

"Does anyone on this panel think that Bruno Iksil, the London Whale, who ran JPM's European strategic investment unit, woke up each day trying to mitigate the risk from excess deposits?" Merkley asked.

Curry responded cautiously, saying: "That is a related area of inquiry at the OCC."

Brown, who is the most prominent congressional advocate for breaking up the largest U.S. banks, succeeding in forcing Curry to acknowledge that in the JPMorgan case, the OCC did not meet its own standards for ensuring strong risk management and audit functions at big banks.

JPMorgan's Chief Investment Office was making $360 billion in trades, Brown stated, a whopping sum that would have made it the eighth-largest stand-alone bank in the United States.

"Should the eighth-largest bank in the nation be allowed to make the biggest, most complex trade — your words — in the entire banking system without the OCC's knowledge?" Brown asked.

Curry initially suggested that JPMorgan was to blame, saying: "We would expect to be aware of significant risks, to have the bank identify them and for us to have adequate reporting about those risks."

But he immediately walked back that criticism, saying that the trades at issue represented only a portion of the Chief Investment Office's portfolio. "And that may be part of the reason why it was not identified as quickly as we would like," Curry said.

The hearing also highlighted the very different ways in which Republicans and Democrats in Congress are reacting to the JPMorgan story.

The panel's top Republican, Sen. Richard Shelby of Alabama, and several of his GOP colleagues focused on the need for loss-absorbing capital in the banking system.

While some of their Democratic colleagues agreed on that point, the Republicans argued that tough capital standards would make regulatory efforts such as the Volcker Rule unnecessary.

GOP Sen. Pat Toomey told the regulators that the Dodd-Frank Act gives them an impossible job.

"We're talking about rules, not an admonition not to play in traffic," he said. "We're talking about many, many pages of very dense and complex matters that are associated with each individual rule. The Volcker rule alone is staggering in its length and complexity."

Shelby, who during a hearing last week made the top officials at the Securities and Exchange Commission and the Commodity Futures Trading Commission acknowledge that they learned about JPMorgan's risky portfolio from press reports, did not push the banking regulators on the same question.

The JPMorgan positions were first reported by Bloomberg on April 5; on Wednesday Curry said only that the OCC has been meeting with JPMorgan's management to discuss the situation since "early April."

Following the hearing, Shelby told reporters that he does not know how the OCC learned of the looming risk at JPMorgan, and that Curry is still gathering facts about the situation.

"But we'll have him back," Shelby said, "to explain what really went on sequentially, step by step."

In response to the losses, estimates of which began at $2 billion but have since been rising, Curry testified that the OCC is undertaking a two-part review of its supervision and response.

"The first component focuses on evaluating the adequacy of current risk controls at the bank, informed by their application to the positions at issue," Curry said. "The second component evaluates the lessons learned from this episode that could enhance risk management processes at this and other banks."

But those assurances were insufficient for several Democratic senators, including Menendez, who issued a warning about the implementation of Dodd-Frank to Curry and his fellow regulators.

"I think every regulator here responsible for implementing the law should know if huge trading losses like this happen at banks after we establish the Volcker rule, and capital rules have been written and implemented, then I think the blood will be on all of your hands if the London whale ultimately goes belly-up next time," Menendez said.

JPMorgan chief executive officer Jamie Dimon is scheduled to testify Wed., June 13, at the Senate Banking Committee's third hearing on the bank's trading losses.

Separately at the hearing, FDIC Chairman Gruenberg suggested that a rule defining what portion of the mortgage market should be exempted from new risk-retention rules will likely not be completed until after the completion of another set of rules, which will define "qualified mortgages," and will establish broader parameters for the mortgage market. The CFPB said last week that it would not complete the QM rule by this summer, but instead is seeking more comments on new data it received.

In another noteworthy development, Shelby blasted the CFPB for declining to clarify the definition of "abusive" loan products, a category established by Dodd-Frank that has caused consternation throughout the consumer banking industry.

"The refusal to write a rule stands in stark contrast to the director's statements that the bureau would give banks clear rules of the road — in other words, certainty what they could do and what they couldn't do," Shelby said.