Yves here. I wasn’t planning on liveblogging this hearing, but listing to the introductory remarks, the knives are really out for JPM. In all the post-crisis hearings I’ve watched, I’ve never seen such unanimity between the Democrats and the Republicans on the severity of the problem and the need for more regulation.
The committee made a point of having the ranking member, John McCain, take the fore in pre-hearing PR. And in the warm-up, McCain stressed how JPM completely disregarded risk limits, deceived federal regulators, and developed business model that depended assumption that the bank was too big to fail. Both McCain and Levin hammered on how the JPM illustrated much bigger problems about how JPM and other banks routinely gamed risk limits and used guaranteed deposits to gamble rather than support the real economy.
Ina Drew is up. She starts with a long, pious pontification about her long career and her sincerity. Her limited substantive claim is that she learned what went wrong from the media after she quit, that she was undermined by flawed VaR model and some members of London team failed to value positions properly. This is such bullshit I don’t know where to begin. The VaR model was implemented to finesse the risk limit breaches with regulators. The unit had (inappropriately) a pricing review function within the CIO. For Drew now to claim that she didn’t know what was happening is either a wild exaggeration or proof the bank was completely out of control and therefore made false Sarbanes Oxley certifications.
Levin starts with Drew with a March 20 report Drew made to the risk policy committee on how long or short the investment horizon of the SCP was. Under pressures, she concedes the horizon was short and it was traded actively, if not daily. He also points out that the position was mainly accumulated in the first quarter. She claims the main position was the main position was longer. Levin points out the growth from $51 to $150 billion was in 1Q 2012.
An an aside, Drew has a disconcerting little girl voice and is trying really hard to play dumb and make minimal concessions.
10:30 AM Drew reluctantly confirms that on Jan 31, OCC was told the MTM position was shrinking in 2012 when the position was rapidly increasing. She claims she didn’t know reports weren’t being sent to the OCC in February and March. She and Peter Weiland, the head of market risk for the CIO, claimed not to know who was supposed to make the reports.
10:40 AM McCain is going after Drew. Asks about that she could only “guesstime” the hedge, but she said didn’t know how the “macro hedges” were hedging the balance sheet but they were fluid. So she’s still trying to hold the line but is not at all convincing.
10:42 AM McCain now goes after CIO statement to the OCC that it planned to reduce position by nearly half and instead tripled it. She claimed they got permission to increase the size in 1Q and planned to reduce it over the rest of the year.
10:55 AM. The feed keeps dropping. Levin is grilling Weiland on how JPM was breaching one risk limit by 1000% and Weiland had at the time ignored the limit because the model was “outdated”. Levin is hammering on the fact that the model had been breached and ignored over the last 3 years, and yet models were supposed to be updated annually. The responses, needless to say, aren’t convincing.
11:05 AM. Further revelations that the VaR was nonsense. Even though the interviewees try contending the model was properly tested, it was in fact never backtested. So it was clearly put in place with insufficient testing, a sign that it was to allow for more risk-taking, and not to control risk.
11:45AM: Bad problems with live-feed, now working better. A couple of astonishing conversations. Levin tries pinning Ina Drew that she told the OCC that the losses on the trade were ~$570 million when the internal report on the prior Friday was $1.2 million. Drew’s face gets hard (an interesting contrast with her little girl voice) and she says it was her understanding that the OCC was getting daily reports. Levin looks quietly gobsmacked and says he’ll ask the OCC.
McCain has a go with the vice chairman, Braustein, on the failure to report to the OCC for two weeks. Cavanaugh says the information was withheld because JPM was concerned that it was “confidential”. McCain says nicely that it is pretty remarkable (in more words than than that) that a regulated entity decides it can withhold information because it doesn’t feel like providing it and that most citizens and businesses don’t have that latitude. Plenty of skepticism re the OCC’s deference. He also grills Braustein whether anyone besides traders suffered consequences. Braustein says yes, gives bromides re pay reductions but is not at all specific. McCain asks whether he suffered any consequences. Braustein says his pay was reduced about 50% in line with Dimon’s pay reduction. McCain asks what that means. He says his pay was cut from $9.5 million to $5.5 million. Gee, he might have had to cut back on his private jet timeshare.
1:15 PM: Levin is now grilling Weiland about transcripts of phone calls where Cavanaugh told a CIO member to stop sending objections to how the SPC position was being handled via e-mail. Braustein is unconvincingly trying to argue that his instructions were because the subordinate was wrong on the underlying policy, as opposed to leaving too much in the way of footprints.
2:15 PM. I’ll keep providing updates as I can, but this is not really working operationally. I’ve tried every feed source (the Senate site, CSpan, and Bloomberg) and the feed drops so often that I only get snippets and it’s extremely frustrating to follow. And since I never watch TV, the CSpan I can get on my TV isn’t showing these hearings. I have to apologize, but tech in getting in the way here.
2:30 PM This is juicy, but I lost it. The OCC noticed immediately that it wasn’t getting its daily report, and figured the first day it was a systems error. The second day it was on the case and was told there had been leaks of the information, they hadn’t figured out how, and they were “rethinking their distribution strategy”. The OCC wanted the reports restored and this led got escalated to Braustein (the vice chairman). Braustein said before Dimon that it had restored the report (as in was about to) and Dimon got angry and said it was his decision.
2:40 PM Waterhouse discusses a heated conversation that the London based OCC examiner had with Ina Drew where they were refusing to provide information and insisting that they had transparency internally, Dimon was aware of everything, and they didn’t need to provide new reports. Curry interjects and says the bank’s position was contrary to 200 years of regulation in the US, that the bank is required to disclosed its books and records to regulators.