44. During JPMorgan’s April 13 earnings call and its May 10 “business update” call, CEO Jamie Dimon and CFO Douglas Braunstein reassured investors and the public that the portfolio was a long-term hedge for helping the bank manage risk. According to the report, the two executives struggled to explain to the Subcommittee why they believed the portfolio functioned as a hedge.
45. On April 13, Braunstein also told investors that the bank believed its SCP trades were consistent with the approaching ban on bank speculation. The bank was unable to provide the Subcommittee with any legal analysis supporting that claim. In fact, the bank’s official public comment letter to regulators said just the opposite of what the bank told investors.
46. Braunstein reassured investors that “all of these positions are put on pursuant to risk management at the firmwide level.” According to the Subcommittee, “virtually no evidence indicates that he, his predecessor, or any other firmwide risk manager played a role in designing, analyzing, or approving the … positions acquired in 2012.” In fact, JPMorgan’s Chief Risk Officer didn’t find out about the SCP’s problems until they were reported in the press. Braunstein also didn’t mention that the CIO had blown through its risk limits.
47. Braunstein also told investors, “[A]ll of those positions are fully transparent to the regulators. They review them, have access to them at any point in time, get the information on those positions on a regular and recurring basis as part of our normalized reporting.” According to the Subcommittee, “This statement by Mr. Braunstein has no basis in fact.” The OCC thought the bank was phasing out the SCP portfolio and wouldn’t even be told about its losses for another three weeks.
48. The Subcommittee points out that in an April 13 public filing with the SEC, JPMorgan indicated to investors that the CIO’s risk had slightly declined, even though the SCP portfolio was three times larger, had riskier assets, and the bank had replaced its previous risk model with a new one that dramatically lowered how risk was calculated.
On July 13, 2012, the bank restated its first-quarter earnings, reporting additional SCP losses of $660 million. It struggled with that, thinking the loss wasn’t “material.”
What’s the big deal?
Some observers might be tempted to dismiss the “Whale Trade” fiasco as a relatively minor mistake at an enormously complex financial institution — a “tempest in a teapot” if you will. The overall losses were at least $6.2 billion — a very manageable amount for JPMorgan, which had shareholder equity of $184 billion on its balance sheet at the end of 2011.
The problem, of course, is that a future loss might be considerably larger. Just recently, JPMorgan itself examined the effects of a “hypothetical” loss of $50 billion. That exercise showed that the bank would fail in that scenario.
So ultimately, we all must ask: What is the likelihood that JPMorgan might suffer a loss that could put its survival — and the stability of the entire financial system — at grave risk? We believe the evidence presented above suggests that likelihood is much higher than it should be. What do you think?
The article 48 Damning Pieces of Evidence From the JPMorgan Whale Trade Investigation originally appeared on Fool.com is written by Ilan Moscovitz.
Ilan Moscovitz has no position in any stocks mentioned. John Reeves has no position in any stocks mentioned. The Motley Fool owns shares of Bank of America, Citigroup , and JPMorgan Chase.
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