resident team in new york. >> one of the impressions you get is the cio office in london actually was -- had significant responsibilities with respect to the bank. the justification in may was that they were making to take these positions, taking these investment positions to protect the bank from the overall portfolio of the bank, which is essential risk operation. can you explain? >> the individuals that are responsible for the -- managing the risk and establishing the parameters that may occur in the london office are housed in new york. that is where the physical focus of our activity has been. >> and they report directly to the chief management or -- >> the chief executive officer, yes. >> right. and you're confident from your review that they had complete

authority to contradict or counter man the office in london? >> the accountability, office of management in supervising the design of the risk management control controls and their monitoring of it. >> when the model for risk was changed, were you aware of that change? did you evaluate the new model? it took place prior to your assuming these duties, i understand that. you came on board about april -- >> 9th. >> and april 6th was the first indication of difficulties. but was that -- i think that the term model evaluated by occ? >> there are hundreds, if not thousands of models employed by large financial institutions to,

uh, measure and monitor a variety of risks and other functions within the institution. but under the authority of the applicable capital regulations, we are required to approve their capital-related models. there are other models that may be at issue here, management-related models or other models that would -- would have been involved in this particular situation. we would not have had an express approval requirement of those models but would likely have been aware of them and we're looking at, uh, our procedures for evaluating other types of models that are used by an institution such as jp morgan chase. i would point out that a year ago of last april, the occ did publish written, uh, formal guidance on the use of models by, uh, occ supervised

institutions. and that guidance does outline, uh, the pitfalls and areas in which banks and bank management must assess in the use of models in measuring risk throughout the organization. >> okay. mr. wolin, right now we face a serious challenge in europe with european banks who seem to be in a much more adverse condition than the united states banking industry, based on capital and other measures based on testimony. put us in a stronger position. >> senator, i think that both dodd-frank and the ability of the financial oversight council to come together and discuss and understand these things, but also the work of the fed and other regulator s sitting at ths table to undergo the stress

tests that have been at the core of making sure that our banking system is well capitalized and well cushioned from the kinds of exposures that might otherwise have have been important aspects of our being in a much better position than we were before dodd-frank and, frankly, in a much better position than our counterparts in europe. >> is that your view, governor tarullo? >> yes, senator. i think that beginning in 2008 and with the hearings conducted by this committee and your counterparts in the house in 2009 on reform, there just was a sea change in attitudes and/ orientation. as secretary wolin indicated, particularly with respect to stress testing, capital requirements. which, of course, are embedded now in section 165 of dodd-frank, i think we just all

have a much better handle on the positions that our banks will be in, in the case of a tail event. which is to say the very bad, low probability outcome. >> thank you. >> senator? >> thank you for the hearing. i hope we're successful on the markup bill. that's a real markup. hopefully, it will happen soon. 2,400 pages, big legislation, i know there will be some good attribute attributes. from my perspective as we get further and further in the rear view mirror, it's apparent to me that dodd-frank was a political response to a -- instead of real reform in so many ways. i do hope that when this season is over of everybody talking about it being the best thing since sliced bread, we'll actually move on to exploring some real reforms down the road.

mr. tarullo, i do thank you for talking about capitoal. that's our best buffer against financial institutions having trouble. that has been a contribution. mr. gruenberg, i appreciate you coming in and talking the other day about orderly liquidation. i do think, mr. chairman -- i don't know how many people have gone through the fdic proposed rules on resolution, but the words liquidation are throughout title 2. i know senator warner knows that well. and i think we've found that it's anything but liquidation. and it really is only dealing with holding companies. these institutions will continue. i do think it would be great for us to understand that. and maybe think about whether there should be a chapter two to title 2. let me move on. i think it's a fool's errand to think that regulators will be ahead of, you know, bankers,

especially in these highly complex organizations. and the notion of having a regulator beside every banker is, again, a fool's errand. i really think we've charged y'all with a lot of things we shouldn't have charged you with in the first place. but the real question to me -- i know that, look, jp morgan lost $2 billion, i think, over a two-year period. they could lose like 80 billion and still be okay. yet we still haven't dealt with the $2 billion that taxpayers really lost. people may be looking at this hearing and wondering why we're having it. the reason i think it's important is this is a real live example of what volker may or may not be. determinations are being made. since we have all the regulators here, i'm start with you, mr. wholen and ask each of you, what does this mean? risk, mitigating, hedging activities in connection with and related to individual or

aggregated positions or contracts. y'all know what the rest of it says. what does that mean? does an institution rightfully, once volker is in place? by the way, we understand volker is not in place today, so it has no relevance whatsoever as it has to do with jp morgan. if a ann institution has tremendous exposure in europe through whole loans, normal loan-making activity, does it or does it not have the opportunity once volker is put in place to hedge against a downturn and economic activity or just activities there that may be adverse to the bank? i would just like for y'all to go across and tell me what this means and is portfolio hedging something that you envision to be something that can happen or cannot happen after volker is fully implemented? starting with you, neal. >> as the statute says and as

you quoted it correctly, if you're hedging something that is related to that, then it's permitted. if it's something that's other than that, then it's not. i think, you know, the question of portfolio hedging depends a lot on what you mean by portfolio hedging. if you're hedging -- if you're, quote, unquote, hedging some macrorisk that is not related as the statute requires it to be to individual or aggregated positions and the risks that come from those, then it is not permissible, our read under the statute. but then our regulators will have to work through exactly the technical issues of what that means. put out a proposed rule. 18,000 or so comments came in. they're working through that right now. the question is not really whether it's portfolio hedging or not. the statute doesn't talk about portfolio hedging. it talks about whether it's associated with individual or

aggregated positions that the firm has actually taken and put on their books. >> as you would, if you would go through, political response to what has just happened in this political season, we could end up making regulations on hedging that make some of the highly complex organizations, if we're going to keep them like they are, even more risky. is that correct? >> well, you know, i think the whole goal here is to allow hedging that relates to risks that are associated with positions of the firm. and in that respect, it's risk reducing. what we don't want to have done and what the volker rule abouts about, of course, at its core, is to not allow proprietary trading activity with the firm's money that the rest of us, the taxpayers are ultimately on the hook for making whole. >> that's what i thought you would say. thank you. >> senator, at the last hearing, we had a discussion of the

distinction between proprietary and market making and the distinction now is between proprietary trading and a hedging trade. when you ask what does that provision, which is basically taken from the statutory language and put into regulation mean, at least with respect to hedging, what the proposed rule would do would be to put in place substantive guidelines between trying to distinguish proprietary trading and hedging on the other. perhaps as importantly, put in place a set of risk management reporting and documentation requirements. so, in essence, if a firm said, we're doing this because it's a hedge, they would be required to explain to themselves, importantly, as well as to the primary supervisor, what the

hedging strategy was, how it was recentliy cory iy correlated wi positionings they were hedging and how they would make sure not to give rise to new kinds of exposures. you ask absolutely the right question. what does that mean? that's the reason why in the propose proposed risk there is some substantive guidelines but also some risk management documentation requirements. >> i would simply state from a supervisory standpoint, we expect all things, large or small, to have robust and comprehensive liability management policies and practices in place. >> and that includes portfolio hedging? >> it would depend on the risks in that particular institution that they're facing. and could include that. the issue that governor tarullo is mentioning, is there robust

risk management in place and with controls and limits and that allows these -- a risk to be addressed. and mitigated without additional risk. that's the concern or issues that the npr is trying to addres address. >> senator, the central issue here is that hedging is a risk as opposed to what we get into speculative nature where you're really trying to generate income. and i think the whole goal would be to -- i think this has been the point that's been made, setting up and creating a set of controls which you could monitor the activity so that the legitimate and important hedging activity goes forward. if you're getting into riskier, speculative activity, you want to be able to identify that. i think that's important for the institution to be able to recognize and important for the regulators to recognize.

>> mr. chairman, i know my time's up. i realize consumer agency is not particularly involved in that aspect, but i thank you all. and i do hope that political pressures of what has happened do not cause regulators to end up doing something different than what they think is good for our banking system. and i do hope, down the road, we'll look at some real reforms that may work for us a little bit better and not put all the ownness on having a regulator beside every banker. thank you. >> thank you. senator warner. >> thank you, mr. chairman. i want to pick up a little bit where my friend, senator corker, left off. you are still here months after -- at least looking into some of these jp morgan activities, trying to determine their strategy.

and i believe governor tarullo said that one of the results of what you envision of volker rule being implemented might be is that determining this assessment of whether your hedging strategy would have to be laid out, in effect, ahead of time to make a determination of whether it was -- fit within the boundaries of appropriate hedging or bled into proprietary trading. do you think whether this particular morgan transactions fell in or out of the volker restrictions or not, would the very nature of having this in effect, sharing of strategy on the -- beforehand perhaps have

given your office more guidance? governor tarullo, if you want to comment on that as well. >> the point i would like to make in regards to the discussion on the volker rule and jp morgan chase, we don't know all the facts. i think that's important before you make any judgment about the rule, if it were in effect, would be plapplicable in this particular instance. this was a risk management issue, regardless of whether or not the volker rule was in play. and the issues really are similar in a sense that, you know, were there appropriate management controls in place in advance of this strategy? were there procedures and reports that enabled management to assess the risks initially and as they may have developed in the risk of that strategy?

at any event, it's still a risk management issue regardless of the volker rule. >> senator, kompt comptroller has been addressing the issue, is this a proprietary trade? he is saying, i believe, that he doesn't have information if volker were in effect it would be a proprietary trade. my point is, though, regardless of what we conclude about the actual nature of this particular set of transactions, if this proprosed rule had been in place, if the hedging exception were to be invoked by a firm, they would have had to ensure that the kinds of risk management that tom speaks of would have been in place and they would have been required to document it. and i suspect we're going to find in this case that there was an absence of documentation, both within the firm and in reporting to supervisors. >> you had, perhaps, a little more guidance on aggregate

hedging. clearly, i think there's a value of aggregate hedging in terms of portfolio, hedging each individual trade. but you would have had at least perhaps a little clearer guidance? >> that's the intention of these additional provisions of the regulation and then, of course, the ongoing supervisory to make sure that the information that is received is scanned and reviewed properly. >> let me move to a different subject because my time is moving out. again both to governor tarullo and mr. wolin. senator corker and i tried to put a rule in place of these living rulewills. as we move down that path, have you had the tools you need to evaluate these -- the back and forth on the creation of living wills and to what standard are you going to hold the

institutions in a sense this living will will demonstrate how they would unwind themselves? are you looking at that in kind of a blue skies environment? are you looking at it in the potential real environment that we may have with a breakup of the euro? i would like to just get your comments on that. >> senator, the statute itself establishes a standard for evaluating the plans. and that standard is the bankruptcy code. and the requirement is that you have to make a judgment as to whether the plan could credibly result in an unwinding of the institutions with the standards of the bankruptcy code. and that's sort of the operating premise for the development of the resolution plans. as i indicated previously, the fed and the fdic issued a joint rule last year, establishing the criteria for the plans. we have been working with the institutions on their

development. under the rule, the first round of plans will be -- and those would be for the largest institutions. assets of over $250 billion will be due in july. so, we've been engaged in a process with those companies in the initial development of those pl plans. we're going to get the initial submissions in july. there's going to be an extensive process of review of those plans following the submissions. >> another thing i would like to add to that, senator, is that obviously it's not possible to taylor a lot of plans. our review of the plans that are submitted is going to need to include basic questions about the ongoing structure of the firm. that is, we're not just going to be able to say, if something bad happens on thursday, will they

be able to resolve by monday morning? i think we're going to need to ask ourselves whether the drafting and review of the plans shows us that there are structural elements or features of the organization that could be an impediment to achieving that and, thus, as a manner of current supervisory policy, we need to adjust. and that kind of exercise should help provide some more is suppleness to whatever the risk is that could eventually lead to the firm's problems. >> thank you. >> thank you, mr. chairman. first o first, i want to indicate i strongly agree with the tenor of the questions we heard from senator corker and senator warner with regard to the volker rule and those aspects. i think we covered that thoroughly. i'm not going to go into that

further myself. i encourage you to take their comments to heart as we move forward. i'm very concerned about how we are moving forward in the regulatory climate right now with regard to the response to things like the jp morgan issues and others. i want to just shift the focus for a minute. and mr. cordray, i want to talk to you first. the housing credit market continues to be very tight. and i'm hearing a lot of concern about how dodd-frank will reduce credit availability through the proposed rules for qualified mortgage that increases liability and qualified residential mortgage that requires a 20% down payment. i know that last week the cfpb reopened the comment period until july 9th, seeking comments about data that can be used to model the relationship between the borrower's ability to repay

and variables such as the consumer ratio of debt to income. panel to discuss the impact of this proposed rule? >> thank you, senator, for the question about the qualified mortgage or ability to repay rule. one of the reasons we did reopen the comment period is we have been recently able to obtain significant amount of data from fhfa that gives us a better window into the mortgage market. we're all, i think, quite concerned. i know all of you are as well, about the direction and trajectory of that market. this is an important rule in helping shape the future of that market. we want to be clear that we craft a rule that is based on sound data and that does not unduly restrict access to credit, which i think is something we have been hearing consistently from small banks, large banks, community and consumer groups across the

country. even after the fed's comment period had closed on this proposed rule, we continue to get immense amounts of comment from different groups and we thought that we would open up a comment period again to make sure everybody had an even chance at commenting on those issues, including data issues that we have identified in the recomment proposal. because this rule was originally proposed by the fed, the small business panel does not -- is not implicated. if we were to try to convene a whole process, we would miss the statutory deadline congress has set for us, which is january 2013, which we fully intend to comply with. that is our approach at the moment. we encourage any small provider that wants to take advantage of the renewed comment period -- this is part of the reason why we did it -- those outside the beltway often do not understand ways that they can access the agency. we want them to have full access

and full voice in our role-making to make sure we're reflecting the entire market. >> well, thank you. to mr. gruenberg, mr. occuri and mr. t mr. tarullo, more broadly defined than the qualified mortgage, would it be correct to say that the banking regulators should wait for the cpfb to finish their rules before they move ahead with their risk retention rules? >> senator, the judgments made on that, as a general matter we felt that there was a logic in having the qrm follow the qm. so, we'll have to see. but there is a logic to that. >> mr. curry, do you agree? >> i think that's a necessary component to the entire package of rule making, the qrm and the qm. >> mr. tarullo? >> interagency process, senator. if people want to wait, we will wait, too. >> all right.

i encourage you to do that. mr. tarullo, recent events have highlighted the difficulty in managed risks. the current exposure method and there has been quite a bit of concern as to whether that is an accurate method of risk modeling. are you considering other models or are you focused on simply staying with the exposure method? >> in what context, the stress test context or the -- >> that's my understanding, yes. >> so, with respect to the stress testing, what we're trying to do in stress tests is make our best judgment as to what kinds of losses would be entailed across the industry. >> let me interrupt. >> i'm sorry. >> i was more focused on the

single counterpart -- >> that is a different issue, right. that is a calibration issue with respect to the exposure of a large institution to another institution. >> right. >> for purposes of the limits that would be promulgating. that's being commented on in the consideration of changes to -- or potential modifications proposed in rule 165, 166. there have been a number of alternatives suggested. i think the challenge, without trying to signal where we would go, because we haven't seen all the comments yet. i certainly haven't had a briefing on it. i think the challenge is going to be on the one hand wanting to have a methodology that tries genuinely to track actual risk exposure, while on the other not

becoming dependent on modeling within firms, because as we've seen in a number of other contexts, dependent solely upon the modeling firms can lead you astray particularly because firms, in our observation, tend to be much better at modeling associated risk assessments for more or less normal times as opposed to the tail events that we're trying to guard against. in thinking about the comments on the proposed rule, we have to keep both those issues in mind. try to cue toward what really are the risks associated with the positions on the one hand and on the other hand wanting to make sure that we're not totally dependent on some internal model. >> it's another example of where if we model too aggressively one way or the other we'll get it wrong and create unintended consequences. i encourage you to get it right and focus on these concerns about the accuracy of the current exposure method.

thank you, mr. chairman. >> senator markey? >> thank you very much, mr. chair. does anyone on this panel think that the london whale who ran jpmc's unit woke up each day trying to mitigate the risk from deposits invested between loans in bonds? >> that is a related area of inquiry at the occ. >> so, you're inquiring but wouldn't argue that case? >> not necessarily. >> no, i wouldn't think anyone would. he woke up each day as head of the strategic investment unit trying to make money for the bank. and so it's kind of a basic observation.