portfolio. they were more complex risks. and on april 13th, we were not aware of that, but soon after we were, we made a public announcement. we thought we owed our shareholders that. so we have been reducing that risk. >> to detail what really happened here, we're talking in general terms now, would you feel better in a closed hearing or would you not like to divulge things because you still have a position in proprietary interests? >> it attacks the company right now. we told our shareholders we intend to make far more disclosure about what happened and specific disclosures about this portfolio and what we have done to reduce the risk in the portfolio. >> i guess the question comes up, is this hedging or proprietary trading? according to some press reports, there's disagreement about whether the chief investment office, which executed these

trades was supposed to be hedging risks or earning a profit. it's been reported that this office contributed more than $4 billion of net income in three yea years, which is about 10% of your overall profit. what was your expectation? was it supposed to hedge? supposed to earn profit or some of both? >> the whole cio unit invests money and earns income. that's invested in a broad arare of investments. and that income is used to pay deposito depositors, used to pay people, so yes, it's supposed to earn e revenue. this was intended to earn a lot of revenue if there was a crisis. i consider that a hedge. it was protecting the downside right of the company. in fact, the biggest risk of the company. the there are two major risks that a jpmorgan face. dramatically rising interest

wrats and a global crisis. and so the hedge was intended to improve our safety and soundness, not to make it worse. >> was what went wrong, was it the way the hedge was con tribed or was it events beyond your control? >> i think it was the way it was contrived between january, february, and march. it changed in something i can't publically defend. >> lessons learned, what have you learned from this problem? this debacle? >> i think that no matter how good you are, how competent people are, never, ever, get complacent in risk. challenge everything. make sure people are asking questions and sharing information and that you have very granular limits. no more this risk in a name or

this risk in a market. including things like liquidity risks so you're controlled. in the rest of the company, we have those disciplines in place. we didn't have it here. that's what caused the problem. >> thank you, mr. chairman. >> senator, schumer. >> thank you, and thank you for coming. my first question is about risk committees. i was a proponent in the dodd-frank of increasing corporate governance and fought to have included in dodd-frank a provision 165h requiring all banks with nonbank financial firms supervised the fed to have a separate risk committee on the board that includes, quote, at least one risk management expert having experience in identifying and managing risks, unquote. you already had one so this,

obviously, you didn't need the legislation to do it. but what went wrong and what did you suggest to the regulators as they formulate rules? why didn't it do its job? >> so the risk committee does a lot of work in conjunction with the audit committee and the full board to talk about the main risk of the company. i think it's a little unrealistic to capture something like this. they spend an awful lot of time. it's hard to do that. i would point out this risk committee took this company through the most difficult financial crisis of all time with flying colors. so the risk committee did a great job. this is a flaw that i completely blame on management, certainly not on the risk committee. since recently, we have had two new directors that have extensive experience in the financial markets. >> okay. so you feel the risk committee,

this was too small an item for them? just give me a little more context for this. >> i think the risk committee reviews a lot of issues, regulatio regulations, requirements, they talk to risk committees, they make sure there's governance in place. it's hard to capture this if management didn't capture it. so we were misinforming them. >> second question goes to the broader context. i think what frightens most people about what happened is not the effect on jpmorgan, as you said, it's a large institution, well capitalized and the shareholders lost, but the taxpayers and customers didn't. but i think the question that bothers most people is, what's to stop this from happening again, maybe being a larger loss of the same type, but particularly at a weaker or less-capitalized institution? it was institutions smaller that started the catapult in the

financial system. so were we just lucky that we found out about this one when we did? what is your assessment, as somebody who knows the financial industry, about the danger of this type of thing happening in other institutions that are not as well capitalized as jpmorgan and the effect on our financial system. >> we did have limits in place that captured it. they should have been much smaller in this particular activity. i think one of the things that regulators can and do do is problem la gait best practices. i think since the crisis, and you should have comfort in this, banks have more liquidity, their boards are more engaged, risk committees are more engaged, there are no off balance sheet vehicles so a lot has happened across companies across america. >> what about nonbanking institutions that do this that

don't have the same requirements but are engaged in the same activities? >> i think the regulators are currently deciding which of the nonbanks are going to be part of risk oversight and i'll leave that to them at this point in time. >> final point. the chairman asked this but it's about claw backs. i was glad to hear there's a claw back policy. it seems that's an appropriate thing to do when people make tens of billions of dollars for taking risks and they do it poorly. it may be a good incentive to be a little more careful, if you will, to have an upside and a downside. can you tell us a little bit about the policy that you have for claw backs? i know you don't want to talk about individual cases because the investigation isn't done, but tell us how it works, how widespread it is, that kind of thing. >> so there's several layers, but most of these people we can

claw back for even things like bad judgment. we can claw back any unvested stock. even cash bonuses. so it's pretty extensive the ability to claw back. i was in favor of the claw back system. one of the legitimate complaints was after the crisis a lot of people walked away from companies that went bankrupt with a lot of money. the board will review at the end of this every single person involved, what they did, what they didn't do and what's appropriate. there's a lot of people at this company that have been successful for a long time. >> is there a limit to the claw back? and second and final question, has it been used thus far in your bank over the years you've had the policy? >> these policies have not been used thus far. >> are there limits? >> it's somewhat limited to what you have been paid over the last two years. >> thank you, mr. chairman.

>> senator krooup l. >> last weekend the testimony that we were presented by the regulators, one of the tensions that we face here is we want to be sure that we are adequately regulating our financial institutions, but we want to b sure also we don't have the regulators running our private sector institutions. in that testimony last week, comptroller from the occ indicated that there are approximately examiners or full-time on site at jp mor began. is that correct? >> i believe so, yes. >> what should the function of the regulators be? our primary focus in terms of policy should be to make sure that the banks are properly capitalize capitalized. should that be our primary focus and what other areas of oversight would be the most effective for us in terms of our regulatory structure?

>> so the regulators, i have been in regulator business my e whole life. they audit it. they criticize it. there have been improvements in companies including jpmorgan because of their audit criticism. so i think you have to give regulators realistic objectives. i don't think realistically they can stop something like that from happening. it's purely management's mistake. if we're misinformed a little bit, we're misinforming them too. the most important thing we can do is high capital p liquidity standards, proper disclosures, proper governance, proper function in risk committees. all those things won't stop the mistakes, they will just make them smaller and fewer and farther between. i think you are going to accomplish some of those things. >> thank you. in terms of the capital structure and to give it a little context here, one of the other things we learned is that

during the stress test that was applied to jpmorgan, it was assumed they could deal with losses around $80 billion and still be adequately capitalized. is that correct? >> we would be adequately capitalized, but i wouldn't be the person sitting in front of you now. we are great believers of stress test. the fed put us through a very severe stress test. if i remember correctly, it was like 13% unemployment, home prices going down, crisis in europe, and markets as bad as what you saw after the lehman crisis. we came through that, in my opinion, with flying colors. we actually stress hundreds of other scenarios. because there are plenty of scenarios that could effect a company like a bank. we want to make sure we have adequate liquidity. so much so that you never question jpmorgan. >> well, thank you. >> and we believe we have that

kind of capital. >> and your current capital is approximately $128 billion? >> i don't know the number offhand, but approximately, yes. >> thank you. i'd like to conclude with a discussion of the vul ker rule. some have said it's not possible to distinguish between proprietary trading and hedging. clearly that's what the vul ker rule contemplates and could be imposed on banks like yours. could you discuss for a moment whether we can kwish between proprietary trading and edging and if so how we make that distinction? >> i think it's going to be hard to make a distinction between proprietary trading and hedging because you can look at everything we do and call it one or the other. every loan is proprietary. if we buy treasury bonds and they lose money, we lose money. so i have a hard time distinguishing. i do understand the intent of

the vul ker rule. it's to reduce activity that's going to jeopardize the company. i completely understand that. i think the devil is going to be the detail in how the rules are written to allow the good of our capital markets and not the bad. i would be happy to talk about more of our capital markets. >> tell me for a minute how you would describe that. what's a proper hedge in the context of the vul ker rule distinction? >> portfolio hedging is something that would protect the company in bad outcomes. you can analyze that. it doesn't mean you'll always be right, but you can analyze that. and there are ways and methods and analytics to make sure you think it protects a company in a bad outcome. >> that will be like going short in the -- >> going short credit if you think there might be a credit crisis. >> well thank you very much. >> you're welcome. >> senator reed. >> thank you very much, mr.

chairman. i think this is a very important hearing because the issues that have been raised go right to the capability of large, complex international financial institutions to manage risk. and contemplating that is the ability of regulators to oversight the management of the risk by those corporations. and i think it also is a strong case, in my view, for a very clear but very strong vul ker rule and also for standing up finally the director of the financial research. i have been talking to chairman johnson and also ranking member shelby about that. but let me ask a question. it goes to risk management. in your proxy materials, risk management seems to be the responsibility of the office of risk management, which is an difference than the cio. was this individual, and i know there was several changes,

monitoring and supervising the cio, the chief investment officer on a regular basis? did he or she prove the change in modelling for the var? >> so every business we have has a risk committee. those risk committees and they report to the head of the company. and there are periodic conversations between the risk committees and the head of risk company and our senior operating group. obviously, that chain of command didn't work in this case either because we missed a bunch of these things. so if we had been paying more attention, we could have caught this and stopped it at this it point. there's independent model review group that looks at changes in models. and we do change models all the time. models are constantly being changed for new facts.

the future isn't the past. and they never are totally adequate in capturing changes in businesses, concentration, liquidity, or geopolitics or things like that. so we're constantly improving them. we don't run the business on models. they are one input. you should be looking at lots of things to make sure you're managing your risk properly. >> did you share with or did they inquire about the change in the modelling? and for the record, the change was just in the office of investment, correct? >> there was a change in the office of investment in january. a new model was put in place. we took it out. >> why didn't you change the model firm y? >> the firm has hundreds of models. this model was specific to the synthetic portfolio. >> were they aware of the change? did you bring it to their attention? >> i don't know.

they often look at models. some models they do an extensive detail. i don't know in this one. >> the chief investment officer is responsible for measuring, monitoring, and managing the firm easterly kwidty. which basically is essentially leaks the implication that their job as risk management, not generating profits by investing deposits. it seems that their model was loosened up given to engage -- is that your conclusion? >> in january the new mold was put in place to allow them to take more risk. it contributed to what happened. we don't, as of today, believe it was done for ne fairous purposes. we believe it was done properly.

there were maybe flaws, but once we realized it didn't reflect reality, we went back to the old model. >> it appears from looking at reports that essentially these credit default swaps were first made to protect loans outstanding, particularly in europe. which is a classic hedging. you have extended credits to corporations. those credits go bad, you want to be able to ensure yourself against that. but then in 2012, at some point, it was switched. and now you start ed taking the other side. which seems to me to be a bet on unrelated to your tall credit

exposure in europe, which looks a lot look proprietary trading designed to generate as much profit as you could generate, which seems if this is something a risk operation and you're hedging a portfolio. how can you be on both sides of the transaction and claim that you're hedging? >> i think i have been clear, which is the original intent, i think, was good. i'm not going to try to defend. under any name, whatever you call it, i will not defend it. it violates common sense in my upon. i do believe thought they were benefitting the company in a crisis. i think, and we now know they were wrong. >> but that leaves us in the situation of how do we build in rules and regulations that prevent, as you would say, well-intentioned, extremely bright people from doing things that are detrimental?

first of all, you have lost several billions of dollars, which this activity is located in the bank and frankly deposits ensured by the federal government. and you have lost market value to your shareholders. the irony to me if there was a good vul ker rule in place, they may not have been able to do this because it doesn't seem to be hedging customer risks or even the overall exposure of the bank's portfolio. >> i don't know what the vul ker rule is. it hasn't been written yet. it's very complicated. it may stop this. >> so there's a possibility, in fact, if it's done correctly and proposed that it would have -- could have avoided this situation? >> it's possible. i just don't know. >> thank you very much. >> senator corker. >> thank you, mr. chairman, for having the hearing and mr. dimon

for being here. i wish we would have had these kinds of hearings. and i think one of the good things that's come out of this is a lot of focus on this committee have focus d on issues that are relevant, and i think that part of this has been positive. mr. dimon, you mentioned the biggest risk a bank takes is making loans. is that correct? >> yes. >> that is the largest risk. would would happen if you had $70 billion in loans, what would happen if you didn't have the ability to hedge that risk in ways that made sense not the way you did it? >> i think there are two things. one is smaller, which is you might reduce the amount of risk you're taking. you might make less loans just under the circumstance that if things got bad, you could still handle it. that might change the price of loans in the marketplace. but i think more than that it,

is you wouldn't be able to protect the company from a systemic event. we know they happen. so to me, i want to survive good times and bad times. jp's balance sheet allowed us to do good things for clients. if we couldn't prelkt ourselves, i think we would have had a hard time serving our clients. >> i think you made it clear, and i know a number of people were talking to regulators about why they couldn't catch something like that. there's no way to catch this type of activity. would you agree? >> i think it would be very hard for them to do. you want continuous improvement. always get better, clarity, cleaner. but it's hard to have the unrealistic expectation to capture this. >> a banker is always going to be ahead of a regulator. you're giving them the information they are rusing to regulate. it's not realistic to think a

regulator is going to catch this. so a lot of people think that, as a matter of fact, one of your peers at one of the large institutions was in yesterday talking about the fact that dodd-frank just really missed the mark. we e had this huge amount of regulation taking place at the institutions. what we should have done is looked at regulating the markets themselves. much of what happens in the markets takes place outside the entities. is dodd-frank more than marginally made our banking system safer? >> you know, we supported some elements -- >> i know what you supported. has it made our financial system safer? >> i think parts of it in conjunction with higher capital, the financial system is safer today than it was in '07. >> i'm talking -- i understand we have larger capital and all banks are doing, but i'm talking

about the regulatory regime that congress put in place. has it it made our system safer? >> i don't know. >> okay. one of your peers, not quite as well as you, but believes not. and as i look back, we looked at the 20 largest institutions in the world. since the 1990s, the japanese meltdown, 16 are either government owned or have had taxpayer money injected into them. and so you look at what we have done and many people obviously are coming out with all kinds of models now. you ever the hain i guess model,. would you share with the committee the purpose of a highly-complex institution? what societal good an institution like yours is, and what our financial system would be like if we did not have these

highly-complex institutions? and secondly, you're obviously renowned, rightly so, as being one of the most -- one of the best ceos in the world. are these too complex to manage in the fact that 16 of the 20 have had injections? what does that say about a highly-complex institution like yours? >> so we have a hugely-complex economic ecosystem. small companies to large companies, there are 27 million businesses. a thousand of the top businesses employ 30 million people. the other folks employed by all of the other 26 million companies or so. there's a place for large companies and small companies. we bank some of the largest in america and around the world. we can bank companies in 40 different countries. we do trade finance. we give lines of billions of dollars to some of the biggest

companies. we can do $5 billion revolvers or raise money in a day or two when they needed to do something. we're the largest banker to banks. we extend $23 billion of credit to smaller banks. they need some of that. there's a great role. we can't do all the things community banks can do in their communities. so you need all these things. there are some negatives to size. so size brings you a scale. it brings you diversification. it was a source of strength in the crisis. it was not a source of weakness. it allows you to invest in data centers, cyber security. there are some negatives to size. greed, lack of attention to detail. but if you do a good job, your clients are being served and you win their business. and so if we weren't doing some

of these things for the large companies, somebody else would. that's all. these are services they need. they don't buy them because we want them to buy them. we provide huge credit lines to them. >> my last question. you basically -- you believe that a highly-complex institution is necessary. if you weren't doing what you're doing, somebody else would be. you also are unsure whether dodd-frank has made our system any safer, especially at the top level. if you were sitting on the oh side, what would you do to make our system safer than it is and still meet the needs of a global economy like we have? >> the biggest disappoint i have is that we never sat down, republicans, democrats, and had a conversation about what went wrong and what need to be fixed.

we still haven't mixed the mortgage markets chrks is a critical to the united states of america. we still haven't fixed some of the other credit markets. there are no sub primes or vehicles. and we could have a great financial system. the american business machine is the best in the world. it is the best in the world. we are all blessed to have it it. and we should focus to get it working again instead of constantly shooting each other all the time. >> thank you for being here. >> senator ma nin gus. >> i paraphrase. it seems to me that you called these trades that lost anywhere between $2 and $4 billion economic hedges.

a tem miss in a teapot, which i now understand you regret and went on to say it morphed. but really a hedge, as i understand it, doesn't create a loss without a corresponding gain. that's why you're hedging. and what seems to me what happened here is you were pursuing a synthetic loan port foal e owe, which was a toxic instrument that caused a big part of our challenges of 2008, the crisis of 2008. and so really, you know, when you reduce a hedge or hedge a hedge, isn't that really gambling? >> i don't believe so, no. >> so this transaction that you said morphed, what did it morph into? >> it morphed into something that i can't justify. it was too risky for our company. >> that is the real concern here. too risky for your