cio's office. and we are looking to make sure that there were appropriate limits and controls on those activities in that area and how they compared to other similar areas within the organization. >> it is important that wall street reform implementation is completed to enhance financial stability and reduce systemic risk. just to be clear doesn't that seem to be that the jp morgan trading loss was systemic? do you agree? and what do you believe are the implications on the wall street reform rule makings that have yet to be completed? >> thank you, mr. chairman for the question. obviously, the loss at jpmorgan

chase was a big loss and one that will effect share holders. we concur in his judgment that it is not about the solvency of the firm or the stability of the broader financial system. i think what is clear is that the lessons that we all learn from what happened at jp morgan chase will serve as important lessons into the range of dodd-frank implementation work to come whether questions about risk management or capital. risk management, enhanced standard, or capital. this incident under scores the need for us to pay attention to examples like this in order to learn those lessons both with. with respect to dodd-frank in limitation. and the broader limitation of

supervision that are ongoing. >> are regulators better coordinated and prepared after wall street reform to deal with external threats to our financial stability and economic growth like a eurozone crisis, what steps are you taking in response to this crisis? >> i think there is no question, mr. chairman, that the existence of the financial stability oversight council has given regulators an opportunity to constantly monitor financial markets and the exposures of our banks and broader financial system to what is going on in europe. the financial stability oversight council has spent a lot of time on europe and thinking through what its implications are and might be to our financial system. that work, of course, is on going.

for the first time, the range o u.s. government to work together in engaging counterparts in europe to make sure that we are as well prepared and have thought through the various contingencies that might be necessary. >> do you have anything to add to this? >> with respect to european preparation, i just say that one thing about the euro zone problems they have been with us for some time as a result of which we have been able to regularize a system of oversight of u.s. financial institution exposures and activities in europe. so right after the first greek problems arose, 2010, on an ad hoc basis we have been looking at these, we have been able to put in a system that allows us to check the positions and exposures of individual firms against -- aggregated data whether from market sources or

from supervisory sources to make sure both we and the firms have a handle on what is going on. other than that, i concur with what the secretary said. >> senator shelby. >> thank you. i think it's kind of a given here from what i read and what i know, the stress test, jpmorgan went through, and so forth, that they have more than adequate capital. i have been told that they would have to sustain losses 40 times, in other words, $70, $80 billion to even, they would still be standing, is that about right? >> senator, in the, in the stress test where we, what we did with the trading book was to assume an instantaneous shock based on our very adverse

scenario which entailed trading losses of $28 billion. we also assumed over the -- over the period of the stress test, credit losses of $56 billion, the sum of those gives the approximately the number you indicated. >> comptroller curry, tell us, just walk us through from what you know -- what was going on at -- at jp morgan. you know? were they managing risk? were they making money? were they doing a combination of what? everybody has got a measure risk. in other words, what was really going on? you had people on -- on site, right? >> that's correct. >> so they took a position. was that a position to manage something they had already done? or could you explain it to us? i know it's complicated. >> that is actually the key

question we are trying to address, senator. is really, what actually happened to this particular -- in this particular investment strategy. and it's a very complicated investment strategy, both in terms of its, its size as well as complexity. we are looking to determine what the actual strategy behind that investment scheme was and also what, if there were any other factors that were driving that strategy other than attempting to mitigate known risks in the bank's portfolio. >> whether it is a bank arena, derivatives, you talk a position somebody else has another position. >> yes. >> so if you win you are looking great, you are looking smart i you lose, you are maybe -- having a bad day. you are not trying to take risk out of the market are you?

>> not necessarily. >> but what are you really trying to do -- from my perspective, i think banks ought to be able to take risk. they ought to manage those risks. the regulators ought to make sure that they know what is going on from your perspective and the fed's perspective of any huge risk they take. that it might, what, endanger the taxpayer. a lot of us maybe not everybody but a lot of us are worried about the taxpayer and bailouts and future bailouts. jpmorgan, as strong as they are, seems from your testimony and others, and what we know, was never in any danger if they lost $2 billion or $4 billion or what. that as it lot of money to me and i guess a lot of money to them. but what did the comptroller's office know and -- were you on top of things? how many people did you have at

jpmorgan, kind of supervising or watching this? >> let me address the issue of -- of the strategy with regard to risk management, first, senator. number one we are looking for the institution to identify and address -- the potential for a serious risk within the organization. we are really not looking to eliminate all risk. if you did so you wouldn't have a bank the nature of a bank is to -- to manage risk. and to be profitable. the role of capital is really to absorb those areas where -- where -- risk is either unavoidable or, occurs just because the nature of the business. and in the case of -- of jp morgan national bank which we supervise there is ample capital, there is over $101 billion worth of capital backing the, just the national bank, not the holding company. with respect to the actual

supervision of of jpmorgan chase. we have 65 individuals who are our core team of examiner whose are resident at the institution. on top of that, we are able to draw upon a considerable reservoir of -- of skilled individuals with expertise in the, in a variety of credit market, capital markets and other areas that are brought in as a -- as a targeted examiners on an as-needed base. we work in connection and cooperation with the federal reserve system which also

supervises the holding company. in terms of this particular investment -- situation at the cio's office, we did -- begin to examine this early in april. we are -- we are -- interest and concern intensified during the month as, losses increased. within the portfolio up to the point that -- that the institution itself announced the significance of the, the losses that were incurred. since that point in time, we have, our focus has been on managing and monitoring the bank's efforts to mitigate, or de-risk that particular portfolio. with the idea -- with the objective of ensuring that there is a soft landing and of that particular position. and that to minimize both risk to the institution and ultimately to the deposit insurance fund. >> when do you think you will finish your analysis of what

really happened and -- all this? >> we hope to do that as quickly as possible and we hope to use our findings to inform us as to what potential implications there are for the other institutions that we supervise and our large bank cadry of institutions. >> thank you, mr. chairman. >> thank you very much. mr. curry, you have 65 personnel devoted to supervision. how many are in london? >> we have five individuals who reside or are housed in our london office. >> and they're responsible for how many institutions in london? >> they're responsible for any national bank that has a global operation especially with the presence in london like a london branch office.

>> how many would that be? >> roughly a half dozen institutes. how common is to have the risk factor outside of the united states? >> in this particular case, the risk office is actually housed in new york where the global operations of the cio office are housed, so from a supervisory standpoint, our focus in supervising that and other global issues is really directed from our resident team in new york. >> one of the impressions you get from reading the press is the cio office in london actually was -- had significant responsibilities with respect to the overall risk of the bank.

in fact, the justification that's been publicly made is they were making -- taking these hedge 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 for the activities that may occur in the london office are housed in new york, and that is where the physical focus of our activity's been. >> and they reported directly to the chief management, or -- >> the chief executive officer, yes. >> and you're confident from your review that they had complete authority to countermand or contradict or direct the operations in london? >> that is part of the focus -- one of the focuses of our review is to determine the accountability, the involvement of management in supervising the design of the risk management 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 onboard april 9th and april 6th was the first indication of difficulties, but is that model evaluated by occ? >> there are hundreds, if not thousands, of models that are employed by large financial institutions to measure and monitor a variety of risks or other functions in the institution. but under the authority of the applicable capital regulations, basel 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 have been involved in this particular situation. we would not have had an express

approval requirement of those models, but we would likely have been aware of them, and we're looking at our procedures for evaluating other types of models that are used by an institution such as jpmorgan chase. i would point out that a year ago, last april, the occ did publish written, formal guidance on the use of models by occ-supervised institutions, and that guidance does outline the pitfalls and areas in which banks and bank management must assess in the use of models in measuring risks throughout their organization. >> thank you. >> 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 many other measures, as governor tarullo's testimony. to what extent did dodd-frank improve our banking situation,

vis-a-vis the european? and put us in a stronger situation? >> senator, i think that both dodd-frank and the ability of the national oversight council to come together and discuss and understand these things, but also the work of the fed and other regulators sitting at this table to undergo the stress tests that have been at the core of making sure our banking system is well capitalized and well cushioned from the kinds of exposures that might have otherwise 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 that were conducted by this committee and your counterparts in the house in 2009 on reform, there was just a sea change in attitudes and orientation both respect to existing authorities and with the use of new authorities, and 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 tale event, which is to say the very bad, if low probability, outcome. >> thank you. thank you, mr. chairman. >> mr. chairman, thank you, and thanks for the hearing. i do hope we're successful in having a markup on the menendez-boxer bill and it's a

real markup, and hopefully it will happen soon. i know that in any big piece of legislation, 2,400 pages, there's going to be some good attributes. i know from my perspective as we get further and further in the rearview mirror, it's more and more evident to me that in many ways dodd-frank was a political response to a -- instead of real reform in so many ways, and i do hope that when this season is over of everybody talking about it being the best thing since sliced bread, will actually move onto exploring some real reforms down the road. mr. tarullo, i do thank you for talking about capital. i think that's our best buffer against financial institutions having trouble, and i think that has been a contribution, and mr. gruenberg, i appreciate you coming in and talking today 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 two.

i know senator warner knows that well, and i think we found that it's anything but liquidation and it's really only dealing with holding company. the institutions will continue. and, again, i just think it would be great for us to understand that and think about whether there should be a chapter two title too, but let me move on to the issue at hand. i think it's a fool's errand to think regulators are going to be ahead of bankers, especially in these highly complexed organizations, and the notion of having a regulator beside every banker is, again, a fool's errand, and i think we 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, jpmorgan 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 $200

billion that taxpayers really loss with the gses, and i know 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-life example of what they may or may not be. tomorrowations are being made and since we have all the regulators here, i will start with you 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. you all know what the rest said, but what does that mean? does an institution once they are in place, we understand they are not in place today. they have no relevance whatsoever as it relates to jpmorgan. what does it mean? if an institution has tremendous exposure in europe through whole loan, normal loan-making

activity, does it or does it not have the opportunity once they are put in place to hedge against a downturn in economic activity or just activities there that may be adverse to the bank? i would like for to you tell me what this means and is portfolio hedging something that you envisioned to be something that can happen or cannot happen after they are fully implemented. starting with you. >> i think as the statute said, the right question to ask is, is it related to individual or aggregate positions? if you are hedging something related to that, then it's permitted. something other than that, then it's note. the question of portfolio depends on what you mean. if you are hedging some macro risk that is not related as the statute requires it to be to

individual or aggregated positions and the risks that come from those, it is not permissible under the statute. in the end the regulators will have to work through exactly the technical issues. 18,000 or so they are working through that right now. the question is not really whether it's portfolio hedging or not, but it doesn't talk about the portfolio. whether it's associated with individual or aggregate positions that the firm has taken and put on their books. >> if you would as you go through, i assume there is an order to have a political response to what just happened in this political season. we could end up making regulations on hedging that make some of the highly complex organizations if we are going to keep them like they are even more risky.

is that correct? >> i think the goal here is to allow hedging related to the positions of the firm. in that suspect, it's risk-reducing. what we don't want to have done and at its core is to not allow activity with the firm's money that the rest of us, the taxpayers are ultimately on the hook for. >> that's what i thought i would say. thank you. >> at the last hearing, we had a discussion with the distinction between proprietary trading and market making. what we are facing is the distinction between proprietary trading and a hedging trade. when you asked what does that provision which is taken from the statutory language and put in the regulation mean, with respect to hedging, what the proposed rule would do would be

to put in place both substantive guidelines for trying to distinguish between hedging of individual or aggregated positions on one hand and trading on the other. perhaps as importantly, put in place a set of risk management reporting and documentation requirements. in essence, if a firm said we are doing this because it's a hedge, they would be required to explain to themselves as importantly as to the primary supervisor, what the hedging strategy was and how it was reasonably correlated with the positions that they were hedging and how they would make sure that they didn't give rise to new kinds of exposures. i think you asked the right question. what does that mean? that's the reason why in the proposed rank, there is an elaboration of both some substantive guidelines and also some risk management

documentation requirements. >> i would state from a strictly supervisoe rory stand point tha expect them to have robust liability management policies and practices in place. >> that are includes portfolio hedging? >> it depends on the risk that they are facing and could include that. the issue i think is as the governor mentioned is truly, is there robust risk management in place and with controls and limit that allows these risks to be addressed and mitigated without introducing official risk. that's the concern or the issues that the mpr is trying to address. >> i think the central issue here is hedging is a risk management activity to reduce risk to the institution as opposed to activity that would

get into a speculative nature where you are trying to generate income. i think the whole goal would be and i think this would be the point that they made is creating a set of controls which you can monitor the activity that the legitimate and important activity goes forward if you are getting into riskier speculative activity and you want to be able to identify that. that's important for the institution to be able to recognize and important for the regulators to recognize. >> i know my time is up and i realize the consumer agency is not particularly involved in that aspect, but i thank you all. i do hope that the political pressures of what happened do not cause regulators to end up doing something different than what they think is good for the banking system and i hope down the road we will look at some real reforms that may work for

us a little bit better and not having a regulator. >> thank you. senator warner? >> thank you, mr. chairman. i want to pick up a little bit from where my friend left off. you were still here after at least looking into the jpmorgan activities, trying to determine their strategy. i believe the governor said that one of the results of what you envisioned a rule implemented might be is that determining this assessment of whether your

he hedging strategy would have to be laid out ahead of time to make a determination of whether it would fit within the boundaries or proprietary trading. do you think whether this particular transaction fell in or out of the restrictions or not, would the very nature of having this in effect, shares of strategy beforehand have perhaps given your office more guidance and if you want to comment on that as well. >> i think the point i would like to make in regards to discussion on the rule and the jpmorgan chase. we don't know all the facts. that's important before you make judgments as to whether or not the rule would have been applicable on this particular instance. the point i would like to emphasize is this was a risk

management issue regardless of whether or not the rule was in play. the issues really are similar in the sense that were there appropriate controls in place in advance of the strategy and were there procedures and reports that enabled management to assess the risks initially and as they may have developed in the course of the execution of that particular strategy. i believe that in any event, it's a risk management issue regardless of the rule. >> i think that the controller has been addressing the question as to whether this is a proprietary trade. he doesn't have information right now that allows him to say if vul car would be in effect if it's a proprietary trade. regardless of what we conclude about the actual nature of thi