“People have learned their lesson.
We’ve been told that so many times since the near-death experiences of the financial crisis. Bankers and regulators have flipped roles: now it’s the bankers who are cautious and their overseers who are aggressive.
Details of JPMorgan Chase’s multibillion-dollar trading loss — brought to light by a riveting and devastating report from the Senate Permanent Subcommittee on Investigations — demonstrate what a sham that is. Bankers aren’t acting cautious and chastened. Risk managers aren’t in the ascendance on Wall Street. Regulators remain their duped and docile selves.
What we now know about the incident is that, as the cliché has it, the cover-up was worse than the crime. The losses out of the London office weren’t enough to take down the bank. But as they were building, JPMorgan traders fiddled with risk measures and valuations. The bank’s risk managers defended the traders and pooh-poohed the flashing red signals. The bank gave incorrect information to its regulator. Top executives then made misleading statements to shareholders and the public. All the while, the regulator served its typical role of house pet.
As JPMorgan got into trouble, traders and the responsible executives treated the valuation of trading positions, made up of derivatives, as a puppet made to do what they wanted. The traders pulled on this calculation or that to change the way they were valuing the position to reduce the losses.
Ina Drew, the head of the bank’s chief investment office, referring to how the positions were calculated, asked an underling if he could “start getting a little bit of that mark back.” She then asked if he could “tweak at whatever it is I’m trying to show.” She might believe it is exculpatory that she prefaced the comment by saying to do it “if appropriate” and that the tweak should come with “demonstrable data,” but any idiot working for her would know exactly what she meant: create some rationale to manipulate the valuations to make things look better than they really are.
This discussion did not make it into the bank’s internal report on the incident from January. Imagine that.
Yes, Ms. Drew was ousted. But her actions show that what financial executives do postcrisis when faced with trouble is no different than what they did precrisis. In testimony on Friday, in a quiet voice, she deflected blame up to Mr. Dimon and down to her traders, claiming she was kept in the dark.
The Senate report makes it clear that JPMorgan misled shareholders and the public, particularly on its April 13, 2012, conference call.
That call, which makes up a particularly damning portion of the Senate report, featured a haughty Jamie Dimon famously dismissing the problem as a “tempest in a teapot.”
Of course, it was no such squall. In the call, the chief financial officer at the time, Douglas L. Braunstein, made a number of what appear to be misleading statements about the trades. Mr. Braunstein said the trading decisions were made on a very long-term basis, when in fact the traders were shuffling positions almost daily to make profits and then to disastrously “defend” their positions from further losses. Mr. Braunstein reassured investors and analysts in the call that the trades were vetted by the firm’s top risk managers, when they were not (though top officials, including Mr. Dimon, knew about repeated risk-measure breaches).
This means “there was risk oversight” for the office that made the trades, and the trading “positions needed to comply with limits,” a JPMorgan spokesman, Joseph Evangelisti, said. “We were not aware at the time of all the deficiencies in the risk organization” of the trading group….”
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