The Senate Banking Committee on Thursday summoned JPMorgan Chase CEO Jamie Dimon to testify under oath about the huge losses his company suffered on an investment strategy that sank JPMorgan’s share price, heightened concerns about the efficacy of new regulations and tarnished the reputation of the nation’s star banker.
Sen. Tim Johnson, D-S.D., announced that Dimon would be called to testify sometime in June after the Senate Banking, Housing and Urban Affairs Committee, which Johnson chairs, has completed two hearings on the slow pace with which banking regulators are drawing up rules required by a 2010 law tightening regulation of the financial industry, informally known as the Dodd-Frank act.
The decision to call Dimon to testify came as evidence mounts that the bank’s losses on trades made out of its London office, originally estimated at $2.3 billion, now total twice that and are continuing to grow. Until now, the boyishly handsome Dimon had been considered the exemplar of good banking practices.
In a statement, Johnson said he and the banking committee’s ranking Republican, Sen. Richard Shelby of Alabama, had agreed that Dimon should be called to testify after their staffs had received briefings over the past week from regulators and JPMorgan on the trading losses. Johnson said the Dimon hearing and two others on banking regulation were “critically important and timely.”
“Our due diligence has made it clear that the Banking Committee should hear directly from JPMorgan Chase’s CEO,” the statement said.
JPMorgan spokeswoman Kristin Lemkau confirmed that Dimon would appear to testify.
“We will continue to be open and transparent with our regulators and Congress,” she said in an email to McClatchy.
Shares of the bank’s stock fell another 4.3 percent to $33.93 on Thursday. The stock had traded at around $45 for much of March and it stood at $40.74 on May 10, the day the trading losses were revealed.
Dimon has been among the most vocal opponents of complex new regulations imposed on financial institutions by the Dodd-Frank act, a posture that’s increased the interest in JPMorgan’s failed trading strategy. The Securities and Exchange Commission is thought to be looking into whether JPMorgan violated securities laws in its disclosure of the trades to investors, and the FBI confirmed Wednesday that it had opened a preliminary investigation.
Lawmakers and financial analysts also expect regulators to use “claw-back” provisions in the Dodd-Frank act to require JPMorgan executives involved in the trading to return bonus money they received as a result of the trades.
Dimon has repeatedly criticized new regulations imposed by Dodd-Frank, especially its limits on how banks can use their own money to make risky investments. Those rules were designed on the premise that losses on such investments could pose risks to the broader financial system.
Since disclosing the steep and mounting losses, Dimon has used language that suggests that the complex investment strategy – essentially a bet that the U.S. economy would perform better than it has – would have been allowed under rules that are to take effect July 1.
That suggestion, however, has angered the architect of those rules, Michigan Democratic Sen. Carl Levin, who challenged the assertion Thursday in a conference call with reporters.
Levin said that he and Sen. Jeff Merkley, D-Ore., had sent a letter to four federal agencies responsible for implementing portions of the Dodd-Frank law detailing the legislative history of the provisions and showing how Congress had sought to restrict the very sort of trade that now had America’s healthiest big bank in trouble.
“We wrote the . . . rule, we remind them, to prevent the big banks from using hedging as a way of avoiding a ban on proprietary trading, and we were very specific in how we phrase it,” Levin said.
JPMorgan officials have described the bet as an economic hedge, but it appears to have been a complex bet that wasn’t made to offset risk – how banks hedge against potential losses – but rather to profit from bettering economic conditions. The bet was a bullish one written against default insurance that had been taken out on a basket of corporate bonds.
It’s that complex “synthetic” hedge that’s likely to be the subject of great attention when Dimon testifies. The structure of the bet is similar to the complex financial instruments that got so many banks in trouble in the near-collapse of the financial system in 2008.