Jun 13 2012
Statement of Senator Richard C. Shelby
Committee on Banking, Housing and Urban Affairs
June 13, 2012
“Thank you, Mr. Chairman,
“Today the Committee will hear from the Chief Executive Officer, President and Chairman of JP Morgan Chase, Mr. Jamie Dimon. Mr. Dimon is here today because JPMorgan Chase lost more than two billion dollars on derivatives trades.
“Normally it is not and should not be the role of Congress to second-guess decisions by private sector businesses. However, because the Federal government guarantees bank deposits, this Committee has a responsibility to ensure that banks do not unnecessarily put taxpayers at risk.
“Congress has, in large part, delegated the responsibility of oversight to our financial regulators. They are supposed to be monitoring the activities of banks like JP Morgan Chase to ensure that they operate in a safe and sound manner. As we learned from the most recent financial crisis and this particular incident, regulators do not always meet our expectations.
“Banks take risks because that is what they do. Usually those risks are beneficial because they enable Americans to buy homes, attend college, and save for retirement. When banks fail to prudently manage those risks, however, serious problems can arise.
“For example, in the years leading up to the financial crisis, some banks claimed that they could safely provide mortgages to borrowers with no documentation and small down payments. Advances in risk management supposedly enabled them to lend to riskier borrowers without threatening the bank’s safety and soundness.
“We now know that this was false. These banks were not applying better risk-management techniques. They were simply forgoing time-tested underwriting standards. The result was the failure of some of the nation’s largest financial institutions, including Countrywide and Fannie Mae.
“Certainly, there were many bankers that did not make these mistakes. By most accounts, our witness today was one of them. Yet, as the financial crisis shows, poor risk management at even a single large bank can have profound consequences. Congress and bank regulators must always watch for risks that could, if improperly managed, threaten the banking system. Accordingly, we should examine the facts and circumstances surrounding JP Morgan’s two billion dollar loss.
“As we do so, I believe that there are two key questions that need to be answered. First, did the losses from these trades threaten the safety and soundness of JPMorgan? And second, could it happen again?
“Last week, the Committee heard from the bank regulators that supervise JPMorgan. They answered the first question when they told us that the 2 billion dollar loss did not threaten the bank’s solvency, because the bank has strong earnings and sufficient capital.
“This conclusion shows once again why the single best way to protect taxpayers from bailouts is to ensure that banks are properly capitalized. Strong capital requirements provide a valuable buffer against unexpected losses arising from the inevitable missteps by banks and bank regulators.
“Although capital should be the first line of defense against taxpayer bailouts, it should not be the only defense. Banks also need to have good risk management.
“Although JPMorgan enjoyed a strong reputation for effective risk management, something went very wrong. Regrettably, the Comptroller of the Currency, the Federal Reserve, and the FDIC were unable to tell us what happened, despite having more than 100 onsite examiners at JPMorgan. Hopefully Mr. Dimon can fill in the details.
“In particular, I hope Mr. Dimon can explain why these trades were made and why they produced such large losses. I also hope to learn the extent to which Mr. Dimon and other JPMorgan senior executives were involved in the decisions that permitted these trades.
“Mr. Dimon has long been recognized for his effective management of a very successful institution. Yet, it appears in this particular case, things got away from him. Why?
“Did Mr. Dimon put too much faith in the company’s risk models? Or did he ignore them?
“It has been reported that officials at JPMorgan may have dismissed warnings that the bank was not instituting appropriate risk management practices. Was Mr. Dimon aware of these warnings? If so, did he respond or did he disregard them?
“It has also been reported that the office responsible for these trades may have had contradictory mandates. While the stated goal of the office may have been to reduce risk, employees of the office apparently believed that they were expected to turn these trades into a profit. Bank employees reportedly referred to this profit as ‘the icing on the cake.’
“What were Mr. Dimon’s expectations for this office? Was he incentivizing them to manage risk or maximize profits? If it was the latter, were the incentives to profit consistent with proper risk management?
“Moreover, what did the Board of Directors know about how Mr. Dimon was managing risk? It has been reported that JP Morgan's risk committee may not have had the expertise necessary to oversee such a large bank. Accordingly, I hope to learn not only about Mr. Dimon’s role in selecting the members of the risk committee, but how the committee oversaw the firm’s risk management.
“Finally, I hope today’s hearing can reveal what lessons Mr. Dimon has learned. This hearing will have served a valuable purpose if it helps banks and bank regulators avoid repeating the mistakes of JPMorgan.
“In this regard, it is unfortunate that the Committee has not held similar hearings with the heads of other financial institutions. Although the Committee is hearing from Mr. Dimon whose bank lost two billion dollars of its own money, it has never heard testimony from the executives of Fannie Mae and Freddie Mac, who have lost nearly 200 billion taxpayer’s dollars.
“Perhaps the Committee could turn its attention to the GSEs’ massive public losses when it completes its review of the relatively small private losses of JP Morgan Chase.
“Thank you, Mr. Chairman.”