J.P. Morgan CEO Jamie Dimon said Wednesday that no amount of regulation could have prevented the $2 billion in losses that rocked his bank earlier this year after a huge bet went bad.
“It’s purely management’s mistake,” he said during questioning by members of the Senate Banking Committee.
Dimon said "strong" regulation is more effective than "more" regulation.
J.P. Morgan’s shares rose $1.12, or 3.32%, to $34.89 following Dimon’s nearly two hours of testimony. Broader markets are essentially flat.
Several protesters who attempted to disrupt the hearing were led out of the chamber prior to the start of the hearing. Dimon, dressed in a dark blue suit, didn’t acknowledge the disruptions.
Dimon repeatedly admitted that the traders responsible for the losses were blindsided when the risks they took spiraled out of control.
The CEO appeared before the committee to answer questions related to the massive losses. The Securities and Exchange Commission has said it will investigate whether J.P. Morgan notified investors of the losses in a timely manner.
The huge positions were described by Dimon as hedges to protect the bank against losses held in other positions, bets designed to benefit J.P. Morgan in the event of a credit crisis. “It was protecting the downside risk of the company,” he said. “It was intended to improve our safety and soundness.”
In prepared remarks Dimon acknowledged that the betting strategy went badly awry. "This portfolio morphed into something that, rather than protect the firm, created new and potentially larger risks,” Dimon said. “We have let a lot of people down, and we are sorry for it.”
J.P. Morgan's stock has fallen 17% since the losses were first publicly disclosed May 10.
But the CEO insisted the losses were an “isolated” incident and that the bank has already taken steps to avoid similar losses in the future.
“We will not make light of these losses, but they should be put into perspective,” Dimon said. “We will lose some of our shareholders’ money – and for that, we feel terrible – but no client, customer or taxpayer money was impacted by this incident.”
Senators questioned Dimon on whether the positions were hedges or proprietary trading for J.P. Morgan's (NYSE: JPM) own profit, a point important to broad regulations now being imposed on the banking industry.
Rumors of the losses reported in the Wall Street Journal and other outlets prior to that elicited a glib response from Dimon at the time: "a complete tempest in a teapot," he described the situation in April.
He said he regrets making that comment now.
The head of the firm's chief investment office, where the trades were conducted, was forced to resign in the wake of the losses.
Dimon attempted to explain to the senators what went wrong, saying essentially that the bankers who made the trades used a flawed strategy and made mistakes. The CIO traders, located in J.P. Morgan's London office, "did not have the requisite understanding of the risks they took," Dimon said.
“When the positions began to experience losses in March and early April, they incorrectly concluded that those losses were the result of anomalous and temporary market movements,” he added.
The losses have elevated a long-running debate over how much risk investment banks should be able to take on using clients' money. The Dodd-Frank banking reform bill includes regulation known as the Volcker rule which bars investment banks from proprietary trading, or trading for their own profit.
The rule is still being written.
Many believe banks conducting proprietary trading took on too much risk last decade which led to disaster when the housing market soured in 2008.
Dimon has been a vocal critic of more banking regulation in general and the Volcker rule specifically.
On Wednesday Dimon, when pressed by a senator, conceded that the rule “might” have prevented some of the losses but that its potential impact on the financial system is unclear. Earlier in his testimony Dimon said, “I don’t know what the Volcker rule is. It hasn’t been written yet.”