The Interviews - Experts Address Recent Fraud Headlines. This collection of interviews offers analysis of recent financial fraud events and cases.
Posted on 15th Jun 2012 @ 1:26 PM
Comptroller of the Currency Tom Curry found himself in the hot seat on Capitol Hill as members of the Senate Banking Committee grilled him and other bank regulators over their handling of JPMorgan Chase’s massive trading losses. Appearing with Curry were Neal Wolin, Deputy Treasury Secretary, Federal Reserve Board Governor Daniel Tarullo, Acting Chairman of the FDIC Martin Gruenberg, and Consumer Financial Protection Bureau Director Richard Cordray.
The June 6 committee hearing may have been titled “Implementing Wall Street Reform: Enhancing Bank Supervision and Reducing Systemic Risk,” but committee members, especially Democratic Senators, quickly zeroed in on JPMorgan’s “London Whale” trades.
Committee Chairman Tim Johnson (D-SD) wasted little time in shifting the focus to JPMorgan and setting a decidedly partisan tone.
“When a bank with JPMorgan’s solid reputation announces that it lost billions of dollars on a large trade reportedly designed to reduce the firm’s risks, it reminds us that no financial institution is immune from bad judgment,” Johnson said in his opening statement. “While the JPMorgan trading loss does not appear to have caused systemic problems, it is a clear reminder that Wall Street continues to need better risk management, vigorous oversight and, if the rules are broken, unyielding enforcement.”
At that point, Johnson added a little something for the benefit of Republican opponents of Dodd-Frank: “To repeal or weaken Wall Street Reform, and defund the cops enforcing it, would take us back to the days before the financial crisis of 2008.”
Menendez Leads the Charge
Sen. Robert Menendez (D-NJ) didn’t mince his words. “So, I know you just got to this position and I am certainly not blaming you personally for this,” he addressed Comptroller Curry, “but I just have a yes or no question: did the OCC screw up in allowing these JPMorgan trades to happen?”
Curry said his goal in reviewing what happened at JPMorgan Chase is “not just to see what the bank itself did wrong, but also how we can improve our supervisory processes at the OCC. So, it will be a critical self-review as part of this process.”
Sen. Menendez didn’t limit his criticism to the OCC. “I think that every regulator here responsible for implementing the law should know if huge trading losses like this happen at banks after we established the Volcker rule, and capital rules have been written and implemented, then I think the blood will be on all of your hands if the London Whale ultimately goes belly up next time.”
Curry: Heightened Expectations
Curry told the committee the OCC is also undertaking a two-pronged review of its supervisory activities. “The first component focuses on evaluating the adequacy of current risk controls at the bank, informed by their application to the positions at issue. The second component evaluates the lessons learned from this episode that could enhance risk management processes at this and other banks. Consistent with our supervisory policy of heightened expectations for large banks, we are demanding that the bank adhere to the highest risk management standards.”
Curry said the OCC is not limiting its inquiry to the particular transactions at issue. “We are assessing the adequacy of risk management throughout the bank. We are using these events to broadly evaluate the effectiveness of the bank’s risk management of its CIO function, and to identify ways to improve our supervision. If corrective action is warranted, we will pursue appropriate informal or formal remedial measures.”
Curry also stressed that JPMorgan, with approximately $1.8 trillion in assets and $101 billion in Tier 1 common capital, has the wherewithal to absorb the trading losses. “Given that scale, the loss by JPMC affects its earnings, but does not present a solvency issue,” Curry said.
He noted that the events at JPMorgan “do not threaten the broader financial system and the bank’s effort to manage its positions is not creating an unusual risk of contagion.”
Regarding the question many have focused on since the JPMorgan losses came to light, whether the trades would be permissible under the proposed Volcker Rule, Curry said it would be premature to reach any conclusion before the OCC’s review is complete. He added, however, that the JPMorgan episode “will certainly help focus our thinking on these issues.”
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