room. we will now proceed. this hearing is part of the banking committee's ongoing oversight of the massive trading loss by jpmorgan chase and risk management bank supervision and the wall street reform act. since the announcement in early may, this committee has heard from the occ and the fed, which are the primary regulators by jpmorgan as well as the s.e.c. and fcc and other relevant officials to learn and review these events. several members of the committee have asked to hear from mr. dimon and due diligence conducted by my staff i decided

to invite the regulators informed the committee that there was a breakdown in the risk management involved with these trades despite the fact that the trades were reportedly designed to reduce the managed risk as they continue to look into the matter that the firms solvency and stability is not in jeopardy at this time. while this is welcome news, questions remain that must be answered if we want our banks to better manage the risks to maintain financial stability as i believe they do. today marks the two-month anniversary of incumbents where they downplayed concerns for the initial reports of the chief investment office trades.

we later learned our out of control trading strategy and i've said before a letter explained we've made an egregious mistake. there's no excuse for it. we know where we are stopping. we know where we are stupid. we know there was bad judgment and in hindsight we took far too much risk and it was badly monitored and never should have happened, end quote. so what went wrong? and how can a bank take on far

too much risk if it was to reduce risk in the first place. and our goal was to make money shtd as the saying goes, and wall street reform and operations of regulators cannot keep up with bank innovation i disagree with the supervision must make a system that is risky. while risk and banks take it

seriously and maintain strong controls. we may also demand that regulators do their jobs well. and they need careful scrutiny and oversight. and unsound practices and do not threaten our economy. some also suggest that capital is financial regulation. capital does and play an important well capitalist bank can fail and if it's not and our financial system will be safer and stronger with multiple and

lines of defense which wall street in addition to higher capital standards, we need regulators to finalize these wall street reforms and congress should fund them with sufficient resources so that they can effectively monitor the financial system. again, it's been two months since he first publicly acknowledged that the trades and an accounting of this event will help this committee better understand that the policy implications are a stronger and safer financial system gone forward. i now recognize shelby for his statement. >> i represent jpmorgan chase

mr. jamie dimon. mr. dimon is here because jpmorgan chase lost more than $2 billion on derivatives trades. normally it is not and i believe it should not be a role of congress to second guess decisions by private sector business however, this committee has a responsibility to ensure that banks do not unnecessarily put taxpayers at risk. congress has, in large part, delegated the responsibility of oversight to our financial regulators and they are supposed to be monitoring the activities of banks like jpmorgan chase to ensure that they operate in a safe and sound manner. as we learn from the most recent financial crisis and this particular incident, regulators do not always meet our expectations. banks take risks because that's what they do. usually those risks are

beneficial because they enable americans to buy homes, attend college, and save for retirement. when banks fail to prudently manage those risks, serious problems can arise. for example, some banks claim that they can safely provide mortgages with no down payments, advancements in risk management enabled them to lnd to riskier borrowers without threatening the bank safety and soundness. we all know this is false. these banks were not applying better risk management techniques. they were simply foregoing time tested underwriting standards. the result was the failure of some of the nation's largest financial institutions including countrywide and fannie may and

freddie mac. by most accounts, our witness was one of them. yet as the financial crisis shows, poor risk management, even a large -- a single large bank can have profound consequence. congress and bank regulators must also watch for risk that could, if improperly managed, threaten the banking system. accordingly, we should examine the facts and circumstances surrounding jpmorgan's $2 billion plus that need to be answered. first, did the losses from these trades threaten the safety and soundness of jpmorgan? and, second, could it happen again? last week we heard from the regulators that supervised jpmorgan. they told us that the 2 billion plus loss did not threaten the bank's solvency because the bank

has strong earnings and capital. this conclusion shows again one of the single best ways to protect taxpayers from bailout is to ensure that banks are properly capitalized. strong capital requirements provide a valuable buffer against unexpected losses arising from bank regulate are tos. although capital should be the first line of defense against taxpayer bailouts, it should not be the only defense. banks also need to have good risk management. although jpmorgan enjoyed a strong reputation for effective risk management, something obviously went very wrong. regrettably, the comptroller of the currency, federal reserve, fdic were unable to tell us what happened last week, despite having more than 100 on-site examiners at jpmorgan. hopefully mr. dimon today can fill in the details.

in particular, i hope mr. dimon can explain here why these trades were made and why they produce such large losses. i also hope to learn the extent to which mr. dimon and other jpmorgan recognized for his effective management of a very successful institution yet it appears in this particular case banks perhaps got away from him. why? did mr. dimon put too much faith in the company's risk models or did he ignore them? it has been reported that and the bank was not instituting appropriate risk management practice. was mr. dimon aware of that happening? did he respond or did he

disregard them? it's also been reported that the officer responsible for these trades may have had contradictory mandates and while the goal may have been to reduce risk, the employees fs office believe that they were expected to turn these trades into a profit. the bank employees reportedly referred to this profit both as the icing on the cake. what were mr. dimon's expectations for this office? was he incentivizing them to manage risk or maximize profits? if it was the latter, were the incentives for profit consistent with proper risk management? moreover, what did the board of directors of jpmorgan know about how mr. dimon was managing risk? it has been reported that the risk and i hope that mr. dimon's role in selecting the members of

the risk committee and how the committee oversaw the firm's risk management. finally, i hope today's hearing can reveal what lessons that mr. dimon and jpmorgan and others have learned. this hearing will have served a valuable purpose if it helps banks and bank regulators avoid repeating the mistakes of jpmorgan. in this regard, i believe it's unfortunate that the can committee has not heard similar meetings with the heads of other fngs institutions and although the committee hearing from mr. dimon whose bank lost two or more billion dollars of its own money, it has never heard testimony from freddie mae and freddie mac who have lost $2 billion of taxpayer dollars. perhaps the committee could turn its attention to the gse's massive public losses when it completes its review of jpmorgan chase. thank you.

>> thank you, senator shelby. this morning's opening statements will be limited to the chairman and the ranking member to allow more time for questions from the committee members. senator warner is a valuable member of this committee and is absent to attend his daughter's graduation but he will be submitting a statement and questions for the record. i want to remind my colleagues that the record will be open for the next seven days for opening statements and any other materials you'd like to submit. now i will introduce our witness. mr. jamie dimon as chairman of the board, president and chief executive officer at jpmorgan chase and company. mr. dimon, your full written statement will be included in the hearing record. please begin your testimony.

>> chairman johnson, ranking member shelby and members of the committee, i'm appearing today to discuss recent losses in a portfolio held by jpmorgan chase's chief investment office. these losses have generated considerable attention and while we are still reviewing the facts, i will explain everything i can to the extent possible. jpmorgan's six line of business provide a broad array of products and services to individuals small and large businesses, governments and not for profit institutions. these include the mutual funds. like many banks, we have more deposits than loans. we held approximately $1.1 trillion in deposits and cio, along with our treasury unit, invests excess cash in a

portfolio that includes agencies, mortgage back securities, corporate debt, and other domestic assets. it also serves as an important vehicle for managing assets and liabilities of the consolidated entity. the bulk responsibility is to manage approximately $350 billion portfolio in a conservative manner. while the primary purpose is to have excess long term interest rate it also maintains a smaller synthetic credit portfolio whose original intent was to protect or hedge the company against systemic events, like the euro zone situation. so what happened? in december 2011, in anticipation of capital requirements, we instrumented

cio to reduce risk-weighted assets and associated risk. to achieve this in the synthetic portfolio, they reduce the existing positions. instead, and entailed any positions that believed it offset the existing ones. this strategy, however, results in even more complex and hard to manage risks. these portfolios are something to protect the firm and created new and potentially larger risks. as a result, we let a lot of people down and we are very sorry for it. let me tell you how it went wrong. these are not excuses. these are reasons. we believe a series of events led to the difficulties in the synthetic portfolio. this is detailed by written testimony but i highlight the following. ceo strategy for reducing the portfolio was poorly conceived and vetted. in hindsight, the trader did not

have a requisite understanding of the risk that they took. it should have been specific to that portfolio and only allowing lower limits of risk on each specific risk being taken. the cio should have gotten more scrutiny from both senior management, and i include myself in that and the firm-wide risk control function. in response to this incident, we've taken important actions to guard against any recurrence. we've apointed an entirely new leadership for cio. our team has made real progress in analyzing, managing, and reducing our risk going forward. it reduces the probability and magnitude of potential future losses. we are also conducting an extensive view which the board is overseeing. we make mistakes and take them seriously and are often our own

toughest critic. we can never say we won't make his steaks, in fact we know we will make mistakes, we believe that this was isolated events. we will not make light of these losses but they should be put into perspective. and we feel terrible but no client, customer, or taxpayer money was impacted by this event. and our balance sheet remains in tact. and $30 billion in loan loss reserves. we maintain strong capital ratios far in excess of the capital standards. as of march 31st, 2012, the ratio was 10.4%, our estimated common ratio is at 8.2%. both among the highest levels in the banking sector. we expect both of these numbers to be higher by the end of the

year. all of our lines of business remain profitable and continue to serve consumers and businesses. while they are still two weeks left in the second quarter, we expect our quarter to be solidly profitable and in short our strong capital position and diversified business model did what they were supposed to do. cushion us against an unexpected loss in one area of our business. while this incident is embarrassing, it should not and will not detract our employees from our main mission, to serve clients, consumers, and companies in their communities and communities around the globe. during 2011, jpmorgan chase raised capital and provided credit of over $1.8 trillion for consumer and commercial customers, up 18% from the prior year. we also provided $17 billion worth of credit to u.s. small businesses up 52% over the prior year. and over the past three years, in the face of significant economic headwinds, we made the decision not to refrench but to step up as we did with markets

in tur turmoil. all of these activities come with risk and just as we've remained focus on serving our serving clients, we also maare main given to assistant to financial volatilely. we'll learn from this incident and my conviction is we will e e emerge a stronger, smarter, and better company. i would also like to speak directly for a moment to our 260,000 employees, many of whom are watching this hearing today. i want them to know how proud i am of jpmorgan chase and of what they do every day for their clients and communities. thank you and i welcome any questions you might have. >> thank you, mr. dimon, for your testimony. as we begin questions, i ask the clerk to put five minutes on the clock for each member.

mr. dimon, there was clearly a break down in risk management at your firm. what did you do, you know, when you made your teapot comment? why were you willing to be so definitive a month before publically announcing the losses when it appears you did not have a full understanding of the trading strategy? >> let me first say when i made that statement, i was dead wrong. i had been on the road. i called the cio. i had spoken to our risk officers. they were looking into it. there was some issues with the cio announced earnings. i was assured by then, and hi a right to rely on them, that they thought this was a small, isolated issue and it wasn't a

big problem. they look at things like how bad can it get. they stress it. under no event did it look like it would get used after it it did after april 13th. >> mr. dimon, there were reports that the cio had scrapped a risk limit that would have recorded triggers to exit positions if losses exceeded $20 million. is this true? if yes, did you approve this? and why was the limit removed? >> there was no loss limit of $20 billion. >> $20 million. >> how much? >> $20 billion. >> no. i'm unaware. cio had its own limits. at one point, those limits were triggered. the cio at that point did ask traders to reduce taking risk.

she started to look heavily into the area, which is a the proper thing to do. sometimes triggers get had hit and it should happen afterwards is people think about it and decide what to do about it. >> there have been concerns raise raised about the change you made in the cio's risk model. why was the risk model changed? did this risk -- does this change mask the true risks of the trading activity? >> so what i'm aware of is that some time in 2011 the cio had asked to update their models, partially to get them updated to be compliant with the new rules. model reviews are done by an independent model review group. they started the process six months earlier. models are changed all the time.

always being adjusted to try to be better. you try to make models get better. the the models run were approved by the group and implemented in january and did effectively increase the amount of risk they are able to take. on april 13th, we were still unaware that the model might have contributed to the problem, so when we found out later on, we went back to the old model. so the old model was more accurate in hindsight than the new model. >> when reports suggest there were multiple warnings of weak controls at the cio that were ignored, strategy was not reviewed outside cio. did you, mr. dimon, make the decision to exempt the cio from any review for risk controls

outside of the unit? or why was no one watching? >> i think the first error we made is that it had done so well and it did have ilts own risk committee. that was supposed to vet all the risk. i think that risk while independent wasn't independent minded enough and should have challenged more rigorously this particular synthetic credit portfolio. i think the second related risk is that the credit portfolio always should have had more scrutiny. higher risk, mark to market, more scrutiny and different limits right from the start. >> mr. dimon, did the structure for the employees at the cio incentivize risky behavior that

led the trading loss instead of rewarding those who reduced the bank's risks? were there e bonuses for generating profits out of the cio? will you seek call backs from management and executives involved in this trading debacle. >> we don't, and have not for fife years, change of control, parachutes. there was no one paid on a formula. the management of the cio portfolport folio was sub board nat for the rest of the company. hay couldn't take too much exposure, et cetera. they were paid for what they did for the whole company. and when we pay people, everyone, we look at their performance, the unit's performance, the company's performance and their performance includes recruiting, training, integrity, sharing

with senior management, all the things we need to do to make it a better company. so i don't believe that the compensation made this problem worse. but -- and like i said, none of these folks were paid on formula. the second question. when the board finishes a reviews, which i think is the appropriate time to make those final decisions, it could be inappropriate to make those decisions before the final review, you can expect it's likely it will be club x. >> senator shelby. >> thank you, mr. chairman. mr. dimon, so we would have some idea of what happened, could you explain a little farther what really happened without divulging your propriority interests, we don't want you to do this, could you tell us a

little more? in other words, you were managing risk. what were you managing? >> the biggest part of -- the biggest risk we take is credit, loans. the excess deposits, we have a $350 billion portfolio. its average is double plus. it's conservatively managed. there's a profit of $7 billion. in addition, we also have $150 billion in cash today, pretty much invested in central banks around the world. so e we try to be a very conservative company. >> we understand that, but in this particular occasion that brought these losses on, explain to us without getting into your proprietary area what you were doing and what went wrong? >> so the synthetic credit portfolio -- >> and by portfolio, what do you mean? >> swaps, derivatives, traded in the markets. >> you took a position in them,

right? >> we took a position in them. if you look at the position, what it was meant to do was to earn a little money, but if there was a crisis, like lehman, euro zone, it would reduce risk dramatically by making money. that was the original intent. in fact, it did accomplish those objectives. >> were you investing or hedging? or a combination of both? >> i would call it hedging. we protect the company in the event things got really bad. and they did get really bad at one point and it did have some of that protection. >> is that the index? >> if credit went really bad, this would do well. that was their original intent. in january, february, and march, we'd ask them to reduce this risk. you could go long or by selling the positions you had. they created a far larger