This Watchdog Is Worried About JPMorgan’s Management

WhaleWhen just one of your derivative traders racks up a loss of $6.2 billion like JPMorgan Chase’s (NYSE:JPM) Bruno Iksil — now known as the London Whale — did in the early months of 2012, you cannot expect your reputation to remain intact. Once the bank enjoyed an image as one of the best run firms on Wall Street — it emerged from the financial crisis as among the healthiest of the big banks — but now the institution has been downgraded by a confidential government scorecard as concerns about the company’s management and its board increase.

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JPMorgan’s trading strategy was a “runaway train that barreled through every risk warning,” said Senator Carl Levin, the Michigan Democrat in charge of the Permanent Subcommittee on Investigations, during the investigation of the bank’s 2012 trading losses. Last week, the subcommittee held hearings where five current and former bank executives detailed their actions in the London Whale trading catastrophe.

The probe has revealed one salient issue; the nation’s largest bank ignored internal controls and manipulated documents last year…

After acquiring a supervisory letter dated July 27, 2012, The Wall Street Journal reported that, following the revelation of the trading losses, the Office of the Comptroller of the Currency lowered the company’s management rating by one notch, signaling that oversight “needs improvement.” During the financial crisis in 2008 and 2009, regulators cut the overall ratings of Citigroup (NYSE:C) and Bank of America (NYSE:BAC) to 3, based on concerns regarding their exposure to the credit crisis and their purchases of troubled companies.

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For the management category — a portion of a ratings measure known by the acronym CAMELS, used by regulators to determine the strength of financial institutions — grading is on a scale of 1 to 5, where 5 is the worst. Before the scandal, JPMorgan had a rating of two, a level indicating “satisfactory management.” But in July that grade was dropped to three, which people familiar with the matter told the Journal was not solely related to the London Whale incident. A three in the management category means that the “capabilities of management or the board of directors may be insufficient,” according to OCC guidelines.

Each letter in the acronym stands for a different aspect of a bank’s condition; the “M” stands for Management. While the composite CAMELS score the bank eventually received is unknown, the management rating “is given special consideration when assigning a composite rating,” stated the guidelines.

The supervisory letter from the OCC cited “lax governance and oversight” in the bank’s London office, which was responsible for the London Whale trades, as well as “other oversight deficiencies,” according to a report released last week by the Senate panel. This report further showed that even as the London Whale’s losses were increasing, Dimon briefly withheld some of the details from regulators; for a short time in 2012, JPMorgan stopped providing profit and loss reports for its investment bank to the Office of the Comptroller of the Currency.

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On the very day that the bank received the downgrade in July, JPMorgan announced several management changes, elevating two executives that helped settle the London mess and taking power from its top finance officer and investment-bank head.

JPMorgan also received another blow earlier this month after the Federal Reserve announced it had found weaknesses in the capital-management plan that the bank submitted to this year’s stress tests.

Chief Executive Officer Jamie Dimon told investors last month that the focus for 2013, along with growing “organically,” is meeting the “wave of our regulatory demands.” But even though he has prepared for this eventuality, the downgrade still represents a significant and unusual setback for the bank, which posted a record profit of $21.3 billion last year.

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