Several JP Morgan Investigations Articles and Wall Street Accountability (Maybe Finally??)

[Debbie DuBois]

SEC JPMorgan Chase Investigation: Agency Looking At 'Appropriateness And Completeness' Of Financial Reporting

By MARCY GORDON 05/22/12 06:35 PM ET

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WASHINGTON — Federal regulators are reviewing what JPMorgan Chase told investors about its finances and the risks it took weeks before suffering a multibillion-dollar trading loss.

Mary Schapiro, chairman of the Securities and Exchange Commission, told the Senate Banking Committee Tuesday that the agency is examining JPMorgan's earnings statements and first-quarter financial reports to determine if they were "accurate and truthful."

Schapiro and Gary Gensler, chairman of the Commodity Futures Trading Commission, said the $2 billion-plus loss at JPMorgan should be a lesson for regulators that they need to tighten rules mandated under the 2010 financial overhaul.

"It would be wrong for us not to take this example," Schapiro said. JPMorgan is the biggest U.S. bank by assets and the only major U.S. bank to stay profitable during the 2008 financial crisis.

Most Republican lawmakers voted against the financial overhaul. They say it won't prevent another financial crisis. And they worry that it will drive business overseas.

Sen. Richard Shelby, the ranking Republican on the panel, questioned why Schapiro and Gensler weren't aware of what was happening at JPMorgan.

"So you really didn't know what was going on ... until you read the press reports" in April? Shelby asked them.

The trading loss was disclosed May 10 by JPMorgan CEO Jamie Dimon in a hastily convened conference call with investors and journalists. In April, Dimon had dismissed concerns about the bank's trading as a "tempest in a teapot" – a characterization he recently acknowledged he had been "dead wrong" to make.

Two more hearings are scheduled before the Senate panel in the coming weeks. Officials from the Federal Reserve and the Treasury Department will testify on June 6.

Dimon has agreed to testify at the third hearing, which has yet to be scheduled.

The JPMorgan CEO has said the loss came from trading in credit derivatives that was designed to hedge against financial risk, not to make a profit for the bank.

The CFTC is investigating JPMorgan's ill-timed bet on complex financial instruments that led to the trading loss, Gensler said.

Under the financial overhaul, the CFTC gained powers to monitor trading in indexes of derivatives. JPMorgan invested heavily in an index of insurance-like products that protect against default by bond issuers. Hedge funds were betting that the index would lose value, forcing JPMorgan to sell investments at a loss.

Schapiro and Gensler said they were hopeful that a key part of the overhaul could prevent the type of loss that occurred at JPMorgan.

The so-called Volcker Rule would prevent banks from trading for their own profit. The idea is to protect depositors' money, which is insured by the government. Regulators are finalizing the rule, which is scheduled to take effect in July. But banks will have until July 2014 to meet its requirements.

In addition to the Senate hearing, the Financial Stability Oversight Council, the coordinating group for federal financial regulators, received a preliminary briefing on JPMorgan's losses.

This group, chaired by Treasury Secretary Timothy Geithner, was updated Tuesday on the status of the investigation by officials at the Federal Reserve, Office of the Comptroller of the Currency, the SEC and the CFTC.

"Those regulators are still in the process of conducting their evaluation of what happened and why," said Treasury spokesman Anthony Coley.

"That examination is an important input into the ongoing effort to design safeguards and reforms, including the Volcker Rule, so that mistakes in judgment at individual banks are less likely to threaten the broader financial system and economy," Coley said. He said the council would return to this examination at its next meeting in June.

Dimon has been among the most vocal critics of the Volcker Rule. The big Wall Street banks won an exemption in the rule: It would let them make such trades to hedge not only the risks of individual investments but also the risks of a broader investment portfolio.

Gensler acknowledged in his appearance before the Senate Banking panel that the various federal regulators working on the rule, from a half-dozen agencies, don't agree on how strict it should be.

"We will ultimately have differences," he said.

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JPMorgan Hearing: Market Regulators Warn They're Broke, Outgunned By Wall Street

Posted: 05/22/2012 1:55 pm Updated: 05/22/2012 1:55 pm

SEC Chair Mary Schapiro and CFTC Chair Gary Gensler Testified before the Senate Banking Committee Tuesday.

Two of the most important financial regulators in the country have a message for Congress: We need more money.

At a hearing before the Senate Banking Committee Tuesday morning, Securities and Exchange Commission Chairman Mary Schapiro and Commodity Futures Trading Commission Chairman Gary Gensler told lawmakers that the demands on their agencies to expand oversight are growing, but that their pocketbooks are not.

"We’re way underfunded at the CFTC," Gensler told lawmakers, after a question on the subject from Senator Chuck Schumer (D- N.Y.). "Imagine if, all of a sudden, there are eight times the number of teams on the [football] field, but only seven refs," Gensler said. "There would be would be mayhem on the field. The fans would lose confidence."

Similarly, Gensler said, investors are losing confidence when when mayhem breaks out in the financial markets as a result of lax oversight. "They feel that the market is unfair."

SEC chief Schapiro echoed the point: "We've been asked to take on very significant new responsibilities," she said. Though the SEC has made progress in hiring new staffers and improving its technological capabilities, Schapiro conceded that, in some areas, the efforts haven't gone far enough.

"We’re still way outgunned by the firms we regulate in terms of technology," she said.

The inadequacy of the SEC budget is an issue that Schapiro has raised in the past, and one that sits at the heart of criticism that the regulator is not able to fully monitor and regulate financial markets. Last month, a number of former SEC enforcement lawyers told The Huffington Post that the SEC is playing catch-up in some of its oversight. "The SEC just doesn't have the resources to be everywhere -- to regulate and to be the cop on the beat," Paul Berger, a former associate director of the SEC's enforcement division who left in 2006 for the law firm Debevoise & Plimpton told The Huffington Post at the time.

The Senate Banking Committee convened Tuesday's hearing in the wake of trading losses JPMorgan Chase disclosed two weeks ago, resulting from bad bets the bank made on credit derivatives. Since those losses were initially disclosed, the amount lost has risen from $2 billion to $3 billion, according to some estimates.

On the question of the JPMorgan losses specifically, Schapiro told legislators that her agency will look into the "appropriateness and completeness" of the bank's financial reporting.

Since JPMorgan disclosed those losses, the question of what steps regulators could take to avoid similar losses in the future has been central to the ongoing debate over the future of financial regulation.

At Tuesday's hearing, CFTC chief Gensler suggested greater regulation of derivatives could help. "The more transparent markets are, the harder it is to misunderstand the risk you have," he said.

That echoes comments made by one of his predecessors, Formef CFTC chair Brooksley Born. One of the earliest U.S. officials to warn of the dangers of unregulated derivatives, Born recently told The Huffington Post: "Derivatives regulation is absolutely necessary for the safety of our financial system. Something like [the JPMorgan loss], or something many times worse, could happen at any time, and we don't know about it. Nobody knows."

But Gensler also suggested a need for stricter regulation of hedging and proprietary trading by banks. Sloppy hedging strategies have been blamed for the losses at JP Morgan. Making sure that banks hedge risk without turning those hedging operations into money-making units in their own right (which critics have accused JPMorgan of doing in this case) is a core goal of the so-called Volcker Rule. That rule, part of the Dodd-Frank financial-reform act, would ban proprietary trading by federally-insured banks and is set to take effect this summer. Without stricter oversight, Gensler said, banks "are tempted to swing for the fences" in an effort to turn a profit.

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FDIC Sues Bank Of America, JPMorgan, Others Over Toxic Mortgage Bonds That Sank Two Illinois Banks

AP | Posted: 05/21/2012 6:27 pm Updated: 05/22/2012 8:31 am

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WASHINGTON (AP) — The government has sued several big banks over toxic mortgage securities they issued that were bought by two small Illinois banks which failed in May 2009.

The Federal Deposit Insurance Corp., which seized the two banks when they failed, filed the civil lawsuits Friday in federal court. The agency named as defendants banks including Citigroup, JPMorgan Chase, Bank of America, Credit Suisse, Deutsche Bank, Royal Bank of Scotland, UBS and HSBC.

The FDIC says the banks made false statements and deceived investors about the risks in the securities backed by pools of home mortgages. The failures of the two Illinois banks, Strategic Capital Bank and Citizens National Bank, cost the deposit insurance fund $169 million and $37.2 million, respectively. The FDIC seeks a total of about $92 million in damages.

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JPMorgan Chase Trading Loss Renews Focus On Financial Regulation

AP | By MARCY GORDON Posted: 05/22/2012 12:03 am Updated: 05/22/2012 8:38 am

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WASHINGTON (AP) — Federal regulators and lawmakers are renewing the focus on financial regulation in the wake of a multibillion-dollar trading loss at JPMorgan Chase & Co.

News of the surprise loss at JPMorgan, the biggest U.S. bank by assets, has revived calls by Obama administration officials and Democratic lawmakers for tougher oversight of Wall Street banks. But Republicans insist that the 2010 financial overhaul law won't prevent another crisis and will drive business overseas. Regulators are still drafting rules for much of the law, and they have been lobbied by big banks to water down key areas.

Most Republican lawmakers voted against the overhaul law, which came in response to the 2008 financial crisis.

The Senate Banking Committee is holding a hearing Tuesday at which two key regulators will be asked about the trading loss at JPMorgan, the only major U.S. bank to stay profitable during the crisis.

Mary Schapiro, chairman of the Securities and Exchange Commission, has said that her agency, like all regulators, is "focused" on the JPMorgan situation. The SEC is examining the bank's disclosures to shareholders about the trading loss.

The loss was disclosed May 10 by JPMorgan CEO Jamie Dimon in a hastily convened conference call with investors and journalists. Dimon in April had dismissed concerns about the bank's trading as a "tempest in a teapot" — a characterization he recently acknowledged he had been "dead wrong" to make.

Gary Gensler, who heads the Commodity Futures Trading Commission, said Monday that agency has begun an investigation into JPMorgan's ill-timed bet on complex financial instruments that led to the trading loss. Gensler said the inquiry is "related to credit derivatives products as traded by the chief investment office of JPMorgan Chase." He declined to give any details.

Ina Drew, who was the bank's chief investment officer and oversaw the trading group responsible for the loss, left JPMorgan last week.

Under the financial overhaul, the CFTC gained powers to monitor trading in indexes of derivatives. JPMorgan invested heavily in an index of insurance-like products that protect against default by bond issuers. Hedge funds were betting that the index would lose value, forcing JPMorgan to sell investments at a loss.

JPMorgan CEO Jamie Dimon has said the loss came from trading in credit derivatives that was designed to hedge against financial risk, not to make a profit for the bank.

The Banking Committee chairman, Sen. Tim Johnson, D-S.D., has said he is inviting Dimon to testify about the loss at a related hearing in the near future.

Dimon last week apologized to the bank's shareholders. He said Monday that JPMorgan is suspending plans to buy back its own stock. The bank will continue to pay a dividend despite the trading loss, which Dimon called "an embarrassment" and "a black mark."

The trading loss didn't cause anything close to the panic that followed the September 2008 failure of the Lehman Brothers investment bank. But it shook the confidence of the financial industry. JPMorgan's stock price has dropped 20 percent since the disclosure, lopping off $30 billion of market value.

It isn't known whether the JPMorgan episode ultimately will result in stricter regulation.

It has recharged a debate about how to ensure that banks are strong and competitive without allowing them to become so big and complex that they threaten the financial system when they falter. Does the massive trading misfire at JPMorgan — widely seen as one of the safest banks — show that Wall Street banks have become "too big to fail" as well as "too big to manage?"

The loss also put a fresh spotlight on a part of the overhaul law known as the Volcker rule, which is designed to prevent banks from placing bets for their own profit. This is known as proprietary trading. The idea is to protect depositors' money, which is insured by the government. If a bank's losses were to wipe out those deposits, taxpayer money would have to be tapped.

Regulators are finalizing the Volcker rule. Dimon has been among its most vocal critics. The big Wall Street banks won an exemption in the rule: It would let them make such trades to hedge not only the risks of individual investments but also the risks of a broader investment portfolio.