to order. we are suspending until the sergeant of arms and the capitol police restore order. this is a hearing in which we will ask people to cooperate so that we can conduct a serious inquiry into this matter. thank you. [captions copyright national cable satellite corp. 2012] [captioning performed by national captioning institute]

>> the people that do foreclosed on. stock foreclosure now. stop foreclosure not carry -- stop foreclosure now. stop foreclosure now. w.op foreclosure no stop foreclosure now. stop foreclosure knockonow. [unintelligible]

>> and this hearing will come to order. i asked the capitol police to please remove anyone in the audience who is interrupting in the hearing. before we proceed, i will remind our audience that any interruption of the hearing will not be permitted and you will be escorted out of the room. we will now proceed. this hearing is part of the

banking committee's ongoing oversight of the massive trading losses announced by jpmorgan chase and implications for risk management, bank supervision and the wall street reform act. since the announcement of the loss in early-may, this committee has heard from the sec, the fed, and relevant officials to learn from these event. some members of the committee have asked to hear from mr. dimon, and after due diligence conducted by my staff and ranking member shall be's staff i decided to invite mr. -- mr. dimon. last week, regulators conform to

the committee there was a breakdown in risk management involved with these trades despite the fact that the trades were reportedly designed to reduce the bank's risk as they -- risk. as they continue to look into the matter officials have assured us that the stability of our financial system are not in jeopardy at this time. while this is welcome news, questions remain that must be answered. if we want our largest banks to better manage their risks to maintain financial stability, as i believe we do. today marks the two-month anniversary of mr. dimon "campus in a teapot" comment where he downplayed research -- concerns of the reaper trade. -- of the trade.

we later learned it was no risk controls the cost the company billions of dollars. as i have said before, no financial institution is immune from bad judgment, and in mr. dimon's own words he explained "we made a terrible, egregious mistake. there is almost no excuse for it. we now we were stupid. we know there was bad judgment. in hindsight, we took far too much risk. the strategy was badly vetted, badly monitor and should never have happened there, what went wrong? for a bank renowned for risk management, where were risk controls? how can a bank taken on far too much risk when the point of trade is to reduce risk in the

first place? was all a bit the goal really to make money? -- all of it the goal really to make money? should they be focused on reducing? as the saying goes, you cannot have your cake and eat it too. as far as policy implications, my colleagues would argue that wall street reform micromanage is the operations of a large bank and regulators cannot keep up with bank and evasion. i disagree that less supervision had and less regulation will make banks less risky. we can and must demand that banks take risk management seriously and maintain strong controls. we must also demand that

regulators do their job well. after all, beijing is an important, the -- banking is an important, risk-filled business and the need overset so that mismanagement does not threaten the stability of our economy. some also suggest that capital is a silver bullet in financial regulation. while capital does and must play an important role as a backstop we must not rely only on capital. any well-capitalized banks can fail and threaten the financial stability if it is not well- managed or well-regulated. our financial system that is safer and stronger with multiple and well corroborated lines of defense, which wall street reform requires in

addition to higher capital standards. congress should find -- fund them with sufficient resources so they can effectively monitor the financial system. again, it has been two months since he first publicly acknowledged -- the trades, so i expect mr. dimon to be able to answer the questions today. a full accounting of these events will help this committee to better understand the policy implications for a safer and sounder financial system going forward. i now recognize ranking member richard shelby for his opening statement. >> thank you, mr. chair. today, the committee will hear from the chief executive officer, president and chairman of jpmorgan chase, mr. jamie dimon who is here today because

jpmorgan chase lost more than two billion dollars on derivatives trades. normally is not and it should not be the role of congress to guess -- second-guess decisions of private sector businesses, however the federal government guarantees bank deposits, and this committee has a responsibility to insure that banks do not unnecessarily put taxpayers at risk. if congress has in large part delegated the responsibility of oversight to financial regulators that are supposed to monitor the activities of banks like jpmorgan chase to ensure that they operate in a safe and sound manner. as we learned from the most recent financial crisis and this particular instance, regulators do not always meet our expectations. banks take risks because that is 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 however, serious problems can arise. for example, in the years we've got to the financial crisis, some banks claimed they could safely provide mortgages to borrowers with no documentation and small down payments. advancements in risk management but supposedly enable them to lend to riskier borrowers without threatening the bank's safety and soundness. we now know this was false. the banks were not applying better risk management techniques. they were simply foregoing time- tested underwriting standards and the result was the failure of some of the largest financial institutions including countrywide, fannie mae and freddie mac. certainly, many bankers did not make these mistakes, and by most

accounts our witness today was one of them, yet as the financial crisis shows for risk management in even one single large bank can have profound consequences. congress and bank regulators must, which always watch for risks that could is improperly managed threaten the system. we should examine the facts surrounding j.p. morgan's to billion dollar loss, and as we do so unthinkable questions need to be answered. -- as we do so, i think two questions need to be answered. did the losses threaten the safety and soundness of j.p. morgan had and could happen again? last week, we heard from banking regulators. they answer the first question when they told us that the $2 billion did not threaten bank insolvency because the bank has strong earnings and sufficient capital. if this conclusion shows once again why the single best way to

protect taxpayers from bailouts is to ensure that banks are properly capitalized. strong capital requirements provided valuable buffer against unexpected losses arising from the inevitable missteps from banks and regulators. 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 j.p. morgan enjoy a strong reputation for effective risk management, something obviously went very wrong. regrettably, the comptroller of the currency, the federal reserve, the fdic, they were unable to tell us what happened despite having more than 100 on- site examiners at j.p. morgan. hopefully, mr. dimon today can fill in the details. in particular, i hope mr. dimon

can explain why these trades were made and why they produced such large losses. i also hope to learn the extent to which mr. dimon and other j.p. morgan senior executives were involved in the decisions that permitted these trades. mr. dimon has long been recognized for his effective management of a successful institution but it appears in this case things perhaps get away from him. why? did mr. diamond put too much faith in the risk model? or did he ignore them? it has been reported that officials may have dismissed warnings that the banks is that the bank was not administrating appropriate that the bank was not administering appropriate risk strategies. it has also been reported that the office responsible for these trades may have had contradictory mandates.

while the stated goal of the office may have been to reduce risk, and plays of the office apparently believed they were expected to turn these into a profit. bank employees referred to the profit as the icing on the cake. what were mr. dimon's expectations for this office? was he incentivizing them to manage risk or to maximize profit? if it was the letter, where the incentives to profit consistent with proper risk management, and moreover what did the board of directors know about how mr. dimon was managing risk? it has been reported that the risk committee may not have had the expertise necessary to oversee such a large bank. i hope to learn not only about mr. dimon's role in selecting the members of the risk committee but how they committee oversaw the firm, the risk

management. finally i hope the hearing reveals what lessons mr. dimon, j.p. morgan and others could learn. this hearing will have served a valuable purpose if it helps banks and regulators avoid repeating the mistakes of j.p. morgan. in this regard i believe it is unfortunate the committee has not held similar hearings with the heads of other financial the institutions and although the committee is hearing from mr. dimon's whose bank lost $2 billion in its own money, it has never heard from executives of fannie mae and freddie mac who have lost nearly two hundred billion dollars of taxpayer dollars. perhaps the committee could turn its attention to the gse compel massive public losses when it completes the review of the private losses thus far of jpmorgan chase. thank you, mr. tippett >> thank you.

mr. richard shelby. >> one opening statement will be permitted to the ranking member. i will note that senator warner 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 would like to submit. now, i will introduce a our witness. mr. jamie dimon is the chairman of the board, president and chief executive officer at jpmorgan chase and co. mr. dimon, your full written statement will be included in the record. please begin your testimony. >> chairman johnson, ranking member shelby, and members of the committee, i am appearing

today to discuss recent losses in a portfolio held by jpmorgan chase's chief investment office cio. 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 chase's six lines of business provide a broad array of financial products and services to individuals, small and large businesses, governments and non-profits. these include deposit accounts, loans, credit cards, mortgages, capital markets advice, mutual funds and other investments. what does the chief investment office do? like many banks, we have more deposits than loans -- at quarter end, we held approximately $1. cit -- billion in loans. cio, along with our treasury

unit, invests excess cash in a portfolio that includes treasuries, agencies, mortgage- backed securities, high quality securities, corporate debt and other domestic and overseas assets. this portfolio serves as an important source of liquidity and maintains an average rating of aa+. it also serves as an important and liabilities of the consolidated company. responsibility is to manage an approximately $350 billion portfolio in a conservative manner. while cio's primary purpose is to invest excess liabilities and manage long-term interest rate and currency exposure, it also maintains a smaller synthetic credit portfolio whose original intent was to protect -- or "hedge" -- the company against a systemic event, like the financial crisis or eurozone situation. >> so what happened? we constructed cio to reduce risk-weighted assets and associated risks. to achieve this, the cio could simply reduced existing

positions. instead, starting in mid- january, it embarked on a complex strategy. this strategy and the decorating a portfolio that was larger and resulted to be more complex and harder to manage risk. this morphed into something that rather than protect the firm created new and potentially larger risks. as a result, we let a lot of people down. that me tell you how it went wrong. these are not excuses. these are reasons. this is detailed in my written testimony but i will highlight the following. the cio strategy of reducing the synthetic portfolio was poorly conceived. they did not have an understanding of the risks they took. the risk limits should of been specific to the portfolio and

much more granular, only allowing lower limits and each pacific crest to be taken. specifically, there should and more scrutiny from senior management, and i include myself in that, and the firm-wide risk control function. did response we've taken important actions. we have appointed entirely new leadership for the cio. we have made progress in managing and reducing risk going forward. while this does not reduce risk already, it does reduce the probability and magnitude of potential future losses. we are also conducting an extensive review that our board of directors has overseen. when we make mistakes, we take them seriously. we are often our own toughest critic. we can never say we will not

make mistakes. we believe that this was an isolated event. we will not make light of these losses, but they should be put into perspective. we will lose share all the money, and for that we felt terrible. our balance sheet remains intact. as of quarter-end, we happen extremely strong capital ratios, far in excess of regulatory standards. as of march 31, 2012, our ratio was 10.4%. our estimated ratio is at 8.2%. both are among the highest levels at the banking sector. we expect both of these numbers to be hired by the end of the year. all lines of business remained profitable and continue to serve

consumers and businesses. while there are still two weeks left in the second quarter we expect the quarter to be solidly profitable. our position in capital did what was supposed to do -- cushion against an unexpected loss in one area of our business. while the incident is embarrassing his it should not and will not detract employees from our main mission to serve clients in communities around the globe. in 2011, jpmorgan chase raised capital and provided capital of over $1.8 trillion, up 18% from the private year and provided over $17 billion of credit to small businesses, up 50% from the prior year, and in the face of headwinds we made the decision to step up as we did with markets in turmoil as the only bank willing to commit to

lend trillions to the state of california, illinois. just as we have remained focused on serving our clients, we have also remained focused on managing our business. my conviction is will which we will emerge stronger, and as a better company. i would like to speak directly for a moment to our two hundred 60,000 employees, many of home are watching. i want to know how proud i am of jpmorgan chase the company and proud of what they do every day for the community. thank you and i welcome any questions you might have. >> thank you, mr. dimon, for your testimony. as we begin questions i asked the court to put five minutes on the clock for each member. mr. dimon, there was clearly a

breakdown in risk management at your firm. what did you know when you made your "tempest in a teapot" comment? why were you willing to be so disconnected when it appears you did not have the full understanding of the trading strategy? >> let me first say that when i made that statement i was dead wrong. i had been on the road. had spoken to our risk officers, our chief financial officer, there were issues with the cio. i was assured by then and i have the right to rely on them, that they thought this was an isolated, small issue and it was not a big problem. they look at things at how bad could it get, and under no event

did it look like it would get as bad as it got after april 13. >> mr. dimon, there were reports that the cio had scrapped a risk limits that would have required traders 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 compared >> $20 million. >> how much? $20 million. i am not aware of a $20 million loss limit. cio had its own limits on exposure. at one point in march some of those limits were triggered and the cio as traders to reduce taking risks and started looking heavily into the area, which is the proper thing to do.

sometimes triggers get hit, and it should be focused on to decide what to do about it. >> there have been concerns raised about the change made in the cio's risk model. when the regulators were notified, why was the risk model change, and did a change of less the true risk of the trading activity? >> what i am aware of is that sometime in 2011 the cio had asked to update their models partially to be compliant with the new basel rules. model reviews are done by an independent group that start the process six months earlier and in january did have a new model. i should note that models change over time to be better.

models were approved by the model review group, implemented in january and did effectively increased the amount of risk the unit was able to take. on april 13 we were still not aware that the model might have contributed to the problem, so when we found out later on we went back to the old model. the old model was more accurate in hindsight than the new model -- than we thought it was quite to be. >> reports suggest there were multiple warnings of leaked controls at the cio that were ignored and in your testimony you said strategy was not reviewed outside of cio. did you make the decision to exempt the cio from any review of risk controls outside of the unit, or why was no one

watching? >> the first error and we made is the cio had done so well, so long that i think there was complacency. they had their own risk committee that was supposed to review all of the risk. i think it was not independent- minded enough and should have challenged more rigorously this synthetic portfolio. the second related risk is the synthetic product portfolio should have always had more scrutiny. there were higher risks and there shouldn't it limits from the start. >> -- there should have been higher limits from the start. >> mr. dimon, was the pay structure at the cio incentivizing risky behavior that led to the trading loss instead of rewarding those who reduced the bank's risk?

were there bonuses for generating profits? other than cio, will you seek clawback from executives involved in this trading debacle? >> to start with, we have not had for five or six years several -- special severance packages, where parachutes. nobody was paid on a formula. the management of the cio portfolio was subordinate to the rest of the country -- company. they were not allowed to do what they wanted. the could not take high-risk, etc.. when we pay people, everyone, we look at the unit performance, the company performance, and that includes a recruiting, training, integrity, sharing with senior management -- all the things we need to do to make

it a better company. i do not believe the compensation made this problem worse, and like i said none of these folks were paid in a formula. your second question was clawback. when the board finishes the review, which i think it is the appropriate time to make the decisions, you can expect we will take proper corrective action and i would say this is likely to be callbacks. >> senator richard shelby. >> thank you. >> mr. dimon, so that we would have some idea of what happened, could you explain a little further what really happened without divulging your proprietary interests? we do not want you to do this. tell us a little more. in other words, you are managing risk. what were you managing?

>> the biggest risk we take is credit, loans. the excess deposits, we have it $350 billion portfolio. that is the biggest part of the cio. the average rating is aa +. we also have the cash invested in central banks around the world. >> we understand that, but in this case that brought these losses on, explained to us without getting into your proprietary area what you were doing and what went wrong? >> the synthetic credit portfolio -- originally the design -- >> what do you mean? >> index derivatives trading in the market. >> you took a position in the? >> we took a position in them that was meant to in the nine

environments make a little money but there was a crisis they would reduce risk by making money. during 2008, 2009, it accomplished those investments. >> were you investing or hedging? >> i would call this hedging, hedging their risks of the company, protecting the company if things got really bad. >> the credit went bad? >> yes, if credit when really bad, this would do well. that was the original intent. in january, february, march, we asked them to reduce this risk. they created a portfolio that have far more risks, that were far more complex, and on april 13 we were not aware of that,

but soon after we were and we made it public announcement, as we thought i owed the shareholders that, and since then we have been managing and reducing risk. >> to tell what really happened, here in general terms, would you feel better in a closed hearing, or would you not to divulged things because you have a position for interests? >> we told shareholders we intend to make more disclosures about what happened and specific disclosures with this portfolio and what we've done to reduce the risk in the portfolio. >> i guess the question comes up, was this hedging or proprietary trading? according to some press reports there is disagreement about whether the chief investment officer, which executed these trades, was supposed to be hedging risks or earning a

profit. it has been reported this office contributed more than $4 billion of net income in three years, about 10% of your overall profit. what was your expectation for this unit, the cio unit? was it supposed to hedge, or some of both? >> if the whole cio unit to invest money and earns income, and that is a broader array of diversified investments, and the income is used to pay depositors, branches -- yes, it is supposed to earn revenue. in this specific synthetic revenue portfolio it was intended to earn revenue if there was a crisis. i consider that a hedge. it was protecting the downside risk of the company, and, in fact, the biggest risk of the company. the biggest risks faced are dramatically rising interest rates and a global credit crisis. those are the two biggest risks we face.

we intended to improve safety and soundness, not make it worse. >> was walked went wrong the way the package was contrives, or event beyond your control? >> i think the way it was contrived between january, february, march, it changed into something i can not publicly defend. >> lessons learned -- what have you as ceo of j.p. morgan, which is our largest bank, what have you learned from this problem, this debacle? >> i think that no matter how good you are, how competent people are, never get complacent in rest, challenge everything. make sure people in risk committees are asking questions, share information, and that you have granular limits, no more than this risk in a marked the much including -- in a market,

including things like liquidity risks. in the rest of the markets we have those things, and we did not have it here. that is what caused the problem. >> thank you, mr. chairman. >> senator schumer. >> thank you. good morning. my first question is about risk committees. i was a proponent in dodd-frank of increasing corporate governance and fought to have included in the dodd-frank provision when 65-8 -- 165-8, a separate risk committee on the board that includes "at least one risk management expert having experience in identifying, assessing and managing risk exposures of large, complex firms." some questions have been raised about the oversight provided by your firm. you already had won, so you did not need the legislation, but

what went wrong with the rest committee and what could you suggest to regulators as they formulate rules about risk committees? why did they not do their jobs, finding out this was one area that did not have the limits in place elsewhere? >> there could be a lot of work to talk about the main risk of the company. it is not realistic to capture the risk committee to capture something like this. i would point out this risk committee took the company for the most difficult financial crisis of all time with flying colors. so, the risk committee did a great job. this is a flaw i would blame on management, not the risk committee. recently, two directors have been added that have experience in financial markets. >> ok. so, you feel the risk committee -- this was too small of an item for them? give me a little more context for this.

>> the risk committee reviews broader issues, regulations, requirements -- they need a lot of management. they talk to rick committees. i think it would have been hard to capture this is management did not capture it. we were misinformed and impaired >> the second question goes to the broader -- we were misinforming them. >> the second question goes to the broader context. a share. -- the shareholders lost, but the taxpayers did not. what is to stop this from happening again, maybe being a larger loss, but particularly in a week or less well-capitalized institution? it was an institution smaller than j.p. morgan the start of the capital the catapult, firms like lehman brothers.

-- the catapult, firms like lehman brothers. were we just lucky? what is your assessment about the danger of this type of thing happening in other institutions that are not as well-capitalized as j.p. morgan? >> we were not lucky. we have limits in place that captured it. they should have been much smaller in this particular activity. one thing regulators can and do do is this a minute and, a best practices everywhere. -- disseminate and propagate best practices everywhere. there is more transparency. boards are more engaged there are no off-balance-sheet vehicles. a lot of this has happened across countries, across america. >> what about nonbanking institutions that do not have the same requirements but are engaged in similar activities? >> i think the regulators are currently deciding which of the

nonbanks will be part of systemic risk oversight and i will leave that to them at this point in time. >> final point, the chairman asked this, but it is about callbacks, and i was glad to hear there is a clawback policy. it seems to be an appropriate thing to do. when people make tens of millions of dollars for taking risks and they do it clearly, if there is a clawback there might be a good internal incentive to be a little more careful, if you will. could you tell us a little bit about the policy that you have for slotbacks? i know you do not want to talk about -- callbacks? i know you do not want to talk about individual cases, but tell us how it works, how mandatory it is, that kind of thing. >> there are several layers. we could clawback for judgment,

cash bonuses, so it is expensive. i was in favor of the system. i think one of the legitimate complaints was that after about crisis a lot of people walked away with money from companies that went bankrupt. some of that was not appropriate. in this case the board will review every single person involved. some people have been successful for a long time to >> is there a limit to how much the clawback is, or is it discretionary, and second and final question has it been used thus far in your bank over the years you have had the policy? >> it is not been used thus far. >> are there limits? >> there are limits essentially to what you have been paid. some limits are to what you have been paid over the last two years. >> senator crapo. >> thank you, mr. chairman and

mr. dimon. last weekend, the testimony presented by the regulators, one of the tensions that we face here is we want to be sure we are adequately regulated and our financial institutions and we want to be sure we do not have the regulators basically running private sector institutions. in that testimony last week, the comptroller indicated that there are approximately 65 on-site examiners from occ on site at j.p. morgan. is that correct? >> i believe so, yes. >> what should the function of the regulators be? many said the primary focus should be to make sure the banks are properly capitalized. should that be the primary focus, and what other areas of oversight would be the most effective for us in terms of regulatory structure? >> so, i've been in the regulatory business my whole

life, and they look at many things we do, they audit it, criticize it, and it is important to acknowledge there have been changes because of their criticism. i think you have to keep realistic objectives. i do not think realistically they can stop something like this from happening. it is purely management compelled mistake. if we are misinformed a little bit, not purposely, we are misinforming them. the most important thing is high capital, good liquidity standards, proper disclosure, proper governance, proper functioning risk committees which it all of those things will not stop the attacks, -- risk committees -- not all of those things will stop these things, but they will make them smaller. >> one of the things we learned was that during the stress test applied to j.p. morgan it was assumed j.p. morgan could deal

with losses of around $80 billion and still be adequately capitalized. is that correct? >> we would be adequately capitalized, but i would not be the person sitting in front of you right now. [laughter] >> we are great believers in stress test we were put through a severe stress test. 20% unemployment, a crisis in europe, and markets as bad as what we saw during the bid and brothers crisis, and we came through with flying colors. -- with lehman brothers, and we came through with flying colors. we want to make sure we have adequate capital and liquidity so much to the extent that you would never question j.p. morgan. we believe we have that kind of capital. >> your current tier one capital is approximately one of the $28

billion? >> approximately, yes. >> i would like to conclude with a discussion of the volcker rule. some have said it is not possible to distinguish between proprietary trading desk and hedging. clearly, that is what the volcker rule contemplates and if we implement it is what is when be imposed on banks like yours. could you discuss whether we can't distinguish between proprietary trading -- whether we can distinguish between proprietary trading and hedging? >> i think it would be hard to make a distinction. you could look at almost anything we do and call them one or the other pair every loan we make is proprietary. if we lose money, the firm loses money. if we buy treasury bonds and they lose money, we lose money. i have a hard time distinguishing it. i understand the intent of the volcker rule, to reduce activities that could jeopardize a big financial company.

i think the devil is in the details in how these rules are written that allow the good of our capital market and not the bad. >> tell me for a minute how you would describe that. what is it proper hedge in the context of the volcker rule distinction we are trying to make? >> something to protect the company in bad outcomes. you can't analyze that. it is not exactly right. -- you could analyze that. it is not exactly right. i believe you should be able to do portfolio hedging and there are ways to protect the company for that outcome. >> is that something like going short? >> going short credit if you think there might be a credit crisis would be one way of doing that, yes. >> senator. >> thank you, mr. chairman.

the issues raise go to the ability of large financial institutions to manage risk and complimenting that is the ability of regulators to oversight the management of risk by those corporations. i think it is also a strong case in my view for a very clear but very strong volcker rule, and also force stand in up -- standing up a director of national research, and i've been talking to chairman tim johnson and ranking member richard shelby about that. this question goes to your proxy materials. risk-management seems to be the responsibility of the office of risk management which is different than the cio. was this individual, and i know there were several changes, monitoring the cio on a regular

basis? did he or she approve the change in modeling? >> every business we have has a risk committee. report to the head of risk for the company. there are conversations between the risk committee and our senior operating group about the dangers. obviously, that chain of command did not wrote -- working in this case because we missed a bunch of things. you could blame it on anyone in the chain. there is an independent group that looks at changes in models and we do change models all the time. models are backward-looking toward the future is not the past, and there never --

looking. the teacher is not the past, and they never captured changes in been geopolitics or things like that. we do not run the business of models. models are one input. you should be looking at lots of other things to make sure you are managing risk properly. >> did you share with or did the occ inquire about the change in the modeling, and for the record, this change was just in the office of the investment, correct? >> there was a change in the office of investment in the january. >> why did you change the model -- did you not change the model firm-wide? >> the firm has hundreds of models? -- models. >> let me get back to theocc, were they aware?

>> i do not know particularly in this one. >> if the chief investment officer response is to put risks in other structural risks, which is essentially their job is risk management, not generating profits by investing deposits. it seems that there model was loosened up considerably, giving them the opportunity to engage in more risky activities. is that your conclusion? >> in january, the new model was put in place that allow them to take more risk and it contributed to what happened. we do not as of today believe it was done for nefarious purposes. we believe it was done properly by the independent model review group. there might be flaws in how it is implemented, but once we realized it did not accurately

reflect reality we went back to the old model. >> it appears from looking at some published reports that essentially these credit default swaps were first made to protect your loans outstanding, particularly in europe, and that was in the 2007-2008 time period. that is classic hedging. europe gave credits, they go bad, you want to ensure yourself against that. then, in 2011, 2012, at some point, the bed was switched, and in spite -- you started selling credit protection, which seems to be a bet on the direction of the market not related to your actual credit exposure in europe, which looks a lot like proprietary trading designed to

generate as much profit as you can generate, which seems to be inconsistent if this is simply a risky operation and you are hedging a portfolio. how do you be on both sides transaction and claim you are hedging? >> i think i have been clear with your original intent. i am not going to try to defend. under any name, i will not defend it. violated common-sense. i believe the people doing it thought they were maintaining a short against high-yield credit that would benefit the company in a crisis and we now know they are wrong. >> that leaves us in a situation where how -- of how do we build in rules and regulations that prevent well- intentioned, extremely bright people that do things that are very detrimental? first of all, you're lost several billions of dollars --

you've lost several billions of dollars and a significant amount of market value to your shareholders. the irony to me is is there was a good volcker rule in place they may not have been able to do this because it does not seem to be hedging customer risk for the overall exposure of the portfolio? >> i do not know what the volcker rule is. it does not been written yet. it is very complicated. it may very well have stopped parts of what this portfolio morphed into. >> there is a possibility that it could have avoided this situation? >> it is possible. i just do not know. >> thank you very much. >> senator corporate -- senator bob corker? >> thank you, mr. chairman, and mr. dimon. i wish we had had these hearings

prior to the passage of financial regulation, and one of the good things that has come out of this is a lot of folks on the committee have focused on issues that are relevant and that part of this has been positive. mr. dimon, you mentioned the biggest risk of bank makes is making loans, is that correct? >> yes. >> what would happen in an institution like yours if you had $700 billion in loans, and you did not have the ability to hedge that risk in ways that made sense, not the way you did it? >> there are two things. he might reduce the amount of risk you are taking part >> which means less loans? >> you might make less loans. that might change the price of loans in the marketplace. i think more than that is you would not be able to protect the company from a systemic event.

we want to protect j.p. morgan from systemic events. we know they happened. i want to survive good times and bad times. the balance sheet alatas to do good things in 2008 and 2009 for clients. we could not protect ourselves clients. >> you have made it clear -- protect ourselves and clients. >> yet made it clear there was no way for regulators to catch this? >> it would have been very hard. there is always continuous improvement, but it is hard to have an unrealistic expectation that you could capture things like this. >> a banker is always going to be ahead of a regulator, basically, and you give them the information they are using to regulate so it is not realistic to think that the regulator is going to catch this. one of your peers was in

yesterday talking about the fact that dodd-frank has really missed the mark. we have this huge amount of regulation taking place at the institution and what we should have done is look at regulating the markets themselves. much of what happens in the market takes place out of regulated entities. let me ask you this question, has dodd-frank more than marginally made our banking system safer? >> we supported some elements. >> i know what your -- what you supported. has it made our financial system safer? >> parts of it in conjunction with higher liquidity, the financial system is safer today than it was in 2007. >> i understand we have larger capital. i am talking about the regulatory regime that congress put in place. has it made our system safer.

>> i do not know. >> one of your peers, not quite as well known as you, believes not, and we looked at the 20 largest institutions in the world since the 1990's. 16 of the 20 are either government-owned or have had tax payer money injected into them. so, you look at what we have done, and many people are coming out with all kinds of models now, the glass-steagall is being talked about compared -- talked about. would you share with the committee the purpose of a highly complex institution, what societal good an institution like yours is, and what our institution would be like if you did not have these institutions? secondly, you are renown as being one of the most -- one of

the best ceo's in the country for financial restitutions. you missed this. are these institutions today just too complex to manage and the fact that 16 of the 20 have had injections, what does that say about a highly we have a complex financial ecosystem. there is a place for large companies and small companies. people like us, we bank companies in 40 different countries. we do a trade finance. we do it intraday lines of billions of dollars to some of the biggest companies. can do $5 billion revolvers or

raise money for america's fortune 100 companies in a day or two if they need to do something. we extend $23 billion of credit to small banks. i look at it as you need some of these things. our diversification is a source of strength in a crisis. it allows you to invest in data centers, cybersecurity. but there are some negatives to size. lack of detail. but if you do a good job, your clients would be assured and you win their business. if we were doing some of these things for the large global american companies, and somebody

else would. they don't buy them because we want them to. we provide huge credit lines to them. >> you believe that a highly complex institution is necessary and if you're not doing what you were doing, other people in the world some other place would be. it also are not sure whether dodd-frank has made our system any safer, especially at the top level. if you were sitting on this 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 disciplined i've had is we have never actually sat down republicans, democrats, businesses, and had a real detail conversation about what went wrong and what needs to be fixed. we still not fix the mortgage markets, which is critical to

the u.s.. we still have not fixed some of the other credit markets. fixed a lothas of things. we could have a great financial system. the american business machine is the best in the world. we are all blessed to have it. if we could get it to working again instead of constantly shooting each other all the time. >> thanks for being here. senator menendez. >> hedge or not a hedge, that the question? you call the trade that lost that2 billionto $4 billion economic hedges a tempest in a teapot, which i understand now your regret. a hedge does not create a loss

without a corresponding gain. that's why you are hedging. what seems to me that happened here is that you are pursuing a synthetic loan portfolio, , which was a toxic instrument which caused the 2008 crisis, so when you reduce a hedge or hedged a hedge, is that not really gambling? >> i don't believe so. >> this transaction that you said more fact, what did it change into, russian roulette? " it changed into something i cannot justify, too risky for our company. >> that is the real concern, too risky for your company, which is one of the nation's

finest, largest well-capitalized banks. if it is too risky for your company, with stops it in the future from being where you billion,lose maybe $50 create a size that ultimately creates a risk on the banks and takes that into a run and become the collective responsibility of every? every >> that is what we are trying to prevent. i have heard you talk about the fortress balance sheet. i'm glad to hear you say to senator schumer that we should take comfort that banks are more collateralized. t one way to think about this is i wonder your regret calling the efforts to require banks to hold more money "an american" and putting the nail in our coffin? -- unamerican.

you will do against us when we were trying to pursue greater capitalization of these banks. >> i don't think what you said is true. i supported parts of regulation and reform. i support higher capital adand liquidity. we supported proper transparency. we supported a lot of the things you requested. we did not fight everything. when i mentioned the anti- american thing, i was talking about between dodd-frank and -- , things that were getting skewed between american banks. american banks cannot have preferred stock like foreign banks. >> you did not specifically say as part of your comment was the requirement for banks to hold unamerican?was on americ

>> i did not. >> you might want to review that. what you criticized then and what your bank has been lobbying extensively against is the very types of protections that at the end of the day can guarantee that the american taxpayer does not become responsible. i think about the fortress balance sheet you spoke about. i remind you that fortress balance sheet has a moat that was done by taxpayers to the tune of --. the one thing that american taxpayers would seek is to insure that you are not working against the very essence of w

legitimate efforts to control the rest, so you can prosper and your shareholders can prosper but the same time call it does not become the collective risk of the taxpayers of this country. is that not fair for the american people to ask? >> i want financial regulation as you do. we have supported thenm. -- them. there are some we think don't make sense. >> i think you are entitled to tell the things that don't make sense. i also think the american people, after making major investments in your bank and other institutions, are entitled to ensure they don't have to reach into their pocket again. demint.tor p >> thank you. i really appreciate you voluntarily coming in to talk with us. it is important that we talk about things happening in the

industry. it helps us as we look forward and, hopefully, it will contribute to best practice scenarios in industry. i appreciate your emphasis on continuous quality improvement. we can hardly sit in judgment of your losing $2 billion. we lose twice that every day in washington. we plan to continue to do that every day. it is comforting to know that even with a $2 billion loss in the trade last year, your company still had a $19 billion profit during that same -- but during that same time we lost over $1 trillion. if we had a call back provision, none of us would be getting paid today. the intent of this is to not sit in judgment but to understand better what happened. some of the questions have been very helpful. as you can tell, there's a

temptation every time something goes amiss, we want to add regulation. we surrounded the banking industry with so many regulations and we still seem to have problems here and there. i think we do need to recognize that you are a very big bank, the biggest in the world. you've got a very big profits. periodically you are going to have a very big losses. we need to look at that as part of doing business and also in the context of making sure, as the senator said, that we don't create additional risk for the taxpayer, which you appear to be in much better fiscal say that we are as a country. we know that risk is required to make a profit. you are dealing with a lot of capital that you have to put to work. certainly, that will experience profits and losses and generally you have done pretty well. i do want to follow up on ker askingrp

about the dodd-frank legislation, many of us are frustrated that bank managers want to manage your business for you. we are not capable of doing that for what we have been given to manage. i would like to come away with some ideas on what you think we need to do, what we should take a part that we have already done, to allow industry to operate better, and at the same time not put the american taxpayer at risk. i am honestly looking for some ideas as we look over the next year and hopefully in a position where we can make some positive changes. >> the only real suggestion i have is i believe in strong regulation, not always more. what we set up is a system with more and more regulators. we don't even know who has

jurisdiction over many of the issues we are dealing with any more. when something happens there are four different regulators. we need for a simple, clean regulatory system with intelligent design. that's not what we did. we created a really complex and no one could adjudicate between all the different regulatory agencies and it's not clear who has the responsibility for authority. >> in a lot of industries i have worked in, they get together as peer groups to discuss best practices and sharing information with each other. is that something that you relatively do with other banks around world on how to deal with risk and how these committee should work and what the failures are? is that going on? >> we used to do a lot more. we have constant conversations with regulators and we constantly ask for feedback on goals. we send them a lot of analysis and details. there is less collaboration among banks, among legislators,

amothem there used to be. it has become much more adversarial. >> the laws and regulations are not necessarily improving things. some of the things you have done voluntarily like capital requirements. if we could do anything to encourage the industry to develop a lot of its own voluntary rules, that would guide us a lot better. if i could leave you with one thing, if you could come back this time next year and talk about how the industry has put together a large scale best practice committee that would help us keep banking as a private enterprise rather than a government institution. >> yes, glad to do it. >> senator brown. >> thank you for being here. you have 19,000 employees in the columbus area who are my

constituents, so we have a mutual interest in your institution running safely and soundly. i don't want to see consumer lenders in columbus losing their jobs because cowboys in london make too many risky bets. i have a series of brief questions. if you could possibly give a yes or no answer or a short answer, i would appreciate that. the chairman touched on this earlier, if you could give a yes or no, did you personally approve of the chief investment officer posing trading strategy? >> no. i was aware of it, but i did not improve -- approved it. >> did you monitor his office? >> generally, yes. >> last week i asked at a hearing about this, thisocc oversight -- about occ's

oversight or lack of oversight. they say they have five examiners in london who divide part of their time examining your operations, the portfolio of assets in question being $200 million, which is bigger than the vast majority of banks in the u.s. one of your executives in april told investors that the trades in question were fully transparent to the regulators as part of normalized reporting. the occ letter says that occ were not aware of the level of risk occurring at your chief investment officer until april. here's my series of questions. is what the occ told about the trades taking place in your cio office true prior to april 6 media reports? >> we tried to be very open with regulators. they do get some reports. we give them what they want. in this case, since we were

misinformed -- the mistake we made, we passed on to them. the second we found out, the first ones we got on the phone with was regulators and we said we have a problem. we describe them and they have been deeply engaged since then. >> that was april 6. april 13 earnings call, was occ told prior to the earnings call? >> i don't know. among the first people we called our board and then the regulators when we found out and probably not even in that order. " the issue is partly your side and partly occ. did you know if occ inquired about trades or the five regulators in new york, did they inquire about the trades prior? >> i don't know.

>> at what point did occ take steps to challenge the trades? >> i think the second that they understood the significance of the trade, they started to challenge it every day. and they continue to. >> 5 regulators in london enough? >> i don't no. in this modern day and age, they get all the reports from london and they can do it by an telepresence. 19,000 employers in columbus served 30 million americans and deserve a lot of middle-market companies, they innovate, we run a lot of call centers there, our credit cards that we ship around the country, so those people are not just doing ohio- based business. >> since 2007 your chief

investment officer has grown from 76 to $307 billion. occ says your activities were not considered to be high risk but that a similar level of thatity, large hedge s are complex are not present in other banks. my question is should occ have been more focused on trade with synthetic derivatives that they admit now in hindsight or larger and more complex than any other banking system? >> we should have. >> if your bank did not have 2.3 metrillion in assets, would your cio need to beat that $370 billion? >> a lot of the increase was because of wamu.

what we are doing now is we have 1000 small-business bankers in the states where wamu was. investing in assets and conservatively other than this one thing is what we do. >> the senator made a statement a moment ago, offered the question or observation that it raises the possibility that jpmorgan chase maybe too complex to manage? to too large to regulate? -- is it too large to regulate? it has quadrupled in size to $2.30 trillion today. there are six american banks that are 800 billion and above. over last five years you've grown by 400 billion. this case demonstrates that in a

practical matter, neither you nor the occ could monitor what was happening at the chief investment officer that would be the eighth largest bank in the united states if it were standing alone. 559 subsidiaries in 37 countries, executives and , from listening to your conversation and sing the occ, it appears regulators cannot understand why what is happeninin all these offices. it demonstrates that too big to fail banks are too big to manage. and manage >> senator. >> thank you, mr. chairman. mr. diamond, let me start by saying thank you for being here today. -- mr. dimon.

you have a acknowledged it was a dumb of and the loss is unfortunate. you have apologized for that. what i want to do is ask you about some things may be at a 25,000 level, if i could. starting out, how many regulators do you have on site in your organization from some federal entity? >> hundreds, i believe. multiple regulators. >> sense something like this pops up, are the channels clear anymore as to who you deal with and who is regulating what stand who you need to be paying attention to? >> we are always going to treat

the regulators the way they deserve to be treated. whenever the system is, we have to deal with it. we have people assigned specifically to deal with regulators, the fdic, bocc, the fed. -- occ, fed. >> how much have your regulatory costs increased as a result of dodd-frank, the volcker rule, whatever it is? >> i have estimated roughly about $1 billion a year, across systems. maybe a thousand programs that we run. we have to accommodate the rules. rules come out of brussels and out of the u.k., etc. we will do all those things, meet all the requirements, but it will be costly. >> one of the things i have maintained in many hearings

since we have examined dodd- frank before and after its passage is that there's just a point at which it is economically better business to do business elsewhere than the united states. do we run the risk with dodd- frank? literally, we have made life so complicated, so hard to navigate that you have enterprises who decide i will just go to singapore or wherever, to do business. >> we will be able to navigate all that. i do hear a lot of people saying it is easier to be overseas. some companies to move overseas recently. >> my concern is it does not stop there. what i saw about dodd-frank, it started with a laudable purpose, let's try to figure out what

happened in 2007-2008 and how do we fix it. then all of a sudden farmers co- ops were showing up in my office and asking what are we doing? i'm thinking, how did the farmers co-ops have anything to do with what happened in 2007- 2008? i have not verified this because somebody just told me this last night, but somebody who worked with this banking committee mentioned last night at an event i was at that there had not been a single bank charter last year in the united states and it had been 78 years since that happened. do you have any information on that? >> i was not aware. >> it further occurs to me that an enterprise as big and powerful as yours, you've got a lot of firepower, will find a way to navigate what has happened.

you are not located in my state and i doubt that you are considering locating in my state, although it would be a great place for you to do business. >> i hope to be there one day. >> what i suspect that's happening is our medium to small banks are now trying to navigate through this very complex legislation. these are banks where maybe they employ a dozen people or two dozen people and they're just. going to give just what is your impression of that? >> we bank a lot of smaller banks. i think some of these things are harder on the smaller banks ban on some of the larger banks, unfortunately. >> thank you, mr. chairman. >> senator tester. >> thanks for holding the hearing. and thanks, mr. dimon, for being here. this gives us understanding of how the company committed

egregious mistakes from a poorly constructed hedging strategy. i want to focus on the company's role leading up to mf global's bankruptcy, resulting in a loss of 1 $26 billion in client funds when mf global was not obligated by law to segregate and protect. in its final days, it shuffled hundreds of million dollars around from account to account. mf global customers, including many montana farmers and ranchers, saw their farms wiped away overnight. throughou though its customers have received back 72 cents on the dollar, the fundamental trust and if farmers or ranchers have has been broken because of the firm's violation of a lot as well as their failure to segregate client funds, which is a bedrock of a commodities

trading. we have no information on the release of mf global trusty testimony.'den's we need to make sure ranchers and farmers see their funds returned and that those responsible for the breach of segregated customer funds are held accountable. over 100 of my constituents have their accounts raided by mf global to cover the front rows the institutional losses. if anybody with a visit in this, i want to know about it. on may 18, he announced the return of $162 in cash proceeds of the excess collateral that your firm held at the time of mf global's liquidation more than seven months ago. funds rightfully belonging to mf global customers, including hundreds of ranchers and farmers. why did it take your from seven months to return these funds? >> the second they had

problems, we immediately went to the trustees and told them exactly what we had and did not have. we had been waiting for them to finish the work. there was no hiding anything. we have cooperated every step of the way with the authorities. " there was money released initially, i believe, when mf global started down this path. that was by your firm. but there was $168 million held seven months. why? if it was their money, it should have went to them. >> i think we were waiting for the guidance of the court and the trustee. >> i know that the investigation singled out your company, it highlighted your ongoing negotiations and potential litigation that he may bring against jpmorgan chase. in the final days before mf global went to bankruptcy, j.p. morgan had significant concerns about the health of the firm of

mf global and its compliance with regulations guiding the protection of consumer -- of customer funds. you're from was focused on whether collateral was paid with customer segregated funds. according to the investigation, your front except to protect itself and its exposure to mf global, placing mf global on alert, limiting the transactions the firm could take and increasing collateral requirements. despite repeated attempts by various senior risk management officials at your firm to determine whether collateral for the $175 million transfer request on october 28 was in compliance with the rules regarding segregated funds account, mf global did not sign a letter that your firm demanded. without this confirmation and your suspicions, jpmorgan chase all tool it transferred the funds and accepted the collateral.

were you aware of the effort by senior risk-management officers at your firm to seek compliance confirmation from mf global? >> not the time it. flexed why did jpmorgan chase relent on efforts to secure signatures of the letter and allow the transfer without written assurance? >> i think the transfer has been made -- had been made. we were asking them, to make sure they had done the right thing. it was not required. >> even though you had placed mf global on debit alert and you limit it -- you increase their collateral requirements, when they ask you to transfer the money, there was no conversation about where this money -- whether this money was segregated funds? >> they transferred it to us, yes. >> they requested a transfer? >> it was coming over draft from the prior day or something.

>> the question is, you guys were concerned about mf global and you guys know the industry better than anybody sitting up here, you guys knew what was going down with mf global because you put them on debit alert. they had requested money to be pulled out that was in your facility to be sent to another facility. there was some question by senior management officials in your firm whether this was segregated money, money that farmers were hedging with and in your words the hedging was to protect the company in bad outcomes -- from bad outcomes. can you tell me if jpmorgan chase any obligation to protect those funds? but the lawyer just did in notes and gave all confirmation and then went bankrupt. >> so you got all confirmation on this? is that general operating procedure? >> no, general operating procedure is that you don't have to ask at all.

it's their responsibility. >> even? when a company's going? -- even when a company is going belly up? my concern is there were a lot of farmers that hedge to protect themselves from that now comes. if this money was transferred and it was segregated money, there's a real problem. that's all. just looking out for my folks. >> i still believe they will get all their money back. >> i just want to make sure the individuals that are held responsible. i want to thank the chairman for his flexibility on the time and i want to thank you for the hearing. >> senator moran. >> thanks for being here. you responded to someone's question earlier, describing the things that are good about smaller institutions and the things that create problems in

larger institutions. i don't have that list in my memory, but what stands out is hubris, arrogance. how do you manage a company the size of data morgan and overcome that list of adjectives that you described are a natural occurrence with a large organization? >> they do occur in small organizations as well. >> you're not talking about the senate, are you? >> definitely not. not now. [laughter] i think all companies want to have great employees always open and challenging themselves and learning from their mistakes. our people are honest all the time and they share reports. hopefully we have fostered the right kind of. culture at j.p. of we believe we are in business to serve clients. that is a job number one. we do it every day around world in 2000 communities.

we hope that our people believe that and it's in their hearts to do it every day the right way. we asked them to treat people the way you would treat your friends or your parents. we ask them that you see a problem, raise your hand and call the right people. we constantly have tried to improve our products and services. we tried to and acknowledge legitimate complaints. we tried to announce them and fix them. >> how you managed a morgan is the business of your board of directors, your shareholders, but it does have consequences to those of us who believe in the free-market system, its value, its merit. i have the sense and i hope it's the case that it is a responsibility you understand. how did the morgan and every company large or small conduct themselves, would behavior they exhibit really matters in our ability to be an advocate for a free-market that creates jobs

and economic opportunity and allows americans to pursue the american dream. >> i cannot agree more. what could be ask a more specific question. our ranking member, senator shelby, often talks about sufficient capital as the greatest deterrence for too big to fail, toward systemic risk. i agree with that. one of the other components that is involved in trying to make certain that the taxpayers are not responsible for the demise of a company like yours, a financial institution like yours, is the living will. would you describe to me what process has a morgan gone through to develop that living will? how transparent is it? what role do the regulators play? what evidence would give me or others satisfaction that your company can be dissolved without

a call upon taxpayer dollars? >> we have to get rid of anything that looks like to big to fail. we have to allow our big institutions to fail. it is part of the help of the system. we should not prop them up. we have to allow them to fail. you want to be sure they can fail and not damage the american economy and the american public. a big bank, we want to be in a position where big banks could be allowed to fail. it's called bankruptcy. i would call it bankruptcy for big dumb banks. i would fire the board and what about the equity and the unsecured should only recover what they would recover in a normal bankruptcy. the resolution authority start to put the authority in place and a living will means giving information to regulators that. know how to that. it is complex. fdic has taken down a lot of large banks without damaging the

american public, including wamu , and american savings bank some years ago. it's more complex now, it's updated. if they needthe need to know whs if a certain thing happens. how to go about dismantling jpmorgan chase that did not cost taxpayers. if the ftse ever puts -- and i think the bank should be dismantled after that and the name should be buried in disgrace, but even if it ever cost the fdic money, that should be charged back to the other big banks. during this crisis we have paid $5 billion, so we are paying the fdic. the other big banks should collaborate and make sure rules are in place so we don't

jeopardize each other. >> if taping morgan became a big, dumb bank and was in serious financial difficulty, is your sense that it would be -- a circumstance would be included with j.p. morgan posted demise and no cost to the taxpayer? >> yes. >> mr. dimon, i understand that j.p. morgan is lending more money to businesses, and i appreciate that it. however, it appears lending is not keeping pace with the deposits you are taking in. it last year reported in had 1.1 trillion dollars in deposits. this is more deposits than any other bank in the united states. the other big banks reported

ratios that are 10% to 20% higher than your bank. it seems like lending to american businesses would be less risky than what was being done in the london office. is your loan deposit ratio lower than your peer banks because you are perhaps prioritizing the risky trading activities over landing? can we hope that you are going to focus more on lending in the american market? >> we are making all the good loans. we can we are a global money center bank. that means we have deposits from governors around the world from sovereign entities, from large corporations that can be taken out tomorrow. we do have to keep liquidity. we have several hundred billion dollars right now invested in central banks around the world in case the biggest companies call up and say send me the $5 billion. we are a bank for people that

can face huge liquidity fund's. >> the records indicate your reported loan deposit ratios, the other big banks are 10% to 20% higher than yours. that would seem not to square with your statements that you want to lend but you don't have the customers plan to. >> market loans uptalk% on average for the last eight quarters. our small business loans up 52%. corporations have a lot of choices out there, mortgages last quarter for us was $40 billion, which is a huge number of new mortgages. we're not like all other banks. we do need to keep a lot of cash around to deal with immediate demands of the people dealing with us. we're talking about some of the biggest companies in the world.

>> one final comment, the biggest banks with whom you are competing are described in the same way you just described yours. their loan deposit ratios are higher than yours. >> they are all different. >> we often hear constituents trying to get a modification or stave off foreclosure is. they typically come to us because they're having trouble getting through to their lender. sadly, it is common for our constituents to say that the bank lost their paperwork. years since the crisis began, we are still hearing about these mixups. as a constituent who had along with jpmorgan chase said recently, "i don't want to lose my house because they cannot keep their paperwork straight."

why have banks not been able to sort out these paperwork problems? >> i agree they should not lose their home because we failed with their paperwork. i would love you to send that to me. we have hired 20,000 people to deal with the faults, modifications. we have offered modification of 1.2 million loans. and given alternatives to foreclosure to 700,000 loans. or not very good added to problems first started. we were overwhelmed. >> the cio office carries out a very complicated transactions and you employ some of the smartest people in the industry to work for you. your bank undertakes such complicated business on one hand, but on the other hand oftentimes you and other banks

of your size cannot seem to do something as simple as straighten out your own paperwork. the plight of the american homeowner, does it have the same attention or should it have the same attention that the bank gives to its cio office? >> yes, it should. we should do it properly. for anyone that has issues, please send it to me and we will take care of it right away. >> thank you. >> senator. >> thank you, mr. chairman. it's been very instructive to the public and members of the committee. i think you told senator shelby that the purpose of hedging is to earn a lot of revenue in the event of a crisis. i think you said that hedging works to an extent in 2008 for your company.

can you quantify the extent to which hedging worked in 2008? >> i never said the 2008 year, but the synthetic credit portfolio and several billion dollars of income. we could give you more specific details. but that is probably what we need to do with a follow-up. you said you did not know what the volcker rule was. if you don't, we don't either. i think you know how it's being drafted. as it is currently drafted, how would that have affected the cio's ability to do the hedging in 2008 and prevent losses? >> i think you are allowed to hedge under the current regulation, but i don't know wouldhe current worlrule do.

the ability to actively make markets, to raise capital for companies and clients and investors is the main thing. we have the best and the deepest and most transparent capital markets in the world. the capital markets of america are part of the great american business enterprise. we have the best in the world. we have had some problems. we don't want to throw the baby out with the bathwater. how does it benefit? the cost of buying or selling a share stock is a 10th of what it was years ago. the cost of doing swaps is a sense of what it was eight years ago. if they're doing it at a cheaper price, the people they invest for are doing things cheaper. that's a good thing for them. it also allows corporations to issue debt cheaper and quicker.

a large corporation wants to issue $5 billion, it can be done in a day around the world. they can get a cheaper price. the liquidity in markets keeps the spread low and benefits investors and issuers. the secondary markets and primary markets are directly related. , then cost is no here - the issuers can do it. the investor is not fidelity. it is the person who fidelity is investing for peridots are retirees, veterans, etc.. it's a good thing. the volcker rule had so many pieces to it when it came out, we are urging people not to think of it as binary but to think of it as traffic laws it. some cars should go 65 and some should not. some lights should. be should we -- some lights should be bright.

all these securities are different. we need to own that for a while. we cannot turn them over very quickly. we need to buy securities that we make sell tomorrow, but you want to sell them right now. you are our client and we make a little bit of money every time it happens. we don't take a lot of speculation. go through the details and make sure we get it right and we end up with the deepest and best capital markets in the world. i don't want to be sitting here in 20 years wondering why it is elsewhere. >> thank you. i hope you can appreciate why i only had five minutes. i think you told senator corker the financial system is safer today and you cannot say dodd-

frank has helped at all. but i think then you went on to say the regulation regime is not necessarily stronger today but it is more complex and you don't really know what the jurisdiction is. have i paraphrase your testimony correctly? >> some of the things in dodd- frank and other things made it safer, but the most important thing is higher capital, higher- high liquidity, and better risk management. >> you said something else that caught me by surprise. that was the testimony that nobody got all the parties in a room with people in your industry, democrats, republicans, and folks affected, and talk about what

was needed and what needed to be fixed. correct? >> yes. >> did you volunteer to be part of that conversation? >> we said that we would do whatever you want and go through it in detail. we spoke with lots of people. our folks did a lot of analysis and research. it lack the real collaboration that should taken place. i think it would have been better had there been more collaboration and at the end of the day shake hands with a new system in place and move forward. let me ask about the living will. are you telling this committee that jpmorgan chase has a living will that has been approved by? no, it has been drafted and circulated to legislators.

they have to coordinate it with foreign entities, so it will take a little sign. >> thank you. >> senator. >> thank you for coming before the committee. in 2008 through 2009, your company benefited from a half trillion dollars in low-cost federal loans, $25 billion into -- in tarp funds. with all that in mind, would j.p. morgan not have gone down without the massive federal intervention directly and indirectly in 2008 or 2009? >> i think your misinformed. that is leading to a lot of the problems we have today. j.p. morgan took part with the

ftse in the room, tim geithner, ben bernanke in the room, we did not need tarp. we were asked to take it to stop the system from going down. we did not borrow from the federal reserve. they asked us to, they said please use these facilities. we were not billed out by a ig. been okay if it had gone down. >> aig did benefit you enormously. i'm asking you to respond to questions and i also have five minutes. let's agree to disagree. but i think that many alice everette the conclusion if you had -- many analysts have come

to the conclusion that you would've been out of a job. how many countries in the history of the plant have been offered a half trillion dollars in low-interest loans? not many. but the basic concept behind the volcker far wall is banks are in the lending business and not in the hedge fund business. do you share that basic philosophical orientation? >> we're not in the hedge fund business. >> i want to turn to the report of a few days ago. it reports that jamie dimon created thecio, had her to report directly to him, encouraged her department to seek profits by speculating in higher yield asset such as credit derivatives, according to a half-dozen former executives of the company. that sounds like offering a hedge fund and doing so at your

direction, the government insured deposits. >> $350 billion of assets incio. the average rating is aa+, the average maturity with a duration of three years and not 20 or 30 years. the average yield is 2.7%. those characteristics are of a young, conservative portfolio. in addition we have $150 billion sitting in central banks around walt. that is considered conservative. and not conservative there are legitimate complaints in other areas, yes. but the former head of credit- rating said we want to ramp up the ability to generate profits for the firm, this is jamie dimon's new vision for the company. you would disagree that was your instruction? >> i don't know what he means.

>> here's the general picture. it is one in which the assets from cio or spend dramatically fivefold over four years, with numerous executives of your firm to testify that at your personal direction they were to invest in higher yielding assets rather than traditional government- backed securities. and yet when those bets go bad, instead of taking responsibility, you blame it on the unit that you set up. should you not take personal responsibility since they were following the game plan that you had personally laid out? >> the $350,000 portfolio is conservative and it has an unrealized gain of $7 billion. it is synthetic credit and that's why we are here. we have made a mistake and i'm absolutely irresponsible. the book stops with me. >> the heart of the vocal rule addresses liquidity management and says the funds that are in between loans should be invested

in either treasuries or government backed instruments. taking those same deposits and putting them into high-risk investments and credit derivatives is a fundamentally different strategy. i am puzzled by your comment early on that you are not sure whether or not the vision laid out by the volcker far wall between hedge funds and banking's would have prevented the type of operation that you set up in london. -- volcker firewall. >> i have already confessed to the sins on the synthetic credit side. we will not do something like that again. it will not stop us from making money. we are doing what the bank is supposed to do. we do it every day. >> from what you say, your plan going forward is when you have surplus deposits and you are managing them, and return to the

strategy of relatively safe, liquid investments rather than operating in the derivatives? >> the current strategy is to stay relatively liquid. >> thank you very much. >> i understand we have two votes beginning at noon. >> please take them. >> senator. >> thanks, mr. chairman. and thanks for being here and for your testimony. you made the statement that the answer is not more regulation, it is smarter, stronger regulation. i absolutely strongly agree with that. unfortunately, i think a lot of dodd-frank, most of dodd-frank has been more regulation, which in many cases has been more confusing and not helpful regulation. another way i might put it is i think we need more systemic changes and less

micromanagement. the big systemic changes that are under discussion that impact what we are talking about are capital requirements and the volcker rule. so i want to explore that. capital requirements, i understood when you criticize previously that part of the criticism was higher capital requirements for bigger banks. correct? >> it was more about the details behind it. when we went through the crisis, we had 7% . the capital ratios never went down. today we have 10%. all the new rules, it would be 14%. so there's an issue of how much capital is enough. we never argued about having more capital and we have no

problem with 10, 11, 12. but the calculations should be done fairly and properly. some of them make it harder to have proper capital. i have complaints about how the chief of the charge has been done. >> in general, do you think very big banks should have clearly higher capital requirements? >> i would be fine with that in general. >> compared to the 7% floor for a bank as big as yours, where should that be? >> i thought they should have said you will have 8%. 8 is plenty and it does not create confusion. people don't know what the real requirements are, because the rules are not in place. it takes years. i would say just 8 and let the regulators have time if they think that's a wrong number a couple years from now, change it again. it should not be a once-in-a- lifetime change. i was worried there would be capital confusion. people don't know what the

capital is, what it is supposed to be, or how it will be evaluated. that is not conducive to lending. that is conducive to people retaining their capital and reducing their balance sheets. >> there are other folks like switzerland requiring 19% of their two large banks. is that over till? >> yes, 19 is not comparable to my ten. >> what would be an apples to apples comparison? >> it's much higher, but they have a bigger problem for the size of their country's. >> the volcker rule, is there a true version of the rule that should be implemented and makes sense? but i think that it is a struggle to get it right because it was written vaguely and it's hard for regulators to come up with rules that make it easy for

market makers and regulators. unmasking about if we start with a blank sheet of paper, would you support a properly designed but true version of the volcker rule? would you should there's been no such -- >> it was unnecessary. >> so you think it is basically an unnecessary? >> i think it is unnecessary. if you said the intent is that we do not want to take so much risk on the trading books, i think there are ways to do that. i would try to rewrite the rules. >> what are sort of the systematic, simple regulation ways to do that? >> this is trading books. proper capital, proper liquidity. make sure it is appropriate for the product and customers. proper risk measures and proper risk controls. >> ok. again, i strongly endorse

overall the concept of not more regulation but stronger, smarter regulation. what is i am concerned about some sort of like the dodd-frank reaction to the crisis, i do not think the solution is we're going to have really smart regulators this time, instead of just simply smart regulators before. we are going to have more regulators. quite frankly, my concern about some of your testimony about the chase reaction is that i sort of hear that tone in your reaction. well, we're going to be smarter about the of this time. we're going to get it right this time. we're going to pare down. i am wondered if there should not be a more systemic change within the company to avoid this. >> i understand your point, yes. >> are there any more truly systemic changes in light of this incident? >> in our company? >> yes. >> know, we're going to make

sure that there are no other issues like this around the company -- no. but i can never tell you we will not make a mistake. >> i am not asking that. but will there be more broad scale changes within the company in reaction to this incident? >> a thorough review of every single thing that happened, and we do think it is isolated. >> ok, thank you. >> we will hold up the vote for a few minutes. senator hagen. >> thank you for holding this hearing. ms. stirdimon, -- mr. dimon, thank you for your testimony. i know your company encourages people to raise their hands lacy things going wrong, and they appreciate you doing that today. i want to talk about the actual trade. i would like to get some perspective about the size of the trade, the size.

we saw press reports about the london way of, and -- how big was the position, and the real question is, how could it be so large without coming to the attention of management, of regulators, and ultimately, shareholders? >> i have to declined to comment on some of that. my job is to first protect my company and to manage it. i can disclose certain things. some of the information was accurate, some was not. it was a complex series of trades, not just one single thing. i can manage that risk down. i can go through the reasons that it should have never gotten to this size.

>> would not ask anything to put the process at jeopardy. in may, jpmorgan changed how it calculated the amount of money that the firm's chief investment officer could use in a single day, and you have talked about this somewhat. can you discuss those changes and when the decisions were made? >> the old model took effect about 10 or 15 of this year. the new model put in place. on april 13, there's no reason to believe that the new model was not better, nor do we realize the severity of the problem. shortly after that, we filed on may 10. between the last weeks in april and the first parts of may, we realized the problem we had.

we filed. we put the old model back because we thought it was more accurate than the new model. we made that disclosure to our shoulders. >> can you explain the magnitude of losses? over last two or three years, i mentioned the models, the future is not the past. things change. concentration, liquidity, people confused about europe, credit spreads. the old model better predicts the sort of things that happened in april and may than the new model. >> some banking regulators

through their consideration of on thebasel committee are considering a move to an expected shortfall. what a move to this expected shortfall provide regulators and investors more information about the possible losses than a bank could experience? >> i do not know, because i do not know how good is all calculated. that is one measure. we also would get stress tests. i do think it is important that people stress test properly. but management cannot rely on models to run businesses. they are one input. there's also judgment, knowledge, and experience and the general fear you have learned over 56 years on how things can go wrong. >> thank you. also in your testimony, you indicated that one of the reasons that the chief investment officer started adding positions in the synthetic credit portfolio was to reduce the risk in anticipation of basel

requirements. can you explain what these conditions would be problematic under basel? >> i think in 2011, the fourth quarter, it was about $20 billion. basel three was estimated to be something like $60 billion. we thought it was an ineffective use of risk weighted assets. the intent was to bring that out -- bring that down over time. >> why did you say the bank would experience similar reductions? >> there were other parts of the company that we looked at the new balls of three. -- the new balls 03. >> thank you. >> thank you, mr. chairman. good to see you. being lost is no fun because of

your body else has asked the questions. but let me try. first of all, i appreciate your ole's se to senator c observations about the difficulty borrowers are happening -- having with responsiveness from banks. i will say to anybody listening to this hearing, who may be listening to it, if it would make the same generous offer, i think all of us would appreciate, on behalf of the people we represent. in your written testimony, and you said it again today, you said that while the cio c- purpose iso will-'s to manage, it maintains the credit portfolio. the intent was to protect the larger institution. at of curiosity, wondered what those two functions were in the same place -- is that something that you're thinking about at all? i know that you hedge all across

your lines of business, but i wondered why this was not buying the same place? >> it did not have to be. but the unit worried about exposure, consolidated foreign- currency exposure, consolidated, and some of the credit exposure consolidated. it was a rational place to put it. there are other things to hedge credit exposure. >> as somebody who supports a hedging exemption in the context of the volcker rule, which i also support, it raised in my mind the question of whether having them in separate places might -- because the purposes are different, having them in separate places may have a useful value. the second question i had was about the trade, and then i will move something -- a move on. you're also made the observation in your written testimony that this transaction could have been handled by unwinding, lessening the degree

of exposure. why wouldn't that have been the thing to do? i do think the folks that made this decision made this decision? >> i am told that they fought with the were doing was a more cost-efficient way to reduce the exposure and maintain some of the head against back tell you cents. that is what i am told they were thinking. >> that fees or less? >> that over time, he would not spend as much money on one way versus the other. >> ok. since you are hearing, and mr. chairman, this is unrelated to the topic at hand, but i think you're well aware of my concern about the fiscal condition of this country. i wonder if you could take the last couple minutes of this time to talk about how you see our relative position with europe and other places, the political

risk of our not accomplishing what we need to do in the fiscal side? and the upside if we could actually come together in a comprehensive way to address the long-term fiscal condition of the united states? >> if you're asking one citizens of and in, i will be happy to share. >> yes. >> europe has serious issues. there is a good reason for the european union, for political and monetary union. it is complex, 17 nations and more. the united states has a serious issue. we have to acknowledge that we have a serious problem. we have several. the fiscal cliff, i will not go through. the one thing to keep in mind is that it may not wait until december 31. markets and businesses may start taking actions before that that could slow down the economy, which would be a bad thing. i would not be of the mine that is ok to wait until after the election, until midnight december 31. i think it would be better to do

something now so we do not create additional uncertainty among businesses and consumers. we have to get our fiscal act in order. i mean, it will either be done for us or we do it ourselves. there is a road map, which i like -- not every part, but it is called simpson-bowles. if we had done something remotely like simpson-bowles, in my opinion, you would reduce uncertainty about taxes. you would increase confidence among our -- in america. you'd have a real fix of the long-term fiscal problems. i think you would have a more efficient and effective tax system that is conducive to economic growth. i would urge everyone to support getting something like that done. the specifics, unfortunately, no people argue, but they are not as important as getting something like that done. and we missed an opportunity to do it. i think it helped cause a little downturn last year. >> thank you. >> senator shelby has a brief observation to make. >> do you know of any bank that

has been well-capitalized, well- regulated, and well-managed that has failed? >> i do not, sir. >> i know you are aware that we have closed about 500 banks in the last three or four years, and just about everyone of those banks failed because they were inadequately capitalized. bad loans. so, would you agree that there is no substitute for capital? when you run a financial institution, you have got to have capital, and you have got to be liquid. >> there is no substitute for capital. that is correct, sir. >> thank you. >> thank you for your testimony and for being here with us today. it is a reminder that we cannot let down our guard and we must remain vigilant so that we continue to have a strong and stable financial system.

before we adjourn, i also want to provide committee members a brief update on [unintelligible] ranking member shall be and i are continuing to discuss a way forward on finance legislation. we have worked together in the past markups to keep amendments to those related to the bill, and i hope that my colleagues will agree to continue this approach. this hearing is adjourned. [captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012]

>> jamie dimon, the head of jpmorgan chase, testifying for about two hours and 15 minutes before the senate banking committee, the first of two appearances that the jpmorgan head will have on capitol hill. next week he will be before the house financial services committee. we will have coverage on that on seaspan3 -- on c-span3. we will also be reassuring this. we will also be taking phone calls. our current financial regulations strong enough? 202-624-111 for republicans20. 2-624-115 for democrats. 202-624-7760 for independents.

it was a wide ranging hearing today. it dealt with the $2 billion was the jpmorgan suffered recently this spring. i want to show you some of the comments of the jamie dimon said on house senior management reacted to the loss. >> the risk committee does a lot of work to talk about the main risk of becoming. i think it is unrealistic to expect -- they spent a lot of time. it is hard to do that. >> m i clear? >> took this committed to the most difficult financial crisis of all time with flying colors. i would blame this on management, certainly not in the risk committee. recently, to the new directors had extensive experience in financial markets. >> ok, so you feel the risk committee, this was too small an

item for them? give me a little more context for this. >> the risk committee reviews a lot of issues, regulations, requirements. they meet a lot of management. they talked risk committees. i think it has been hard for them to capture this if management does not capture it. to the extent we were misinformed, we were misinforming them. >> that was jamie dimon and senator chuck schumer a short while ago. some of the testimony today before the senate banking committee on the jpmorgan loss. again, we're going to take your phone calls momentarily. we will give you a chance to see the entire hearing later today, 8:00 p.m. eastern, here on c- span. you can participate online or on our facebook page. we're asking the same question. our current financial regulations strong enough -- are

current financial regulation strong enough? we got a question, and this is a banking regulations are a joke. our facebook pages open for your thoughts and comments. jamie dimon talked about some of the severance packages for the chief investment office in london were this lost took place. >> the big picture of compensation for jpmorgan to start with -- we have not had for five or six years special severance packages for executives, a change of control parishes. there was no one paid under a formula. the management of the cio was a subordinated throughout the company. they were not allowed to do what they want. it cannot take too much high- yield exposure. there were paid for what they did for the whole company. 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 do not believe that the combination made -- compensation made this problem worse. like i said, none of these folks were paid in a formula. the second question was clawbacks. the appropriate time to make the final decisions, it would be inappropriate to make those decisions before you finish final review. you can expect proper corrective action, and i would say it is likely, but this is subject to the board, but is likely to be clawbacks. >> senator johnson, the head of the banking committee. let's go to your phone calls. roland in nevada on our democrats line. go ahead. caller: i am glad you played

the hearing. i have been watching since the late 1980's. i do not think anything has changed in these hearings since 1989. the biggest problem is that it is a dog and pony show. i noticed when mr. jamie dimon was being asked questions by the democrats, there were not letting him monopolize the time they were allotted. and on the other side, republicans were just letting him run out the clock. it does not make any difference which side of the dial a person is on. if the pri -- which side of the aisle the person is on. it basically did not in me. it was -- it did not enlighten me. it was a commercial for chase. >> when you say dog and pony show, you did not learn anything from the questions or answers?

caller: i learned there was a lot of abdication of responsibility. they say the buck stops with him, he is the responsible party, but he claimed a lot of ignorance that i was really surprised that he was that way with. host: the thing the current financial regulations, dodd- frank, and more, are strong enough? caller: no, they're not. if it was as originally proposed, we would be in a better situation. jpmorgan chase as well. host: independent line, virginia beach. go ahead. caller: i think dodd-frank was a good start. they need more regulation. these banks are allowed to loan out 10 times the amount of capital they actually have. they go bankrupt, and they take the money from the american people and leave them home was. he should be locked up.

host: before the hearing got under way, if you were with us at about 10:00 a.m., there were a number of protesters in the room. they did not start the hearing until they cleared the room of a double of protesters. you will get a chance to see that again tonight at 8:00 p.m. eastern. next, indianapolis, republican line. hello. caller: hello there. i have been watching the hearing this morning. agreed -- it is greed. none of the regulators have been punished. they should get their money confiscated. there were $300 million. dodd-frank, they have their share of dealing in the house loans also. it is a big mess. [unintelligible]

and suffer, and it is dreadful. thank you. host: democrat might come in new york city. caller: hello, i am from s.i., new york. host: welcome. what are your thoughts on the current regulations and jamie dimon's testimony today? caller: congress made a big mistake when they repealed the glass-steagall act. there is the reason why the separation of banking and brokerage worked for 70 plus years. that needs to be reinstated. i do not believe jamie dimon needs to be raked over the coals for the $2 billion trading loss in the trading entity. if the trading entity is separate and apart from the banking and they have sufficient capital to sustain it, then it

should not be a problem. but there was not a problem here is when the brokerage side of the business was making billions. host: the new jersey senator made the point in his questioning about the excess capital, about having additional capital and how that was part of the financial regulations law. how do thing jamie dimon responded to that? caller: i only saw the latter part of the conversation. i was out, so i missed that part of it. but the brokerage side of the business used to have capital ratios and requirements that were monitored by the sec and the new york stock exchange. again, as long as they adhered to those requirements, there was not a problem. and the focus should be more on protecting customers and the public. for example, jon corzine in --

what is the entity? host: mf global. caller: mf global. that is a sin that customer funds were exposed. for money from that amount to be moved to a segregated account to be used by the firm had to go off the chain of command. host: thank you. we have a call on our republican line from ohio. go ahead. hello. i think we lost him. let's go to ann in illinois, independent line. caller: good morning. just a short comment. i used to be in banking for 20 years as a lone secretary. i belonged to a bank group of about 12 banks in illinois. we were conservative lenders. at that time, prime rate was

about 17.5% to 20%. wo andld loan prim plus to three, but we were conservative. i think our banking industry needs to go back to being very conservative. if they want to lend money and there's money to lend, that is fine. but you cannot lend money to be below cannot pay it back. we have to be very careful. we used to be audited by three auditors. our own, state auditors, and the fed. if we did not keep our delinquencies at 5% of our assets are below, we were in trouble. host: was the bulk of your business and mortgages or business loans or what? caller: our business portfolio was like $54 million. mortgages, a business loans, fha loans. but we made sure, as a

conservative lender, that if you came in as an individual and you wanted the buying a house but you could only buy a house based upon what you made, we did not try to do a drug house that you cannot make payments on. i started in banking in 1968 and left in 1989. host: are you still there? you left in what year? caller: 1989. host: what were these years when the prime more aid was 17%? caller: there were back in the 1970's. host: what were you paying for interest on the money market -- caller: you're getting it at prime plus two or prime plus 3. host: but what was the interest you were earning? caller: probably another 2% over the but not much. because we were conservative, we

broke even. host: julie, california. are you there? i think we lost julie. a call from arkansas on the the democrats in line. are you there? caller: hello? yes, this is julie from california. yes, i do think we have regulation in place, because banks -- as one of the senator mentioned, we have these banks that have not met certain rules and were not doing well when it comes to lending or investing. so i think we definitely have [unintelligible] however, i do think that jamie dimon -- he was a very good, by the way. i really liked his answers. i do not know, maybe they were

not ready for all these investments. it seems to me, as i read what has been happening, is maybe they were overwhelmed. but i think regulations are in place and i do not think we need to suffocate our banking industries. with sarbanes-oxley and the other regulations, we have been suffocating our banks. i think we need to stop that. i think we have regulation. we need to make sure we're following them and investigating them. host: do you think dodd-frank made things tougher? do they strengthen the regulations that we had before them? caller: may be. i would say yes. host: thank you. we appreciate the calls. you can continue the conversation on our facebook page. hear bing is the question -- our current banking regulations strong enough? we will replay the hearing with jamie dimon tonight at 8:00 p.m.

eastern. next tuesday, the jpmorgan head will testify before the house financial services committee. the house is out this week. we will carry that hearing next week at 10:00 a.m. eastern on c- span3. next, a look at part of today's hearing. >> we will come to order. i ask the capitol police to please remove anyone in the audience who is interrupting the hearing. before we proceed, i will remind my audience that any interruption of the hearing will not be permitted, and you'll be escorted out of the room. we will now proceed. this hearing is part of the banking committee's ongoing oversight of the massive trading losses announced by jpmorgan

chase and the implications for risk management, bank supervision, and the wall street reform act. since the announcement of the loss in early may, this committee has heard from the fed and other primary regulators for jpmorgan, as well as the sec, cftc, and other relevant officials to review and learn from these events. members of the committee have asked to hear from mr. jamie dimon and through due diligence, conducted together by my staff and the ranking members staff, i decided to invite mr. jamie dimon. last week, regulators informed the committee that there was a breakdown in the risk management involved with these trades despite the fact that the trades were partly designed to reduce the bank's risk as they

continued to look into the matter. officials have assured our committee that the firm's solvency and the stability of our financial system are not in jeopardy at this time. while this is welcome news to the questions remain that must be answered if we want our largest banks to better manage their risks, to maintain financial stability, as i believe we do. today marks the two-month anniversary of mr. jamie dimon's [unintelligible] where he downplayed concerns from initial reports of the company's chief investment officer at trades. we later learned and out of control trading strategy with little to no risk controls that cost the company billions of dollars. i have said before, no financial

institution is immune from bad judgment, and mr. jamie -- mr. jamie dimon's own words, he later explained "we made a terrible, egregious mistake. there's almost no excuse for it. we know we were stupid. we know there was bad judgment. in hindsight, we took far too much risk. that strategy we had was bad leave fed did. it was badly monitored. it should never have happened." what went wrong? where a bank renowned for its risk management, where was the risk controls? how can a bank take on far too much risk if the point was to reduce risk in the first place? or was the gold really to make money? should any hedge result in net gains or losses or should be

focused solely on reducing a banks' risks? as the saying goes, you cannot have a big and eat it, too. as for the policy implications, some of my colleagues complained that the operations are micromanaged of a large bank and regulators cannot keep up with bank innovation. i disagree with that was supervision and less regulation will make this system less risky. while risk cannot be eliminated from our economy, we can and must demand that banks take risk management seriously and maintain strong controls. we must also demand that regulators do their job well. after all, banking is an important risk-filled business. they need careful scrutiny and

oversight so that risk- management or unsafe and unsound practices do not threaten the stability of our economy. some also suggest that capital is a silver bullet in financial regulation. while capital does and must play an important role as a backstop, we should not rely only on capital. any well-capitalized bank can fail, and certain financial stability if it is not well- managed or well-regulated. our financial system will be safer and stronger with multiple and well-capital of braided lines of defense, -- [unintelligible] we need regulators to finalize these wall street reforms, in congress should fund them with sufficient resources so that

they can effectively monitor the financial system. again, it has been two months since the first publicly acknowledged that the trades, expect mr. jamie dimon to be able to answer tough but fair questions today. a full account of these events will help this committee better understand the policy implications for a safer and stronger financial system going forward. i now recognize the ranking member for his opening statement. >> thank you, mr. chairman. today, the committee will hear from the ge executive officer, president, and chairman of jpmorgan chase, mr. jamie dimon. he is here today because jpmorgan chase lost more than $2 billion on derivatives trades. normally, it is not, and i believe it should not be the role of congress to second-guess

decisions by private sector businesses. however, because the federal government guarantees bank deposits, 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. they are suppose to be monitoring the activities of banks like j.p. morgan 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 is 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 produce the manage those risks, however, serious problems can arise.

for example, in the years leading up to the financial crisis, some banks claim that they could safely provide mortgages to borrowers with no documentation and a small down payments. advances in risk-management supposedly enable them to lead to riskier borrowers without threatening the bank's safety and soundness. we now know that this was false. these banks were not applying better risk-management techniques. they were simply for going time- tested underwriting standards. the result was the failure of some of the nation's largest financial institutions, including countrywide and fannie mae and freddie mac. certainly there were many bankers that did not make these mistakes, and by most accounts, our witness today was one of them. yet, as the financial crisis shows, poor risk management, even a single large bank, can have profound consequences.

congress and bank regulators must always watching 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 loss. as we do so, i believe there are two key questions that need to be answered. first, did the losses from these trades threaten the safety and soundness of jpmorgan? second, did it happen again? last week, the committee heard from the bank regulators this supervised jpmorgan. they answered the first question when they told us that the $2 billion-plus lost not threaten the bank's solvency because the bank has strong earnings insufficient capital. this conclusion shows once again why the single best way to protect taxpayers from bailouts is to ensure that banks are properly capitalized. strong capital requirements

provide a valuable buffer against unexpected losses arising from the inevitable missteps by banks and bank regulators. 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 enjoy it is strong reputation for effective risk management, something obviously went very wrong. regrettably, the comptroller of the currency, the federal reserve, the fdic were unable to tell us what happened last week despite having more than 100 onside examiners at jpmorgan. hopefully mr. jamie dimon and fill in the details today. in particular, i hope he can explain here why these trades were made and why they produced such large losses. i also hope to learn the extent to which mr. diomon and other

executives were involved in the decision that permitted these trades. he has long been recognized for his effective management of the very successful institution, yet it appears in this particular case, things perhaps got away from him. why? did he put too much faith in the company's risk models or did he ignore this? it has been reported that officials at jpmorgan may have dismissed warnings that the bank was not instituting appropriate risk-management practices. was mr. jamie dimon, a that happened, was he aware of this? if so, did he respond or did he disregard them? it has also been reported that the office responsible for these trades may have had contradictory mandates. and while the stated gold of the office may have spent to reduce risk, employees of the office apparently believed that they were expected to turn these trades into a profit.

banking employees reportedly referred to this profit as "the icing on the cake." what were mr. dimon's expectations for this office? with scenes and devising them to manage risk for maximize profits? -- was the incentivizing to manage risk? what did the board of directors of jpmorgan chase no about how mr. dimon was managing risk? it has been reported that jpmorgan's risk committee may not have the expertise necessary to oversee such a large bank. i hope to learn not only about mr. dimon's role in selecting the members of the risk committee but 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 of it helps

banks and bank regulators avoid repeating the mistakes of jpmorgan. all in this regard, i believe it is unfortunate that the committee has not held similar hearings with the heads of other financial institutions. although the committee's hearing mr. dimon from, whose bank loss $2 billion + of its own money, it has never heard from executives of fannie mae and freddie mac, who have lost nearly $200 billion of taxpayer dollars. perhaps it the committee can turn its could -- if tensions g to these's mass of public losses when it completes its review of the relative private losses thus far to jpmorgan chase. thank you. >> thank you. this morning's opening statement will be limited to the chairmen and the ranking member to allow more time for questions from committee members. i will note that senator warner

is a valuable member of this committee but his absence 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 of the materials you would like to submit. now i will introduce our witness. mr. jamie dimon, 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, ranking member, members of the committee, i am prepared to discuss recent losses in a portfolio held by jpmorgan chase's chief investment office. these losses have generated

considerable attention, and while we're still reviewing the facts, i will explain everything i can to the extent possible. the six lines of business provide a broad array of financial products and services individuals, small and large businesses, governments, and not for private institutions. these include deposit accounts, loans, credit cards, mortgages, a capital advise, fund raising, a mutual-fund, and other investments. let me start by explaining with the chief investment officer and does. like many banks, we have more deposits than loans. at quarter-end, we held approximately $1.10 trillion in deposits and $700 billion in loans. cio and our trish regan and invest excess cash in a portfolio that includes treasuries, agencies, mortgage- backed securities, high-quality securities, corporate debt, and other domestic and overseas assets. it also serves as a vehicle to manage assets and liabilities of

the consolidated entity. in short, the bulk of the responsibility is to manage and approximately dollars2590 billion portfolio in the conservative manner. the primary purpose is to invest ex's liabilities and manage long-term interest rate and currency exposure and also maintain a smaller, synthetic credit portfolio whose original intent was to protect our heads the company against a systemic event the like the financial crisis or the bureau's own situation. what happened? in december 2011, as part of a firm-wide effort and in anticipation of newbasel requirements, we instructed cio to reduce risks. to achieve this , thecio could have reduced existing positions. instead, starting in mid- january, it embarked on a complex strategy that entailed in the positions that it believed offset existing ones.

this strategy ended up creating a portfolio that was larger and resulted in even more complex and hard to manage risk. this portfolio was something that rather than protect the firm, created new and potentially larger risk. as a result, we let a lot of people down, and we're very sorry for it. let me tell you how what went wrong. these are not excuses. these are reasons. we believe now that a series of events in the synthetic credit portfolio lead to difficulties. this is the detail by written testimony. cio strategy reducing the credit portfolio was fully vetted. in hindsight, they did not have the requisite understanding of the new risks they took. the risk limits should have been specific to the portfolio and much more grain year, for example, only allowing low limit of risk on each specific risk taken. the synthetic credit portfolio

should have gotten more scrutiny from senior management, including myself, and the firm wide risk control fortune. we have already taken a number of important actions to guard against any recurrence. we appointed entirely new leadership for cio. our team has made progress and aggressively analyzing, managing, and reducing our risk going forward. this does not reduce the losses already incurred and does not preclude future losses, it reduces the probability and magnitude of potential future losses. we're also conducting an extensive review of this incident, which are board of directives -- directors are independently overseeing. we make mistakes and take them seriously. we're often our own toughest critic. we apply lessons learned through the entire firm. we can never say we do not make mistakes. in fact, we know we will make mistakes. we do believe this was an isolated event. we will not make light of these offers, but they should be put

into perspective. we will lose some of our shareholders' money, and for that we feel terrible. but no client, a customer, our taxpayer money is impacted by this event. the balance sheet remains intact. as of quarter end, we held $190 billion of equity and well over $30 billion in loan-loss reserves. we maintain extremely strong double ratios in excess of regulatory capital standards. as of march 31, 2012, our basel 1 ratio was 10.4%. the basel 3 ratio in 8.2%. both among the highest levels in the banking sector. we expect both numbers to be higher by the end of the year. all of our lines of business remained profitable and continue to serve consumers and businesses. while there is still two weeks left in the second quarter, we expect our quarter to be solidly profitable. our strong capital position and

business model did what they were supposed to do, a cushion against 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 from consumers, and companies in our communities and communities around the globe. during 2011, jpmorgan chase rate capital and providing credit of over $1.80 trillion for consumer and commercial customers, up 18% from the prior year. we provided more than $17 billion of credit to u.s. small businesses, up 52% over the prior year. over the past three years, we made the decision not to retrench but to step up, as we did with markets in turmoil being the only bank willing to commit billions of dollars in the states of california, new jersey, and illinois. all of these activities come with risks. just as we remain focused on serving our clients, we also remain focused on managing the

risk to our business, particularly given to his considerable global, economic, and financial volatility. we will learn from this incident, and my conviction is we will emerge stronger, smarter, and a better company. i would also like to speak directly to our 260,000 employees, many of them are watching this hearing. i want them to know how proud i am of jpmorgan chase, the company, and proud of what they do every day for their clients and their communities. >> you can see all of jamie dimon's testimony tonight at 8:00 p.m. eastern here been on c-span. jamie dimon will be back on capitol hill next week before the house financial services committee. we will have that live as well, tuesday, 10:00 a.m. eastern, on c-span3. in under 10 minutes, we will take you live to the u.s. chamber of commerce in washington. they're hosting a daylong discussion on a jobs in the economy.

the event includes the release of the third annual enterprising state study which would said house is of it states are doing in today's economy. we will have that when it starts at about 1:00 p.m. eastern. until then, "washington journal" viewers way in. host: here is a net line from this morning. fast and furious. face-off on gun running. hearings on the hill heating up. the attorney general came under attack tuesday from republicans over his handling of the fast and furious gun running investigation, including a call by one senior senate judiciary committee member for is resignation. during a heated exchange during an oversight hearing, senator cornyn of texas said mr. holder failed the standards of accountability, and determining who knew about it or approve the

walking of guns into mexico. america deserves an attorney general will be honest with them, he said. what did you think of the face- off that happened yesterday in the senate committee, and how you think the attorney-general has done? we will hear some of that exchange rate just a moment. first, let's look at a couple other stories in the news. republican senators criticized holder over his response to leaks. instead of being about fast and furious, this is about information, classified national security information. republican members of the judiciary committee criticized the decision by the attorney general to appoint two u.s. attorneys to investigate recent disclosures of classified national security information, saying the move was not enough and that he should appoint a special prosecutor. at a committee hearing, the republican senators accused the administration of leaking the information and said mr. holder

was trying to shield the obama administration from the scrutiny of a prosecutor would be completely independent of the justice department. let's listen to an exchange between the attorney general and senator cornyn of texas from yesterday's hearing. [video clip] i am every one of come to an impasse that represents a major threat to our national security. your office this is a clear conflict of interest. yet, you're willing to appoint a special counsel. you also support a truly independent investigation and you will not take these threats seriously. meanwhile, you still resist coming clean about what you knew and when you know it with regard to fast and furious. you will not cooperate with the investigation, and will not hold anyone, including yourself accountable. your department blogs stands from implementing its ems to combat voter fraud. you violated the public trust, in my view. by failing and refusing to

perform the duties of your office. mr. attorney general, it is more with sorrow than regret and anger that i would say you leave me no alternative but to join those who call upon you to resign your office. >> this is now the ninth time i have answered questions before a congressional committee about fast and furious. i am the attorney general that put an end to what was used by fast and furious. i suppose he would hold a higher regard and was briefed on these kinds of tactics in an operation called wide receiver and did nothing to stop it. nothing. 300 guns at least walked in that instance. i called on an inspector general to look into this matter, to investigate this matter. i am the attorney general who made personnel changes at atf and the u.s. attorney's office that was involved, overseeing

the changes of processes and procedures to withinatf to make sure this does not happen again. i do not have any intention of resigning. host: the attorney general defending his record to members of the judiciary committee. let's hear what you have to say about this. larry is a democrat in mississippi. caller: good morning. this is all political. they're trying to get him out because of voter suppression going on in florida and other places. they said that is why they want to get him out. he is doing a great job as far as i am concerned. as he said, he stopped dead when he was in a wide receiver during the bush administration -- he stopped that. nobody did anything about it. so this is all political. host: patricia, independent caller from wisconsin. caller: i think that eric holder

is a very effective. host: why so? caller: because he is doing the best job he can do. and republicans -- it is just a very political. it is just like when gonzales -- he was a very, very corrupt. host: how do think this will play on? you see senator cornyn calling for the attorney general's resignation. he has no plans of stepping aside. what do you think happens next? caller: i think our president should stand by him, because he has been very effective. host: let's would get a couple of facebook questions that are coming in.