Senate Report Alleges J.P. Morgan CIO Unit Misled Investors

In losing more than $6 billion in “huge” and “risky” derivatives trades last year, JP Morgan Chase (NYSE:JPM) manipulated derivatives values to hide losses, misinformed investors and outmaneuvered its regulator, according to a report issued by the Senate Permanent Subcommittee on Investigations.

The report charges the bank’s Chief Investment Office “deliberately tried to lower the CIO’s risk results and, as a result, lower its capital requirements, not by reducing its risky assets, but by manipulating the mathematical models …”

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It claims the portfolio breached multiple risk limits and that “bank managers knew about the breaches, but allowed them to continue, lifted the limits, or altered the risk measures after being told that the risk results were ‘too conservative,’ not ‘sensible,’ or ‘garbage.’”

Senator Carl Levin (D-MI), the committee’s chairman, refused to rule out referring the investigation’s findings to the Department of Justice. Levin said the committee will decide whether to involve federal prosecutors or call further witnesses, including CEO Jamie Dimon, following a Friday morning hearing on the matter.

Levin’s committee will question Ina Drew, formerly JP Morgan Chase’s chief investment officer, along with other former and current bank employees. When asked why Dimon will avoid questioning, Levin said “who we have in front of us, are the main actors,” referring to Friday’s witness panel.

In a statement, JP Morgan contends it fully cooperated with the Senate subcommittee, and welcomes the chance to respond.

"We know we have made many mistakes related to the CIO matter, and we have already identified many of the issues cited in the report. We have taken significant steps to remediate these issues and to learn from them," the statement said.

JP Morgan Chase has since dismantled that derivatives portfolio, which investigators claim lost at least $6.2 billion last year. A committee source said investigators suspect JP Morgan Chase absorbed part of the portfolio into other bank operations, and that the bank’s full losses from it are larger.

The bipartisan report recommends requiring banks to identify to regulators all internal investment portfolios of more than a certain value, establish and divulge detailed hedging practices and procedures and produce periodic reports on their hedging activities.

The committee’s top Republican, Sen. John McCain (R-AZ), said the trades represented a “shameful demonstration of a federally insured bank … gambling away billions.”  He also described the responsible regulator, the Office of the Comptroller of the Currency, as “asleep at the switch” and added the office maintained about 65 on-site examiners responsible for reviewing JP Morgan Chase’s activities.

The report said regulators were “regularly informed of the risk limit breaches … yet raised no concerns at the time.”

The committee requests federal regulators strengthen valuation procedures, investigate trades that cause large or sustained breeches of stress and risk metrics and fully implement the Volcker Rule, a pending regulation designed to limit certain bank investing with customers’ deposits.

Committee sources suggested that when it came to reports showing the bank’s daily profits or losses, Dimon decided what information regulators saw. Sources also said regulators told committee investigators it was “very common” for the bank to push back on regulators’ findings and recommendations.

A bank examiner “recalled one instance in which bank executives even yelled at OCC examiners and called them ‘stupid’” according to the report.