Noting that the Office of Comptroller of the Currency had 45 people detailed to J.P. Morgan, Sen. Robert Menendez, D-N.J., was among several committee Democrats who expressed astonishment that the bank's problems didn't generate early and significant attention from the regulator. "Did the OCC screw up in allowing these trades to happen?" he said. "Shouldn't the sheer size of these trades have been a huge red flag for the OCC?"
Menendez said that with enactment of the Dodd-Frank Act financial reform law, the era of regulatory laxity should be over. "If huge trading losses like this happen at banks after we establish the Volcker Rule, and capital rules have been written and implemented, then I think the blood will be on all of your hands if the London Whale ultimately goes belly-up next time," he told regulators.
Sen. Jeff Merkley, D-Ore., said the trading loss highlights a problem with the financial system that goes beyond the willingness of huge institutions to take big risks. He suggested that J.P. Morgan had become so enamored with the lure of trading profits that it had begun to neglect lending to small businesses and the rest of the economy, traditionally a bank's core mission.
He rejected J.P. Morgan's contention that the losses were caused by a hedging strategy gone bad. "Does anyone on this panel think that Bruno Iksil, the London Whale, who ran [J.P. Morgan's] European strategic invest unit, woke up each day trying to mitigate the risk from excess deposits invested between loans in bonds?" said Merkley.
"Small businesses across America are trying to get access to credit. They're highly frustrated. The ability of them to access credit is essential to the recovery of our economy," Merkley said. "Does it do damage to our economy to have banks diverting taxpayer-insured deposits into hedge fund investments rather than making loans to families and small businesses? Does it increase systemic risk to have banks diverting taxpayer-insured deposits into hedge fund investments?"
Sen. Sherrod Brown, D-Ohio, questioned whether the problems with the trades and Mr. Dimon's statements about them signaled deeper problems. "This begs the issue that these trillion-dollar -- $2 trillion in that case -- megabanks are not just too big to fail. They're too big to manage and they're too big to regulate," he said.
The comments came as regulators said they are examining exactly what happened at J.P. Morgan, including looking at the problems as possible sources of information to use when crafting the final draft of the Volcker Rule. The rule as first proposed bars banks from engaging in proprietary trading for their own accounts, but excludes trading done to hedge-specific transactions or company-wide portfolios. In the wake of J.P. Morgan's trading problems, there have been moves to eliminate hedges of portfolios.
Federal Reserve Governor Daniel K. Tarullo told the panel that whichever way the portfolio hedging debate comes out, banks must do more to justify their hedges and risk management. "I suspect we're going to find in this case that there was an absence of documentation, both within the firm and in reporting it," he said.
Thomas J. Curry, comptroller of the currency, told the panel that his agency is still determining exactly what happened at J.P. Morgan. He said there are questions whether the hedges really were portfolio hedges, whether the hedging activities were adequately reviewed by bank officials and whether his agency needs to alter its procedures in light of what happened.
Some Republican members of the committee suggested that the government should increase capital requirements for banks rather than regulate their risk-taking.
Sen. Pat Toomey, R-Penn., suggested the Dodd-Frank Act leads to the government micromanaging banks. "The real goal of the regulatory regime ought to be to just ensure that you don't have systemic risk."
Sen. Richard Shelby, R-Ala., the committee's ranking Republican, questioned the need for the Volcker Rule. He said bad loans, not proprietary trading, is what gets banks in trouble.
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