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Dimon Testimony Whopper: CIO’s Gambling on Disaster = “Portfolio Hedging”

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Well, there’s nothing like seeing Jamie Dimon swinging for the fences. Dimon has taken his defense and turned it into an offense, in both senses of the word.

In Senate testimony, Dimon revealed his idea of “portfolio hedging” to be even more egregious than the harshest critics thought. Dimon presented the job of the CIO to be to make modest amounts of money in good times and to make a lot of money when there’s a crisis. (That does not appear to be narrowly true, since in the last couple of years, during which there was no crisis, the CIO’s staff were among the best paid in the bank and produced significant profits for the bank. That is a bald faced admission that the CIO’s mandate had nothing to do with hedging. A hedge is a position taken to mitigate losses on an underlying exposure should they occur. Instead, Dimon has admitted that the mission of the CIO is to place bets on tail risks that are unrelated to JP Morgan’s exposures. A massive, systemically destructive strategy like the Magnetar trade would fit perfectly within the CIO’s mandate.

Needless to say, this definition is an inversion of not just what the Volcker rule was meant to stand for (limiting financial firm gambles with taxpayer money), it’s NewSpeak, or in this case, DimonSpeak: “a hedge is whatever I say it is, no more and no less.” Another bit of DimonSpeak was his specious response when he was arguing against the Volcker rule. The JP Morgan chief asserted that a customer loan could be construed to be a prop trade. Um, no, Volcker applies to trading books. The fact that he’d run a line like that shows how little he thinks of the intelligence of the Senate Banking Committee and the public generally.

We argued yesterday that Dimon was running a hedge fund in the CIO, and his testimony confirms that. As we wrote:

It’s likely that a significant portion of the CIO’s activities were an accounting gimmick. Let’s remember why it was located in Treasury: it is the chief “investment” office, because it is managing the “investment” portfolio. Banks hold liquidity buffers so that they can meet a bank run. They get special accounting treatment on these positions. While they can sell them at any time, like trading inventories, they are NOT marked to market. Instead, they are kept in an “available for sale” portfolio, which is treated on a hold to maturity basis. That, in really crude terms, means you don’t need to recognize losses until they look pretty certain (usually, credit related).

So what does that mean, in practical terms? It means the CIO is the perfect prop trading/income smoothing vehicle. You can realize gains whenever you want to, by selling (provided the position is in a reasonably liquid market) or possibly even moving it over into your trading portfolio and you can defer most losses. If it makes a turkey trade, it can bury it until the bank has other trading gains or income in other businesses to offset it. And it can keep profitable positions around and realize them as needed to smooth earnings (while the unrealized losses are reported in footnotes, most investors don’t seem to pay much attention to that item). Investors really like smooth earnings, they mistake them for stability and strength of the business, as opposed to adept profit management. No wonder the people in the CIO were so well paid. They’d have to be Dimon’s favorite people.

That’s of course, assuming that they can pull off making bets on tail risk. Nassim Nicholas Taleb took issue with that idea in a recent BBC interview and said that JP Morgan is taking 10 to 15 times the risk of a regular hedge fund:

And confirming Taleb, Dimon said the new VaR model that was implemented backtested well but didn’t work so well in practice because the past does not predict the future. Duh! But we’ve suggested, there were likely other motives for using the new VaR. It was clearly intended to allow the CIO (and probably other units) to take bigger risks and yet show no increase in VaR to supervisors.

Not surprisingly, Dimon was good at giving irrelevant responses. When Jeff Merkeley tried to pin the JP Morgan CEO on the hedge fund-like nature of the CIO, Dimon talked about the low-yielding/low risk nature of the underlying assets. That may be true, but what about the derivative positions taken on top of that? Dimon only described one part of the CIO’s operations. Similarly, Jon Tester went after MF Global, trying to argue that Dimon withheld customer monies and Dimon batted that back, saying he had waited for instructions from the trustee while omitting the fact that he was fighting tooth and nail in court.

Dimon also gave an apple pie and motherhood speech along the line of: We tell people to treat their customers like friends and family. If so, his model of family relations much be the Ptolemys, in which incest and murders were normal.

Dimon had to concede that Volcker Rule might have stopped this botched CIO trade. Remarkably, he argued regulators could not have caught this. Huh? This was an outsized position in an illiquid market. It would not have been all that hard to noticed something amiss if anyone had been watching. The size of a position relative to average trading volumes should be monitored for any meaningful positions.

Finally, at the top of the hearing, a handful of protestors started chanting “Stop foreclosures now” and were promptly escorted out of the chamber. I believe it was Jon Tester (whoops, it was Herb Kohl) who quoted a constituent homeowner who was having trouble getting responses from JP Morgan; Dimon told the senator to send the information to him and he’d look into it personally. One lucky borrower hardly solves for the problems all the rest are facing (I though Michael Bennett was going to make a similar ask but he veered off in another direction). Dimon ended with a vigorous ask for austerity in the US, aka Simpson Boles.

Ironically, Dimon’s throwaway comment to Merkley, that he’s already confessed to and takes full responsibility for the ‘small’ synthetic derivative portfolio’s mistakes, was never picked up by the other senators, and I’ll be surprised if the media appreciates the significance of that wee confession. Since Dimon has admitted in Congressional testimony that he was responsible for the internal control failures in the CIO portfolio SOX should now be a slam dunk for the SEC. But of course, that will never happen.

It was instructive to see how effective confident misrepresentation can be. Most of the Republican senators fawned over Dimon after the ritual scolding at the top of the hearings, and I suspect most of the media will simply replay his lines uncritically. There were a few that will work against him, like his reluctant admission that the Volcker rule might have prevented the failed London trade. But in general, reducing complex situations to soundbites allows for obfuscation and misdirection, which is exactly what Dimon and his ilk are keen to have happen.

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66 comments

  1. vlade

    I’d have asked Dimon only a single question (preferably after he indiced himself with taking the responsibility…): “Why you believe you shouldn’t be charged under SoX?”.

    1. Maximilien

      Your question is to the point. That’s why you’ll never be a Senator (at least not anytime soon).

    2. Richard Kline

      Dimon: “My whale told me the position was small, being closed out, and under control. I believed him. I got a bank ta run, so I didn’t check his numbers. Son-of-a-bitch lied to me, whaddayagonnadooo? ‘Satta crime? Here’s his address if so.”

      Dimon won’t be knocked by SOX because this Admind doesn’t do ten-figure control fraud. Period. Dimon ws _smart_ to work the little snipped into his testimony that ‘he’d already taken responsibility for the slip.’ It’s plain from what was reported that the CIO desks reported directly to him. Even the most cursory look at emails or interview of participants would confirm that. So the _denying_ responsibility is the one thing that could really get Jamie Dimon in trouble; that would be lying in Congrssional testimony, either perjury or close enough to it to be a big problem. It’s _the cover-up that hangs you_, not the crime; that’s the real lesson from main schemes gone bad. The plot can be brazened, it’s the fumbling cover-up that blows up with the tape rolling. So Dimon made sure to get himself _on record_ telling ‘the truth.’ He’s getting his whole nickle out of JippyMo’s counsel’s advice, for sure.

  2. * *

    Now if our kleptocracy had competent management like Russia’s, this stuff would not happen. Dimon just made fools of several senior Senators. If a high-profile member of the kleptocratic elite took it upon himself to humiliate high Russian officials, Putin would treat him to a nice cup of thallium tea. When is President Obama going to learn the deep-state ropes?

  3. James

    Once again, the immortal George Costanza said it best:
    “Just remember, it’s not a lie if you believe it.” Systemic corruption trumps law and order every time. Dimon could save everybody a lot of time and drama by just stating the obvious. “The law is what I say it is, and it’s my money and I’ll do what I want with it. Go f*** yourselves, you bought and paid for hacks.”

    1. LucyLulu

      Dimon subscribes to the Rothschild economic program:

      “Give me control of a nation’s money and I care not who makes the laws.”

      Dimon has stated that those responsible for losses will be subject to salary clawbacks. Does anybody know if he was including himself in this group?

      1. Richard_A

        Don’t hold your breath waiting for any of Dimon’s bonuses or stock options to be redeposited in the company’s accounts. He was talking about the head of CIO, who has been replaced; the risk management unit at CIO; the traders who bonused on the initial profits before the portfolio sank; and maybe the risk management unit at Chase headquarters who should have been watching what CIO was doing.

  4. KnotRP

    Eccles said the rich needed to be saved from themselves.

    Too bad no one in power is willing to risk patronage in order to save capitalism and rule of law. Now that our checks and
    balances have been circumvented and defeated by wide spread application of big money, what remains will rot out from under us all.

  5. Cocomaan

    Giving a Senate testimony these days is almost a guarantee that you will suffer no criminal prosecution.

    1. James

      And get some usually flattering media coverage for free in the process. What’s not to love?

  6. C

    “Dimon had to concede that Volcker Rule might have stopped this botched CIO trade. Remarkably, he argued regulators could not have caught this. Huh?”

    I think this reflects how little he thinks of the regulators and their intelligence.

    Hey doesn’t he sit on the Fed?

    1. Chester Genghis

      Dimon argues with confidence that regulators wouldn’t have caught this even under the Volker rule for good reason: Guess how many regulators were in the CIO unit? Zero. Nada. None.

      That’s another reason the “smoothing” scheme was so brilliant. The CIO provided great cover.

  7. Jimbo

    Dimon can say whatever he likes to his lapdogs, the Senators he sits before and to whom he has distributed nearly $900,000 in “campaign contributions” during the last year.

    1. youthinasia

      $900,000 may be a lot but it goes far when buying Senatorial lapdogs, because these nincompoops come cheaper than before. Not only whores, but whores at a discount.

      1. Maximilien

        Maybe those lapdogs/whores should form a union to keep up their prices: PAWS (Pampered Accessories of Wall Street)

    2. DP

      16 of 22 senators who attended yesterday’s hearings have received campaign funds from JPM’s PAC. Don’t know how they missed the other 6.

  8. KnotRP

    Dimon asserts that regulators cannot catch what bankers themselves don’t know about their corporation’s trading.
    So he’s arguing regulation is impossible, because no
    one really knows what’s going on until it is too late.
    I think that may actually be true, which leads to this
    conclusion:

    If no one, including the bankers themselves, can
    regulate it, no tax payer should be insuring the
    activity or participants — and JPMC’s counterparties should go bust if JPMC put them in a noose and kicked out
    the chair with a margin call. Perhaps JPMC
    would be more circumspect about entering deals
    which are NOT mutually beneficial (since true banking is always mutually beneficial, whereas trading against counterparties always has a winner and a loser)
    if they knew the counterparty’s estate would bounce
    the payoff check the minute the counterparty died.

    Tax payer insurance of counterparties is ENABLING
    what Dimon admits cannot be properly regulated.
    Therefore, if regulation is impossible, tax payer
    backed counterparty life insurance must end. AIG
    should’ve gone bankrupt, and taken JPMC and all
    of the other counterparties in this gigantic trading
    infestation into bankruptcy. And then Banking (win-win)
    could’ve re-emerged from the Trading (win-lose) ashes….

    1. F. Beard

      (since true banking is always mutually beneficial, KnotRP

      No it isn’t UNLESS counterfeiting, usury and gambling are beneficial.

      Asset-backed money is a brilliant invention but the way it is implemented – so-called “credit creation” is inherently unjust.

      1. KnotRP

        It’s mutually beneficial to the bank and the borrower,
        if it’s banking. Trading is never like that.

        However, F. Beard, you are on an orthogonal issue
        that lending money into existence can be bad for
        everyone but the above two parties (ala Steve Keen),
        particularly if those two parties are colluding to
        steal purchasing power instead of working to profitably
        meet some societal need. I agree with that point.

        But I think Banking and Trading are like Pornography;
        hard to define, but most folks know the difference
        between Banking, and Trading, when they see it. Except
        of course, Congress, whose income depends upon not
        being able to see it.

        1. F. Beard

          are colluding to steal purchasing power instead of working to profitably meet some societal need. KnotRP

          It is still theft even if societal needs are met. The proof is a dispossessed, unemployed population that cannot afford the fruits of its own stolen purchasing power.

  9. Kevin

    He could give everyone there the finger and tell them he’ll do as he pleases: and still…nothing will be done.

  10. timotheus

    “I believe it was Tester who quoted a constituent. . . ”

    It was Kohl from, appropriately, Wisconsin. (Save my voter’s ass to make me look great, then proceed with your looting.)

    1. KnotRP

      Dimon said (in response to Kohl) that he believes
      everyone will get their money back from MF Global.

      It seemed like Dimon wanted to say “I’ll make sure
      your constituents get paid back, to make this MF
      Global problem go off radar”. I bet the Senator
      is making up a list of people and amounts already…

  11. Warren Celli

    Dimon’s boldness in so brazenly insisting that wrong is right with over confident misrepresentation parallels Obama’s boldness in his brazen and over confident misrepresentation that he has the power to be judge, jury and executioner, with drone attacks.

    In both cases there is a move to normalize the aberrant psychopathic Xtrevilism of the self anointed elite few at the top. The good cop, bad cop congress and media then chime in and the immorality of it all, and the desecration of the now scam rule of law, all becomes so commonplace. Ho hum.

    If you have had any past doubts that there is a very intentional and incrementally well orchestrated MO at play here those doubts should be fast disappearing.

    Are we ready for the election boycotts yet?

    Deception is the strongest [political force on the planet.

    1. TK421

      Boycotting elections is a terrible idea. Political parties aren’t like a business, so boycotting them does nothing. President Obama would be perfectly happy to win re-election by 3 votes to 2; people who don’t vote for the winner are meaningless to him.

      Vote for the Green party, or the Lego party, or write in Obi Wan Kenobi. But boycotting elections accomplishes nothing.

      1. K Ackermann

        That’s not even remotely true. A successful boycott of the elections would be the galvanizing shot across the bow.

        You would have a president that could be viewed as illegitimate, and easily challenged at every move. He or she would think twice before calling in the national guard to shoot protesters and strikers. The national guard might not even follow orders. Ditto the rest of the services.

        1. Warren Celli

          Excellent comment, and I like the imagery “a galvanizing shot across the bow”. That’s exactly what it would be.

          And given the massive disenchantment with the present government the half of the electorate that does not now vote could easily be claimed by context as a part of the “vote of no confidence” in government bloc.

          It would take a very small percentage of highly visible citizens, totally outside of the system and well organized on the public commons across America, to create the illegitimacy you speak of. And it would serve notice to the national guard and local cops that the time to choose sides is at hand. Many of them, cops and troops, are already very disenchanted as they now see themselves more clearly protecting the blatant thieves that are gang raping their; parents, families, friends and neighbors. The coolness towards troops and cops is now conspicuously noticeable and they feel it. The cop and troop adoring TV shows are losing their power and are now so transparent as to be laughable. They have the reverse effect of depicting the cops as corporate butt sucking boobs.

          There is also the morally right good feeling that comes from no longer with your vote validating and legitimizing such an evil and immoral gang of elite scum bag murderers. You are no longer openly complicit in supporting the murders. Those who vote are the problem as they alone legitimize and validate the murders.

          The third party talk they are now promoting is a tell that they are very worried. That is their last hope of containment and dissipation of the now ever building anger.

          TK421— With five votes total Obama would be history and the people would be rejoicing on the streets.

          Deception is the strongest political force on the planet.

          1. Maximilien

            With five votes total, imagine the breathless election coverage on CNN:

            Anderson Cooper: This looks like it’s going to be the closest election in US history. With all votes counted, we’ve got 49 states TIED! Obama 0, Romney 0 in all of them. Too close for any projections. What’s happening in New York, Wolf?

            Wolf Blitzer: Well Anderson, another close one there too. Obama leads Romney 3-2….hold on Anderson….CNN is now projecting that Barack Obama is the winner of New York state!

          2. LucyLulu

            Agreed that there is a faction of disenchanted veterans and the public attitude towards police is increasingly negative, but have you seen any evidence of police forces being disillusioned with TPTB, particularly to the point that their loyalty and willingness to follow orders might be shaken? Looking at the confrontations with OWS, for example, looks as if the police are only too willing to assist in the infringement of civil rights of the citizenry. They even appear to relish it. And next up, they are working on getting the appropriate FAA approvals to operate drones to conduct monitoring and surveillance. It’s illegal for the military to use drones to spy on US citizens, but apparently the use by police would not fall under this category. A little boost of technology and the government will be able to monitor when you use the toilet.

      2. Up the Ante

        “President Obama would be perfectly happy to win re-election by 3 votes to 2 ”

        very good, that forced a laugh out of me

  12. youthinasia

    I viewed the entire hearing and agree with this author’s reporting and assessment. Not only is the institution of banking in a death spiral thanks to a pliant bipartisan Washington, the real remedies will not see the light of day because Congress will not allow it. The delusion by all parties will continue apace until “it’s all over.” Cue the train wreck video…..

  13. Richard

    Excellent post. Your observation that under Dimon’s definition of the Volcker Rule banks could engage in Magnetar type trades that systemically destroy the financial system is worthy of a much larger type face and perhaps a reference to Goldman who with Abacus showed they are perfectly capable of engaging in this trade.

    1. Glen

      Our country (and you can convincingly argue, the world) is pretty much sunk until guys like this are dragged into court to answer for the fraud and crimes their companies keep committing.

      When will that happen?

      1. Carla

        Well, unfortunately I think it’s going to take more than Warren Celli’s suggestion above of an election boycott, although I like the idea.

        Maybe an election boycott followed by an income tax filing boycott?

        1. LucyLulu

          A tax boycott would be the quickest way to get their attention. Good idea. Money is the root of the problem. Until we get money out of politics, we won’t see any meaningful reforms.

          Defund the crooks!

  14. Conscience of a conservative

    First we know that what went on in the CIO’S office would not qualify for hedge account, second from Chris Whalen we hear that Jamie Dimon was aware of CIO activities back in 2010 when the bank had to take reserves against the positions(which means it was not hedging). Whalen is clear one does not take reserves against hedges.

  15. Warren Celli

    More shocking Xtrevilism!!!!

    “More than $4 trillion in near zero-interest Federal Reserve loans and other financial assistance went to the banks and businesses of at least 18 current and former Federal Reserve regional bank directors in the aftermath of the 2008 financial collapse, according to Government Accountability Office records made public for the first time today by Sen. Bernie Sanders.

    On the eve of Senate testimony by JPMorgan Chase CEO Jamie Dimon, Sanders (I-Vt.) released the detailed findings on Dimon and other Fed board members whose banks and businesses benefited from Fed actions.

    A Sanders provision in the Dodd-Frank Wall Street Reform Act required the Government Accountability Office to investigate potential conflicts of interest. The Oct. 19, 2011 report by the non-partisan investigative arm of Congress laid out the findings, but did not name names. Sanders today released the names.”

    http://readersupportednews.org/news-section2/318-66/11895-sanders-releases-explosive-bailout-list

    Deception is the strongest political force on the planet.

  16. stripes

    Jamie Dimon can’t do a whole heck of a lot with the pigs and crap he holds …… If the FED does another QE Obama, his administration and the traitor politicians will probably have to head underground and Cue the laser.

  17. Jesper

    His actions appears to have cost his shareholders billions. Why hasn’t the shareholders had him fired? Do they still have confidence in him? Or is corporate governance in the US so weak that they can’t (or won’t) fire him for what he has done?

  18. Hugh

    This was all kabuki, a political pantomime for the rubes. Dimon showed up and lied to the Senators. The Senators harrumphed a little and either were too stupid to know they were being lied to or too cynical to care.

    If they were serious about this, they would have majority and minority counsels (or experts) do the questioning. These could do sustained questioning with follow up. But they aren’t serious. So they don’t.

    I mean if they were going to nail Dimon and the other banksters to the wall, they could have done so back in 2008-2009. Instead they sat back and let Dimon, JPM, and the others get bailed no questions asked, no strings attached, no accusations made. Again no surprise. Dimon owns these guys. He owned them then. He owns them now.

  19. Enraged

    Pathological, definition: See dimonish; stumpful; narcissistic. A complete disconnect with reality. The ability to utter the largest lie with such conviction so as to convince the other party that merely asking the question was contemptible in itself.

  20. Gloeschi

    JD was asked how much tier-1 capital the bank had. He didn’t know. Seriously, WTF?

  21. Sam

    Shut Wall Street down. Razor wire, German shepherds, guards with Uzi machine guns. If it throws people out of their homes and condos, so what? There is no worry. If it throws their kids out of school, welcome to the “rest of America.” If bankers, day traders, and hedge fund managers become unemployed, good.

    Limit New York City to credit unions only, and you have to bank within walking distance of where you live. No banks, no bank charters, no bank CEOS.

      1. JTFaraday

        Today, maybe. But if I were one of these eff-ers, I might not be so confident as they are about the day after tomorrow.

  22. Conscience of a Conservative

    About the hearings and the kid gloves questioning by Congress. If Blankfein was watching he had to be thinking, WTF? Watching the two hearings was like night and day.

    1. Carla

      And so what, exactly, happened to Blankfein? He is suffering in what way? He is imprisonned for life WHERE?

  23. Up the Ante

    You must understand that Mr. Dimon is parodying when he utters his ‘cry for help’. He first identifies with everyone else, those he knows are really crying for help. He then ‘cries for help’.

    He is not Jamie Dimon. He is yourself.

    A small role that even he himself wonders why is necessary.

    1. Enraged

      I know! Jamie boy feels my pain. Robme feels my pain. Obama feels my pain. Hell, he even had to repay student’s loans himself… long before Harvard destroyed the economy! He knows what we’re going through. Newt feels… never mind.

      And I know Jamie is crying for help. Not for him but for me!
      Bless his heart. But first, please plant a dagger right into it and turn a few times, slowly. Then, sprinkle with iodized salt and let it bleed, one drop at a time, all the while asking him “Can you feel my pain now? Can you feel me, now?” Only then will I believe him…

      1. Up the Ante

        Yut, because you failed to specify whose heart exactly the dagger goes “right into it”, yut, Jamie, ever yourself, is smilin’ ..

        ‘Tis the nature of their game.

  24. scraping_by

    “SOX should now be a slam dunk for the SEC. But of course, that will never happen.”

    I feel sorry for Barry and his creatures. This should be an expensive out for Dimon, significant money for making sure the real life prosecution goes away. As it is, four years of bootlicking has left them without the leverage to demand the level of bribery that would leave Team Obama set for life.

    As it is, Barry is just an employee, does his work and pulls his forelock to his betters. Sad for the life of a lackey.

  25. Chris

    Great post Yves

    In any other country, a $2,000,0000,0000 loss would see the CEO fall on their sword. The public, the shareholders and the government would demand it.

    In your country, the system protects and rewards such blatent incompetence.

    1. LucyLulu

      In any other country, or even this country a few years back, $2B would be a significant loss. It’s little more than pocket change for the TBTF monstrosities like JPM…..until it isn’t, and when the taxpayers are called in.

  26. financial matters

    Interesting that Jamie would put on these trades while presumably being a major player on the plunge protection team. Maybe it was a hedge..

  27. Gentlemutt

    Congress and/or SOX investigators must get the memos written by CIO’s staff as they beg for their bonuses!

    These will tell you exactly what the traders argued was “hedging” and what they felt was “proprietary trading.”

    And trust me on this — they will almost invariably categorize the big winning trades as ‘prop trades’ and the big losers as ‘portfolio hedges,’ same as it ever was.

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