A federal agency that oversees J.P. Morgan Chase & Co. is taking heat over how much it knew about risk-taking in the part of the bank that suffered more than $2 billion in trading losses.
Sen. Sherrod Brown (D., Ohio) asked Comptroller of the Currency Thomas Curry in a letter Friday for details about the regulator's supervision of trading operations at the largest U.S. bank by assets. Mr. Brown also wants more information about the Office of the Comptroller of the Currency's "process for reviewing trading operations" at J.P. Morgan and other big banks.
Enlarge Image
Close Getty Images/ReutersSen. Sherrod Brown (left) will question Thomas Curry of the Office of the Comptroller of the Currency about its oversight of J.P. Morgan.
The Senate Banking Committee, which includes Mr. Brown, is scheduled to hold a hearing Wednesday that will focus on the trading loss.
More on J.P. Morgan- Inside J.P. Morgan's Blunder 5/18/12
- Key Void at Top for J.P. Morgan
- Heard on the Street: Peering Over J.P. Morgan's Hedges
- Dimon to Testify Before Senate Banking Panel
- White House Steps Up Push to Toughen Rules on Banks 5/16/2012
- For J.P. Morgan Trader, From 'Caveman' to 'Whale' 5/16/2012
- Targeting a Tough Interpretation
- Pay Clawbacks Raise Knotty Issues 5/16/2012
- Funds Bet on J.P. Morgan Before Loss 5/16/2012
- 'London Whale' Rattles Debt Market (4/6/2012)
The questions are a sign of growing pressure from lawmakers, mostly Democrats, to tighten controls on banks as a result of the mess at J.P. Morgan. Republicans have been slow to defend the company, partly because they see it as having been cozy with Democrats.
Some lawmakers are eyeing a new risk model used by J.P. Morgan's Chief Investment Office that failed to reflect the giant position traders had taken on a derivative index. Risk models are mathematical formulas that track various metrics of trades, including how much a position swings from day to day compared to an average.
The model in question, known as value-at-risk, measures how much a firm can lose in a normal trading day. When losses at the J.P. Morgan unit surpassed the projection of the new model, the company reverted to an older model that better reflected the positions' risks.
Read MoreMr. Brown wants to know if the OCC was told that J.P. Morgan had moved to a new value-at-risk model, as well as whether the agency has launched an investigation into the decision to switch models.
The new risk model might have caused OCC examiners to be misled in their conversations with J.P. Morgan officials, since it appeared to cause some confusion at the bank, according to a person familiar with the matter.
Regulators overseeing a bank's activities often have to rely on the same models the bank uses to track its risk, experts said. Problems in risk models can confuse both the firm's risk officers and regulators.
"There is a risk that a bank is taking results from a model and relying on those model results too extensively," said Jeffrey Brown, a managing director at Promontory Group and former risk manager at the OCC.
Mr. Brown also is seeking details about when the OCC learned about the trades behind the losses, the agency's response and how the trades compare to investments made by other large financial institutions.
Mr. Curry, who became the OCC's top official in April, will attend Wednesday's hearing with officials from the Federal Reserve, Treasury Department, Federal Deposit Insurance Corp. and the Consumer Financial Protection Bureau. Lawmakers likely will focus their questions on the OCC's oversight of J.P. Morgan, committee staff members said.
Longtime critics of the OCC, which oversees national banks, say the U.S. agency has responded too slowly to risky activities, opening the door to some of the reckless behavior that triggered the financial crisis.
"The OCC has historically been thought to be sympathetic to banking interests," said Michael Greenberger, a law professor at the University of Maryland and former director of the Commodity Futures Trading Commission's division of trading and markets.
Since J.P. Morgan announced the losses in May, OCC officials have sent mixed signals on whether the trades would have violated the Volcker rule, part of the Dodd-Frank financial-overhaul law that bans proprietary trading.
OCC officials told some lawmakers that the trades were designed to reduce risk and wouldn't flout the rule. An OCC spokesman later said the comments were premature, and Mr. Curry told members of Congress that it is unclear if the trades would be allowed. The Volcker rule, named after former Fed Chairman Paul Volcker, hasn't been implemented.
In a May 25 Senate briefing, OCC Chief Counsel Julie Williams said banks regularly engage in risk-mitigating hedging activities as part of their regular business, according to several people who attended the meeting. Such hedging is appropriate and "a not uncommon thing to do," Ms. Williams said at the meeting.
An OCC spokesman said Ms. Williams's comments weren't specifically a reference to J.P. Morgan.
Write to Scott Patterson at scott.patterson@wsj.com
No comments:
Post a Comment