Did Jamie Dimon, the chairman and chief executive officer of JPMorgan Chase & Co., put too much blind faith in Ina Drew, the former leader of the bank’s Chief Investment Office who was responsible for a proprietary trade that cost the firm $3 billion and counting?
That is the central question that occurs to me after listening to Dimon alternately deflect questions from and charm the pants off the Senate Banking Committee on Wednesday in Washington.
Dimon, of course, did not address that question directly. But knowing how intently he has focused on risk-taking in JPMorgan’s investment bank, regularly attending its risk-committee meetings, and how indifferent he seemed to what Drew was doing -- apparently never attending one of her group’s risk-committee meetings -- one wonders whether he was too much in the thrall of his $15-million-a-year chief investment officer.
“I think the first error we made,” Dimon testified, “was that the CIO unit had done so well for so long” -- making billions in dollars of profit over the years -- “that I think there was a little bit of complacency about what was taking place there, and maybe there was overconfidence.”
He told the senators that the CIO had its own risk committee, which was “supposed to properly overview and vet all the risks,” but clearly that did not happen in the particular “synthetic credit portfolio” that incurred the losses. He said the synthetic credit portfolio should have “had more scrutiny. It was higher risk. It was marked to market. It should have had more scrutiny and different limits right from the start.”
We now know this did not happen. When Bloomberg News first reported on April 6 about the so-called London Whale -- the nickname given to Bruno Iksil, the trader in JPMorgan Chase’s London CIO office who had constructed the fateful synthetic credit trade -- Dimon dismissed the reporting as a “tempest in a teapot.” At the Senate hearing, on this point he was contrite: “Let me first say, when I made that statement, I was dead wrong.”
It turned out that Dimon had been traveling at the time, and called in to Drew as well as Doug Braunstein, the chief financial officer, and John Hogan, then the chief risk officer at the bank, and was told that they “were looking into it.” He told the senators, “I was assured by them, and I have a right to rely on them, that they thought this was an isolated small issue and that it wasn’t a big problem.”
Later in the hearing, after Senator Sherrod Brown, an Ohio Democrat, asked Dimon whether he monitored the CIO, he replied that generally he did. When Brown asked whether he approved of the CIO’s trading strategy, Dimon said, incredibly, “No. I was aware of it, but I did not approve it.”
This answer strains credulity. Dimon has a reputation as being a hands-on manager, even going so far as canceling the company’s use of black sedans for employees working late during the financial crisis. He micromanaged traders at Salomon Smith Barney back in the 1990s when he ran that business for his longtime mentor Sandy Weill, one of the architects of Citigroup.
How could Dimon not have closely monitored what Drew and her traders were doing in this $350 billion proprietary portfolio that was managing the firm’s excess cash on a daily basis? Did he really have such blind faith in Drew -- or did he actually know much more than he is admitting, especially since Drew and two of her London traders have taken the fall for the bad bets?
These are questions that perhaps the House can take up on June 19 when Dimon returns to Washington for more testimony on the matter. In the meantime, what remains abundantly clear is that way too much of what continues to happen on Wall Street takes place in a financial black box. The Securities and Exchange Commission and the Commodity Futures Trading Commission need to wrestle the Dodd-Frank rule making apparatus -- specifically as it pertains to derivatives and proprietary risk-taking -- away from the clever Wall Street lawyers and lobbyists and back to the representatives of the American people, because we are the ones who always end up having to clean up Wall Street’s messes.
At one point early on in the hearing, Senator Richard Shelby, an Alabama Republican, asked Dimon what he had learned from “this debacle.” The smooth-as-silk Dimon answered: “I think no matter how good you are, how competent people are, never get complacent in risk. Challenge everything. Make sure people on risk committees are always asking questions.”
He added: “In the rest of the company, we have those disciplines in place. We didn’t have it here. And that’s what caused the problem.”
The lingering question for Dimon is why he let Ina Drew’s CIO get away with a lower level of oversight than everyone else.
(William D. Cohan, a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. His sister-in-law, Ellen Futter, is on JPMorgan Chase’s board of directors. The opinions expressed are his own.)
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