Counterparties: Ina the belly of the whale
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Last night, the Senate Permanent Subcommittee on Investigations released its 307-page report (plus aÂ 598-page appendix) on JP Morganâs disastrous London Whale trades. The report comes 11 months after trades were first reported, and, as DealBook notes, it details how JP Morgan âignored internal controls and manipulated documentsâ, all while withholding information from regulators.
FT Alphavilleâs Cardiff Garcia pulls some of the most damning excerpts. For instance, the report says that JP Morganâs assertion that they had been fully transparent with regulators had âno basis in factâ. Or take then-CFO Douglas Braunsteinâs comments on an earnings call that the CIOâs trades were a hedge against rising rates. On page 283, the report says that ânone of the scenarios that Mr. Braunstein himself said he relied on indicated that the book functioned as a hedgeâ. Matt Philips writes that JP Morgan has lost that battle: “JP Morgan now freely admitsâincluding Braunstein under oath this afternoonâthat the CIOâs problematic position didnât act as a hedge” and that the Senate report calls them out as proprietary trades.
When JP Morgan abruptly shifted the way it valued these trades, their internal controller described them as âconsistent with industry practicesâ. But what the controller didnât say was that JP Morganâs investment bank valued the exact same securities differently. This may be why regulators described the trade as a âmake believe voodoo magic âcomposite hedge.ââ
Regulators at the Office of the Comptroller of the Currency donât come off looking great either. As Matt Levine writes, the report makes it âclear that no one at the OCC had any idea what was going on at JP Morgan, and never askedâ. The OCC also didnât bother to look at publicly available information that could have helped them understand what JP Morgan was withholding.
Jamie Dimon picked the right Congressional hearing to skip. Chairman Carl Levinâs questioning was pointed and specific; the answers he got from the current and former JP Morgan executives present were not. Braunstein repeatedly used the âI donât recallâ trope, sometimes to an absurd extent. Ina Drew, the former head of the Chief Investment Office, largely blamed London-based subordinates — who didnât testify. In her prepared testimony, Drew says she âdid not, and do not, believe I bore personal responsibility for the losses.â
Dimon may have a tougher time dodging the scandal: an email (see page 293 of the report) suggests he approved an increase in the CIOâs risk limits. And when the OCC requested detailed information on the bankâs positions, he replied âyou donât need that level of informationâ. — Ben Walsh
On to todayâs links:
And, of course, there are many more links at Counterparties.