Losses Mount Much Higher

Well, no warrant has been issued, but JPMorgan CEO Jamie Dimon he is testifying before the Senate Banking Committee about JPMorgan ‘s multi-billion-dollar loss on June 13.

The bank originally reported a $2 billion trading loss on May 10, but since then estimates of the size of the loss have risen. Some believe the losses could reach between $6 billion to $7 billion.

“I expect Mr. Dimon to come prepared to provide the committee a better understanding of this massive trading loss so we can take the implications into account as we continue to conduct our robust oversight over the full implementation of Wall Street reform,” Banking Committee chairman Tim Johnson said in a statement.

The reality of the mounting losses runs counter to Mr. Dimon’s statement at the Deutsche Bank Global Financial Services Investor Conference that the multibillion loss will be forgotten before the year is through –  “an isolated event” that he expects will be “something we don’t have to talk about by the end of the year.”

He declined to explain why, or how the bank could erase the losses. Dimon also said the bank would not give a public running tally of the losses. JPMorgan Chase (JPMFortune 500) shares have lost more than 18% of their value since announcing the loss, wiping out their gains for the year.

Big Questions Unanswered

Bloomberg casts doubt on whether the trades really were “isolated.” Trader Bruno Iksil, known as the LondonWhale because his bets this year were so large, has been known to have been a huge risk-taker since at least 2010. Iksil, who joined JPMorgan in 2005, was given more leeway than many traders because he produced outsized gains during previous years. Iksil’s value-at-risk, a measure of how much a trader might lose in one day, was about as high as the level for the firm’s entire investment bank.

Investigators are examining how long senior executives knew about Iksil’s bets before losses approached $2 billion. One question is why the formula used to calculate Iksil’s VaR was altered early this year to reduce the reported risk by half. This was  and approved by top risk executives,  following an internal analysis in late 2011.

These changes and the timing of the firm’s disclosures about them are the focus of an inquiry by the U.S. Securities and Exchange Commission, Chairman Mary Schapiro. Value-at-risk is crucial to estimate potential swings in profits and losses, and is reported to investors in filings that are reviewed by the SEC. Any changes to the model’s characteristics are supposed to be disclosed, according to Schapiro.  Others are also looking into the loss, including the FBI and federal regulators such as the Commodity Futures Trading Commission. Dimon said on May 10, that the bank changed the mathematical formulas used to calculate VaR for that unit at the beginning of the year, without elaborating on the reasons.

Allen, the other former JPMorgan risk manager, said that a model change big enough to reduce the VaR by half probably would need approval from the chief risk officer, especially if a trading book is unusually large.

Dimon said in April 2009 that he doesn’t pay much attention to VaR and has criticized the gauge when analysts questioned him in past years about its levels. VaR is “a very imperfect number” that “bounces around all the time,” he said on a Jan. 18, 2006, conference call.

The VaR changes may have allowed or encouraged Iksil or other traders in the chief investment office to take bigger positions, said David Hendler, an analyst at CreditSights Inc.

Ignored Washington Warnings And Personnel Shakeups

U.S. banks were warned last year by the Office of the Comptroller of the Currency to closely scrutinize the possibility that computer models used to calculate VaR might not be properly designed or calibrated.

JPMorgan’s team that handled such matters underwent a shakeup that involved at least six management changes within the chief risk office, chief investment office and treasury.  Could these personnel changes have contributed to lapses in risk management? The Federal Reserve, as JPMorgan’s holding-company supervisor, is studying organizational issues around the trading loss to assure that they aren’t repeated in other areas of the firm.

Chief risk officer Barry Zubrow, was replaced by John Hogan, whose new team included Irvin Goldman, formerly the chief investment office’s chief risk officer. Goldman, Zubrow’s brother-in-law, had been fired in 2007 by Cantor Fitzgerald LP for money-losing bets that led to a regulatory sanction of the firm, Bloomberg reported on May 20, although he was not accused of wrongdoing.

Some questioned the appointment. Evan Kalimtgis, who co-headed risk management for the book of securities in the investment office, quit in March after learning that Goldman would become his new boss.  Goldman was stripped of his duties in May, though he remains at the firm.

No smoking guns, mind you, but something was mishandled, and it’s time for the Bank to come clean about it.

JPMorgan Seems `Out of Control,' Johnson Says (May 29)

 Simon Johnson, a professor at the Massachusetts Institute of Technology and a senior fellow at the Peterson Institute for International Economics, talks about his petition to have JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon removed from the Federal Reserve Bank of New York’s board of directors, and discusses the outlook for further financial regulation. (Source: Bloomberg)
Snap! principle of corporate hubris:
Transparency goes out the window when egos go unchecked.