In a long grilling of Douglas Braunstein on Friday, Sen. Carl Levin (D-Mich.) accused the former JPMorgan Chase CFO of misleading investors about the bank’s mounting losses in derivatives trading and cloaking what became a big threat to the bank’s financial stability.
In a way unlike the questioning of other JPMorgan executives, Levin particularly focused on proper disclosures to investors and regulators in his pointed questioning of Braunstein.
Levin, chairman of the Senate’s Permanent Subcommittee on Investigations, said that on an April 13, 2012, earnings call, Braunstein made inaccurate statements about the timing of information released to regulators and the quality of risk-management oversight. He also mischaracterized the derivatives trading as a hedging strategy, according to a 301-page committee report that accompanied Friday’s hearing.
Braunstein — and JPMorgan CEO Jamie Dimon — “omitted key facts” on the call, the report says, including that the troublesome synthetic credit portfolio had tripled in size in the prior quarter and breached all of the risk limits set up by the bank.
The mistakes and mismanagement in the JPMorgan’s chief investment office (CIO) — what’s called the “London Whale” incident, referring to a trader on the credit desk — eventually caused the bank $6 billion in losses. They also turned the spotlight on a business unit that was supposed to reduce the bank’s credit risk but instead “piled on risk, ignored limits on risk taking, manipulated models, hid losses, and dodged oversight,” said Levin.
In responding to Levin at the hearing, Braunstein, now a vice chairman at JPMorgan, maintained that his comments on the earnings call were based on information he had at the time, and that he reported the situation “as accurately as I could.” But Levin pressed Braunstein. “I have a lot of trouble believing that those statements were anything but an effort to calm the seas,” Levin said. “They were exaggerations and inaccurate.”
Eventually, when asked by Levin whether his statements turned out to be wrong, Braunstein said, “In hindsight the positions and the portfolio did not act as a hedge . . . we misunderstood the risks and the complications.”
The committee’s report gave particular examples where the facts, as unearthed by the committee, contradicted what Braunstein told investors.
For example, Braunstein reported to investors that the bank’s regulator, the Office of the Comptroller of the Currency, got regular, recurring updates on the CIO’s trading positions in derivatives. But according to the committee report, the bank “dodged OCC oversight of the synthetic credit portfolio for years . . . and even disputed access to [a] daily CIO profit-loss report.”
As to Braunstein’s claim that the trading positions in the CIO were “put on pursuant to the risk management at the [bankwide] level,” the Senate report says that firmwide risk managers, including former chief risk officer John Hogan, knew little about the derivatives portfolio and its size or nature, “much less its mounting losses.” Neither did any other manager or predecessor of Hogan’s design or approve the synthetic credit portfolio positions, the committee report says.
In general, by telling investors that JPMorgan Chase’s management was “comfortable” with the CIO’s investments, Braunstein drastically downplayed an alarming situation whose precise nature was beginning to surface internally and in the media.
Two weeks before the earnings report, for example, the bank’s internal-audit department had issued a highly critical report of the CIO’s risk-management practices. And two days before the call, a detailed review by senior management found that the synthetic credit portfolio “would have amplified rather than reduced the bank’s losses in the event of a credit crisis.”
Controversial JPMorgan CEO Dimon was rarely mentioned in the questioning of his executive team. But the hearing did bring up one instance in which Dimon appeared to have ordered the suppression of reports to the OCC.
In late January or February of 2012, the subcommittee found, the OCC stopped receiving daily profit-and-loss reports on JPMorgan’s investment bank. The OCC executives said they were initially told by JPMorgan staffers that Dimon had ordered the bank to cease providing the information, “because he believed it was too much information to provide to the OCC.” JPMorgan executives explained that a series of information leaks had caused the bank to rethink its controls and limit the information it was sending to the OCC.
When requested by the OCC, Braunstein ordered the reports’ resumption. When Dimon found out what Braunstein had done, “he reportedly raised his voice in anger at Mr. Braunstein,” according to the subcommittee report, which attributed the report to Scott Waterhouse, an OCC examiner who dealt with JPMorgan Chase.
When questioned by Levin on Friday about the incident, Braunstein said he didn’t recall the specifics of Dimon’s reaction.
Thomas J. Curry, comptroller of the currency, and Waterhouse were also witnesses at Friday’s hearing.