JPMorgan (NYSE:JPM) chief executive Jamie Dimon told the Senate in a hearing on Wednesday that the bank’s recent multibillion-dollar trading losses occurred because traders followed an ill-advised hedging strategy they did not understand completely.
He said traders had made miscalculations trying to reduce the amount of risky assets the bank held and that led to its Chief Investment Office in London embarking on “a complex strategy” in January. “The strategy was not carefully analyzed or subjected to rigorous stress testing within CIO and was not reviewed outside CIO,” Dimon said. “In hindsight, CIO’s traders did not have the requisite understanding of the risks they took.”
The firm’s losses became public last month after Dimon announced during a hurriedly organized conference call that a hedging strategy by the bank’s CIO had failed and produced at least $2 billion in trading losses. The chief executive was asked to appear before the Senate Banking Committee to explain what went wrong with the investments and what the bank planned to do to fix it.
However, before the testimony could even begin on Wednesday, the hearing was disrupted by protesters who chanted “Stop the foreclosures” and “Jamie Dimon is a crook” before they were ejected.
Dimon apologized to the Senate for what he said was an isolated incident. “We feel terrible” that the bank has lost some of shareholders’ money, he said. “While we can never say we won’t make mistakes — in fact, we know we will — we do believe this to be an isolated event.”
He added that the bank had made “real progress” in managing and reducing the risk associated with these trading positions. “While this does not reduce the losses already incurred and does not preclude future losses, it does reduce the probability and magnitude of future losses,” he added.
Dimon said that the bank was in good shape. “Our fortress balance sheet remains intact,” he said. “While there are still two weeks left in our second quarter, we expect our quarter to be solidly profitable.” He also made it clear that the bank’s large size was not a problem but an asset. “In short, our strong capital position and diversified business model did what they were supposed to do: cushion us against an unexpected loss in one area of our business,” he said.
The rest of the hearing is expected to discuss whether bank executives and regulators can possibly spot risks before they become too big. He is also likely to be questioned whether trading restrictions because of the new Volcker rule, which the firm has long campaigned against, could have prevented the losses.