Sorry for the delay, folks -- having some technical difficulties. Will be up in a moment.
9:39 a.m. Again, apologize for the delay, but we're underway. Today's Senate Permanent Subcommittee on Investigations Hearing concentrates on the infamous "London Whale" trades from last year. This is a story about Chase's failure to stop a rogue fund from hiding gigantic losses in its Synthetic Credit Portfolio. There's a huge backstory to this about Chase's repeated failures over its recent history to make changes to internal control procedures that would prevent things like this from happening -- a lot of this material can be found in a stunning report by Josh Rosner, which you can find here. We'll get into all of this today as Chase is confronted about its extraordinary recent history of unsavory behavior -- as Rosner found out, Chase has paid a stunning $8 billion in settlements in the years 2009-2012, and spent $16 billion in legal defense fees during that same period, which means that fully one third of Chase's net income has been spent on the cost of doing bad business, i.e. cleaning up after its high risk and/or illegal behavior. Since Chase is widely considered the most successful and highest-functioning of the big banks, the revelations that will come out today are a major blow to the idea that Too-Big-To-Fail banks can be functional and safe.
Anyway, we're in the middle of Carl Levin's opening remarks right now, and the show is about to begin.
10:11 am First witness is Ina Drew, Chase's Chief investment officer. She is "accepting responsibility" for the events that "happened on her watch," essentially putting up a wall between the Whale trades and Jamie Dimon.
10:19 am Questioning just beginning... as this goes on, I want to acquaint readers with a few insane facts from Rosner's report, which put all of this London Whale stuff in context. Chase has repeatedly been chastened by federal government in the last three years precisely for its failure of internal controls, including a settlement enacted in January of this year in which Chase was slapped for massive failures of money-laundering controls, a legacy of see-no-evil policies toward dirty money and doing business with sanction states that rivals that of HSBC. One of the hilarious details from Rosner's report is that one of the so-called "non-egregious" violations that Chase was punished for in this recent January 13, 2013 settlement was the undisclosed transfer of 32,000 ounces of gold to Iran. That was one of the minor violations. Just to start getting folks up to speed about some of the craziness that was going on at this bank, things regulators have been aware of for years and have done nothing but slap the bank with negligible fines for their activity.
10:32 a.m. Levin confronts Peter Weiland, Chase's former head of market risk, about why, last March, he derided a CRM analysis that Chase had the possibility of losing $6 billion over the course of a year as "garbage." He forces Weiland to admit that he was wrong, in light of the fact that Chase did, in fact, end up losing $6.2 billion. Weiland spit the begrudging admission that he was wrong out of his mouth as though it was a dead snail.
10:36 a.m. Senator McCain grilling Weiland on how it could be that he didn't know who was responsible for reporting to federal regulators. "What, is Chase just such a huge company?" he asks, sarcastically. Again, Weiland is the former head of market risk, so it's pretty amazing that he wouldn't know this information.
10:44 a.m. Weiland's Mark 2012 email calling the risk assessment that Chase could lose $6 billion in the SCP "garbage" is going to be this hearing's version of the "shitty deal" mantra from the Goldman hearings years ago. McCain went after Weiland on the same question, asking if he still thought that warning was "garbage"; Weiland, gritting his teeth, repeated that, "Clearly, [the warning] turned out to be... predictive." He couldn't bring himself to use the word "right."
10:48 a.m. Ashley Bacon, the bank's Acting Chief Risk officer, has just used the term "granularity," which is one of Jamie Dimon's favorite words. Weiland already used the word once as well. It's drinking game time -- do a shot every time a Chase executive uses the word "granular" or "granularity." Two shots if the witness uses the Dimon pronunciation of the word: gran-yer.
10:57 a.m. Levin quotes Weiland as calling something "granular." Drink!
11:04 a.m. Returning to the revelations from the Rosner report: it's crucial to understand that this "London Whale" episode is not an isolated example of the bank blowing off its internal controls. Rosner went bank and found an extraordinary series of settlements Chase has been involved with in the last three-four years, each one worse than the next seemingly, and despite these repeat violations, Chase each time was allowed to skate without serious punishment.
In September of 2009, the Commodity Futures Trading Commission nailed Chase for co-mingling $725 million of its own money with $9.6 billion in customer money, essentially the same activity we saw in the Corzine/MF Global scandal. Chase, incredibly, was allowed to settle for $300,000 in that case.
A year later, the British Financial Services Authority fined Chase 33 million British pounds for doing the same thing – failing to “adequately protect between $1.9 billion and $23 billion of client money between November 2002 and July 2009.”
In April of 2012, the CFTC again found that Chase was failing to segregate customer funds from its own accounts, and fined the company $20 million, which is about 3 seconds of income (I’m exaggerating, but probably not far off) – not even a slap on the wrist, more like hitting them on the wrist with a feather-duster.
Those are just the settlements for failing to implement controls to prevent comingling of customer funds. All of this is background for what we’re talking about today, the failure to implement controls to prevent fantasy accounting and intentionally hidden losses.
11:10 a.m. These early witnesses are being smart, somberly nodding and agreeing with Levin every time he asks a question like, "Weren't you all being raving, irresponsible douchebags when you ignored these warnings of huge losses last year?" Example: when Levin asks current risk chief Ashley Bacon if someone should have investigated all these breaches in risk limits last year, Bacon lowers his head and says, "Yes, Senator." Big stylistic difference from the Goldman hearings, where the Goldman guys couldn't resist letting their know-it-all attitudes leak out. Weiland has come close a few times, but otherwise, we've seen none of that.
11:16 a.m. Break in the action. New witnesses will be coming on. Two guys just below Dimon in the Chase food chain will be coming on, co-Chief Executive Officer of the Corporate and Investment Bank Michael Cavanaugh, and Vice Chairman Douglas Braunstein. Unlike Drew and Weiland, they won't be falling on any swords I think.
This is a good moment to sort of re-state the importance of these hearings. The supposed success and functionality of banks like Chase is more or less the entire argument for not breaking up the Too-Big-To-Fail companies. Chase in fact has the rep of being the "good bank," not a rolling mess like Bank of America or an envelope-pushing bunch of know-it-alls like the guys at Goldman. The fact that the Senate has even chosen to take on this politically-connected "good bank" (Jamie Dimon was once described as Barack Obama's "favorite banker") is a sign that congress is finally getting wise to the looming disaster of the Too-Big-To-Fail problem. McCain's presence in the hearing shows that this isn't just a crusade of Carl Levin's. The hearing may not result in anything concrete being done, but it moves the ball forward significantly in terms of popularizing the idea that Too-Big-To-Fail banks are out of control. If even the "good bank" turns out to be unmanageable and an accounting black box, at some point someone will have to conclude that they all need to be broken up, so that we're no longer in danger of having to clean up after their messes should they blow up.
11:30 a.m. At one point, Jamie Dimon gave the order that Chase would stop delivering daily profit and loss data to federal regulators for a period of weeks. When Levin presses Braunstein and Cavanaugh about this, they blame the OCC, saying that there were leaks of information that they gave the OCC and that that was the reason they stopped delivering data to regulators. When Levin presses Braunstein as to when he gave that explanation to the OCC, he says he can't recall exactly when he gave that explanation or to whom exactly. He also says he can't recall "the specifics" of Dimon's reaction when Braunstein was forced to re-start the process of delivering data to federal regulators.
11:41 a.m. Shit is heating up.
First, Levin points out that on Aptil 13, 2012, Chase had an internal report showing $1.2 billion in losses in the fund in question. Former Chief Investment Officer Ina Drew was privy to that report. April 13 was a Friday. On the following Monday, Drew met with the OCC and told them the losses were at $580 million. When Levin grills her about why she did that, Drew non-replies, saying, "The OCC to the best of my knowledge was given daily profit and loss reports" for the time period in question.
In other words, never mind that I lied -- the OCC should have been able to figure this out on their own, because we were sending them reports with all the raw data. Of course, they didn't send data all the way throughout, as McCain quickly pointed out:
11:47 a.m. McCain asks a sensible question of Braunstein -- wasn't the bank required to give regular reports to the OCC?
McCain: (I'm paraphrasing) So how is it that Jamie Dimon simply ordered the bank to stop giving over that data? What other company just decides which rules it will and will not follow? I mean, am I being an asshole here, or what? (Again, I'm paraphrasing).
Braunstein: Well, the thing is, Senator, we were concerned about confidentiality...
McCain at this point launched into an incredulous rant, asking again how it's possible that Chase could just decide not to comply with rules anymore. "I'm not sure there are many corporations that could get away with such a thing," he says, then wonders aloud -- what the hell is wrong with the regulators that they let this kind of thing go on?
Good question, right?
12:01 p.m. Levin grilling Braunstein on the fact that Chase started using a different valuation system to judge the world of this Synthetic Credit Portfolio as soon as it started to lose money. "Is it common procedure to change your pricing practices when losses start to pile up?"
Braunstein gave a non-answer answer and Levin interrupted him. "That's not what I asked."
Braunstein shrugged, smiled a little bit guiltily, and said, "We believed that what we were doing at the time was consistent with [American accounting practices]."
Levin again pointed out that this wasn't an answer to the question. Ultimately he didn't get an answer. Which is interesting, becaue what Levin was really asking was if Chase had done this in other circumstances.
How many other times has Chase done this? Are there other episodes? Is this a common practice? Levin asked this question and Chase officials refused to answer conclusively that it is not a common practice. This is some ugly stuff.
12:16 p.m. Levin catches Cavanaugh in a bad slip-up. At one point Cavanaugh described the practice of shifting pricing methods in order to hide losses as coincidental. Minutes later, Levin re-asks the question: did Chase change its methodology specifically to hide losses? And Cavanaugh, looking like he's sitting on a chair full of tacks, grits his teeth and says that, "It seems... to our conclusion, that, yes." In other words, he agrees that that's what Chase did.
"But just a minute ago you described it as a coincidence," Levin says.
Cavanaugh then tries to explain that he misspoke before, but it's a bad moment. Chase is now admitting in this hearing that it changed its pricing methodology to hide losses.
12:25 a.m. Levin points out that Chase in its first-quarter 2012 10-Q report filed to the SEC -- its public disclosure -- reported a $719 million loss in the Synthetic Credit Portfolio. Months later, it changed that filing to add $616 million to those losses. Levin askes Cavanaugh if he would agree that this error was "material."
Cavanaugh: Yes, and we take it very seriously.
So now we're getting into the territory of misstatements not only to the OCC, but to the SEC and the investing public.
Next up, the April 13th earnings call, in which Chase execs said all sorts of misleading stuff about the fund.
12:35 It's just unbelievable, what this company has gotten away with.
In the April 13th investor call, Chase represented that, "All of these positions are fully transparent to the regulators," and that data on the positions on that portfolio had been delivered to the OCC "on a regular and recurring basis."
Levin asks, "In fact, longstanding practice at the bank was not to give position data to the OCC -- right?"
Now, rememnber, this investor call came at a time when news about this fund's losses was blowing up in the newspapers and on TV all over the world. Chase then gets up in an investor call and claims that federal regulators got infomation on the positions in the fund on a "regular and recurring basis." In fact, Chase never gave the OCC any information about the fund until this story exploded in the media.
This is a blatant lie, a market-altering lie -- how many people didn't sell Chase stock because they believed federal regulators were on top of any potential problems at the bank, when in fact not only did the OCC not know anything about these positions, there were people in the bank's senior management who didn't understand them? How is this not actionable? It's crazy.
12:43 p.m. Braunstein... he's beginning to pull ahead of Weiland in the douchiest-witness contest. When you look at him, you just want to fill up a tube sock with guacamole and whack him across the face with it.
12:58 p.m. Levin asks Braunstein, shouldn't investors have been made aware in that April 13th call of the true condition of the SCP?
Braunstein, with enormous balls, replies that he says it was an "accurate presentation." This is after he told investors that he was "very comfortable" with the situation in the fund, that the OCC had been getting regular reports, and so on. This despite the fact that Chase knew that the fund had already lost over a billion dollars.
I suspect that this is going to be an issue later on, Braunstein in this hearing calling that April 13th call an "accurate presentation." By no standard was it even within a thousand miles of accurate. This recalls Lloyd Blankfein telling the Senate that Goldman didn't bet against its clients.
Technical issue: I have to vacate the computer I'm working on now. I'm going to have to stop now, and will pick up later with commentary on the examination of the OCC witnesses, which is coming up soon. Thanks for hanging in -- I will be back in an hour or two.
Later: First of all, want to apologize for disappearing yesterday afternoon -- something came up and this hearing went on a little longer than I expected it to. So I went back and listened to the rest of the hearing, and what follows is a continued blow-by-blow, though sadly not in real time. The time markers from this point forward reflect the time on the actual recording, so you can easily search for the exchanges.
A general point about the rest of the hearing, what it's all about and what its significance is. What we're getting in this report is a rare insight of how an Too-Big-To-Fail bank sees itself and its accounting. We're seeing how they actually come up with the numbers that get spit out to the rest of us as shiny, seemingly objectively-arrived-at profit and revenue statements every quarter. What we find out from this hearing and from the research that spurred it into existence is that the accounting procedures at a bank like Chase, particularly with regard to derivatives, are closer to being an exercise in creative writing than real accounting. This giant mountain of a company is made up of a core of optimistic assumptions, almost kid-like fantasies, and in some cases, outright lies. It's really incredible.
So continuing on:
3:42:44 Levin begins questioning Weiland, Chase's former head of market risk, about an extraordinary series of emails and phone calls involving one Patrick Hagan, who was the quantitative analyst for Chase's Chief Investment Office in London. You can take a look at the documents yourself; they begin at Exhibit 50 in this package here. Hagan on March 21, 2012 sent an email all over the company (CC'ing Weiland, among others) with the subject line, "Optimizing regulatory capital."
Now, every bank has to retain a certain amount of capital on hand versus the amount of risk deployed. This is primarily what regulators watch for at a company like Chase -- how much money do they actually have, as opposed to loans, bets, and other liabilities. So a primary concern of every bank is figuring out what number to tell the regulators when it comes to reporting how much "regulatory capital" the bank has on hand.
But as we've already seen at this bank, where the losses from just one portfolio can be calculated as $700 million in one person's eyes and $1.2 billion in the eyes of another, the whole process is highly subjective. Anyway: in this email, Hagan lays out a number of different methodologies he could potentially use to determine the bank's regulatory capital. He talks about the advantages and disadvantages of each, noting that by using the wrong methodology, "the bank may be leaving $6.3 billion on the table."
At the end of the email he makes a remarkable proposal. "We should treat the regulatory capital calculation," he says, "as an exercise of automatically finding the best results of an immensely arbitrary and complicated formula."
In other words, what he proposes is not to pick one methodology and stick with it, but to simply use the methodology in each individual case that will make Chase's numbers look the best. This extraordinary proposal -- doubly extraordinary because he put it in writing and sent it to about a dozen high-ranking Chase executives -- leads directly to Exhibit #51, which Levin goes into next.
"A few hours [after Hagan's email]," Levin notes, "Mr. Hagan gets a call from Anil Banjia, who worked in the bank's model risk and development group."
He then reads off from a transcript of that call:
Mr. Bangia: I think, the, the email that you sent out, I think there is a, just FYI, there is a
bit of sensitivity around this topic. So--
Mr. Hagan: There, there is a lot of sensitivity.
Mr. Bangia: Exactly, so I think what I would do is not put these things in email.
Mr. Hagan: That's exactly what I was told. Javier, Javier is the guy that asked me to
send out the email this morning. And then he found out from, from Pete and - yeah, and
he found out from some -- and Irv that this is ...
Mr. Bangia: Yeah, yeah, I wouldn't put this you know in ....
Levin then reads from the next exhibit, 51b, which shows Hagan calling Bangia later on. It just doesn't get much funnier than this: after being explicitly told not to put something in writing, Hagan, obviously the hired math nerd who doesn't understand that he's not supposed to go blabbing family secrets in potentially recoverable evidentiary form, decides to call Bangia back on what turns out to have been a company-recorded phone call and essentially says, "Hey, you know that thing I wasn't supposed to talk about? Can I talk about it?" And Bangia, amazingly, says, "Sure!":
Mr. Hagan: Hi Anil, this is Pat.
Mr. Bangia: Hi Pat.
Mr. Hagan: Urn, you know that email that I should not have sent?
Mr. Bangia: Urn hum.
Mr. Hagan: Have you read it? Is that a feasible thing to do or is that impossible? .
Mr. Bangia: Well it's, in some ways it's somewhat feasible..
Armed with this transcript, Levin jumps down Weiland's throat.
"Mr. Weiland," he says, "despite the sensitivity, this email indicates that Mr. Hagan continued to pursue his efforts to... optimize regulatory capital. Right? Do you agree with that? Do you agree with what I read?"
Weiland, an almost transparently-complexioned fellow with fashion-geek glasses and a ginger goatee, tries to non-answer. "Mr. Hagan was doing calculations as to what he thought the regulatory capital should be," he says. "He was not responsible for the official calculations..."
"Why hide it?" Levin barks.
Weiland's answer here gets long-winded. Throughout the hearing, the longer the answers, the more the witnesses dissembled.
"Because it wasn't the business purpose it wasn't what we were trying to achieve," Weiland says. "Mr. Hagan had a misunderstanding as to what we were trying to achieve and was treating this regulatory capital exercise as a mathematical problem rather than understanding the actual rules in the process."
Translation: Hagan is just a math guy and didn't know we're not supposed to talk about fudging the law out loud.
"That's why you don't put it in writing?" Levin asks.
"We didn't want anyone to misconstrue or misunderstand what we were trying to achieve," Weiland counters. "And when Pat sent around those emails, people were misunderstanding."
"Yeah," Levin says. "They thought you were doing what it said you were doing, which is optimizing regulatory capital... Therefore, don't put it writing."
"Don't do it and don't say it," Weiland says, righteously you think. At this point, you think Weiland is just the higher-up who's been blindsided by some subordinate's stupidity. But then Exhibit 51c puts that to lie -- a call between Hagan and... Weiland.
This call is hilarious. It's straight out of Office Space. Remember in that movie how everyone kept getting on Peter's ass about screwing up his TPS reports? He made one little mistake, forgetting to put them in the new format, and suddenly everyone in the company is coming up to him and saying, hey, didn't you get the memo about the new TPS reports?
This is the moment where Weiland, playing the role of Lumbergh, goes to Hagan and asks him if he got the goddamned memo about the TPS reports. At the beginning of the call, he tells Hagan that people keep giving him, Weiland, a hard time about the fact that some moron named Pat Hagan actually wrote an email about "optimizing regulatory capital." He's like, Mmm, yeah, did you get the memo about not saying this shit out loud?
Mr. Weiland: I keep getting banged up .... I know you've had some emails back and forth with Venkat and Anil or whoever on the optimization of the IRC and CRM and everything else. Everyone is very, very - I told this to Javier the other day but maybe he didn't mention it to you -everyone is very, very sensitive about the idea- writing emails about the idea of optimizing -
Mr. Hagan: I got that sort of mentioned. I'd say it was mentioned to me [laughter].
Again, this is straight out of Office Space -- it's the scene where Peter says to Lumbergh, Yeah. Yeah. Yeah. I've got the memo right here, but, I just forgot."
The call continues. Weiland-Lumbergh presses on: are you sure you got that? Because I can send you another copy of the memo...
Mr. Weiland: OK, so, I don't know, Irv just came by again and said, "Oh, Venkat was
telling me he got another email from Pat you know -"
Mr. Hagan: From me?
Mr. Weiland: Maybe it's from a couple of days ago, I don't know, but .... if you're
sensitive to it, that's all I wanted to know.
Mr. Hagan: Okay.
Here's the punchline. Weiland goes on and does exactly the same thing that Bangia did: after chiding Hagan for putting the stuff in writing, he proceeds to tell him that he's open to discussing actually doing what Hagan proposed -- "we can talk about" it. Just don't be sending it around in emails.
Mr. Weiland: So I think we can talk about, you know, allocation.
Mr. Hagan: Okay, so nothing about allocation, I understand...
Mr. Weiland: - Uh, you see, the work of the risk manager has very broad and unclear
borders sometimes. Anyway...
Mr. Hagan: - Okay. I did write an email message. I didn't realize it was sensitive to
This whole humorous episode encapsulates what Chase was and probably still is all about. If the numbers look bad, change them, throw off the regulators, but just try not to put it in writing. The failure of superiors to step in and actually change the bad behavior is the constant. At every juncture in this story, from the changing of the methodology of calculating the value of the SCP to the decision to not tell regulators about the losses, there is a moment where a higher-up has a chance to step in and stop the problem. And instead of doing so, he or she always just finds a way to institutionalize the whitewashing procedure.
4:29 After finishing with the Chase witnesses, Levin brings out three regulators from the Office of the Comptroller of the Currency, the federal regulator that seemed to first get a clue about the "London Whale" losses when it read about them in the newspapers.
The three witnesses are Thomas Curry, the Comptroller; Scott Waterhouse, the Examiner-in-Chief for Chase, and Michael Sullivan, the Deputy Comptroller for risk analysis.
4:31:39 Drink! Comptroller Curry in his opening statement talks about how "we directed the bank to provide us with granular information."
4:37:46 Levin: "One of the mysteries of this investigation," he says, "is how a huge and high-risk derivative trading portfolio could be operated for years at J.P. Morgan Chase without the OCC's full knowledge and oversight."
4:39:40 Amazing revelation right from the start. Levin asks Scott Waterhouse -- this is the Examiner-in-Chief of J.P. Morgan Chase, one of America's biggest companies, a guy who basically lives in Chase offices and is supposed to have intimate knowledge of the bank's operations and risk portfolio -- he asks him what he thought when news broke on April 6, 2012 about the London Whale Trades.
"How much did you know about this whole SCP portfolio?" Levin asks.
"At that point in time," Waterhouse answers, "I knew very little."
We're talking about a portfolio that had a notional value, at its peak, of $157 billion. And the government's chief examiner of that particular bank admits he didn't really know about it until it blew up.
4:40:05 I almost choked when I heard this next thing: Waterhouse, in explaining how it was he didn't pay attention to this explosive synthetic credit derivative portfolio, explains, "Given that it didn't surface to our attention, we spent our time focusing on what we considered the higher-risk activities."
Higher risk? Like what? Were Chase executives juggling chainsaws in the hallways?
Levin jumps on this. "You did not consider this to be a high-risk activity?"
Waterhouse: "I did not."
Ladies and gentlemen, welcome to federal financial oversight! The chief examiner of one of America's largest depository institutions -- largest federally-insured depository institutions -- has what is in essence a $100 billion hedge fund made up of insanely complicated exacta bets on inscrtuable synthetic credit derivatives, and he doesn't think it's high risk.
4:40:30 Waterhouse: "In April, 2012, when the London Whale article came out, I was surprised... and I set out to figure out what it all meant."
It just keeps getting better and better.
Levin: prior to that time, did you receive regular information about this portfolio?
Waterhouse: "No, we did not."
4:41:48 Waterhouse is killing me. This stuff is unbelievable. Levin asks him: is it true that, despite what you found out on April 6th, when you asked Chase about the SCp, they gave you "such reassuring answers" that you considered the matter closed on April 30th?
Now, remember, the OCC has just found out that Chase has been systematically concealing what may be the world's largest derivatives portfolio from them for years and years, and that this very portfolio had just exploded in billions of losses and Chase still hadn't alerted the OCC to the problem, to the point where the disaster spilled into the newspapers before the OCC knew what the hell was going on. And yet the OCC's response to all of this was to ask Chase what was going on with the SCP, and take the bank's word for it when Chase swore up and down that everything was okay, man, nothing is fucked here, you're being very un-Dude!
This is just unbelievable stuff. This enormous cock-up explodes into the news, an enormous mess for which the whole world is, rightfully, going to blame the OCC for being asleep at the wheel. These regulators should be steaming through the ears at Chase for lying all this time, they should be barging into Chase's offices with pick-axes and prying open every file cabinet in every office, but what does Waterhouse and the OCC do instead? They accept Chase's reassurances that everything is fine
Waterhouse denies that he closed the case on April 30th at Chase's say-so, and (flashing a look that says, "Give us some credit, anyway") notes that they did set up one more meeting on the issue of the SCP. But then he sheepishly admits: "As we look back... clearly we should have been more aggressive in looking at the portfolio."
Gee -- you think?