company's $2 billion trading loss. mitt romney talked about president obama's economic policies. timothy geithner it discusses the world economy at the council on foreign relations. >> we will get bigger perspectives on jobs, the economy, and the november elections. then, former labor secretary in the clinton administration professor robert reich joins us. later, sheila bair on financial market regulation. plus, your calls, e-mails, and tweets. "washington journal," each morning at 7:00 a.m. eastern on c-span. >> kenya, indonesia, like, kansas, chicago, and washington. this weekend, followed david

maraniss on his journey, with the video record of his travels. he takes calls and questions. also this weekend, conservative .ommentator joan of goldberg's >> american politics have been distorted for the last century or so the the idea that the fervor you move away from the left, the closer you get to bad things. in some ways, the best working definition of a fascist is a conservative who is winning an argument. >> that is on book tv this weekend on c-span2. >> once you realize the magnitude of the difference in macon public life, everything else will pale in comparison.

>> someone from the white house came and said those that think they are crazy enough to change the world are the ones that actually do. >> it meant a lot to me because too many times we find ourselves not focusing on the one thing that should be a top priority. >> every year, the u.s. senate youth program bring students to washington for week in government and leadership education. this week, a senior director on the white house national security staff. >> now that i am in this role, what could i share with them that either i wish i had known along the way or that they will remember when they leave washington, which as you mentioned, is a very intense, rapid-fire experience. if you leave a few key,

encouraging messages at a time when you know it is very easy to be cynical about politics, you have done a good thing to encourage young people to pursue public service. more on sunday at 8 eastern and pacific on c-span. >> financial firm j.p. morgan chase last month announced $2 billion in trading losses. j.p. morgan ceo jamie dimon testified at a senate banking committee hearing where he was met by protesters. its trading practices are being investigated. this hearing is two hours, 15 minutes.

>> this guy should be going to prison. he is a corrupt. this man is a corrupt and he should go to jail. these men are predators on the american taxpayer money.

they are job destroyers. this man is a crook. >> on behalf of chairman johnson of would like to call the meeting to order and then suspended until the chairman has arrived. i would ask the capitol police to restore order. >> this man is a criminal. [unintelligible]

>> the hearing has been called to order. we are suspending until the capitol police restore order. this is the hearing in which we will ask people to cooperate so that we can conduct a serious inquiry into this matter. thank you.

>> where is the chairman?

>> you sold my house from underneath me. >> the people that were foreclosed on. stop foreclosure now. stop foreclosure now. stop foreclosure now. stop foreclosure now. stop foreclosure now. [unintelligible]

>> this hearing 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 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 events. 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. 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's "tempest 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 know we were stupid. we know there was bad judgment. in hindsight, we took far too much risk. the strategy was badly vetted, badly monitored 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 goal really to make money? should they be focused on reducing risk? 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. 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. oforgan chase's six lines 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 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. let 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 have 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 >> 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 complex institution like yours? >> so, we have a hugely complex economic ecosystem. 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. the market has fixed a lot 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, selling cds's, 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 wouldn't lose maybe $50 billion, 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. but 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. saiddon't think what you is true. i supported parts of regulation and reform. i support higher capital and 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 more money was unamerican? >> 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 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. >> senator demint. >> 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 senator corker asking 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, them 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 activity, large hedges that 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 trillion 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 regulators, from listening to your conversation and sing the occ, it appears regulators cannot understand why what is happening in 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? and i am thinking how did the farmers' co-op have anything to do with what happened in 2007 or 2008? i have not verified this because somebody told me this last night and maybe you are aware of it, but somebody who worked with the skanking committee mentioned last night ahead and event i was up -- this is a banking committee meant to last night that there has not been a single bank charter that had been 78 years since that had happened. do you have any information on that? >> i was unaware of that. >> it further occurs to me that at an enterprise as big and powerful as yours, that you have a lot of firepower and you're huge. we will find a way to navigate

what has happened here. you are not located in my state and i doubt you are probably considering locating in my state, although it would be a great place for you to do business. >> i would like to be there one day. >> what i suspect is happening is that our medium to small banks are worn out --are now trying to navigate through this complex legislation. these are banks or maybe they employed a dozen or two dozen people and they are just going to give up. what is your impression of that? >> wii bank a lot of smaller banks and i think some of these things are harder on smaller banks then larger buyers, unfortunately. >> thank you, mr. chairman. >> thank you for being here. it gives us a better chance to

understand how j.p. morgan in your words committed an egregious mistakes from a poorly constructed hedging strategy. i would like to focus on j.p. morgan's role in the days leading up to mf globla's bankruptcy. when they were obligated by law to segregate and protect. in its final days of operation, and shuffled hundreds of millions of dollars from account to account for. a shell game. mf global customers saw their funds wiped away overnight in this so-called shell game and the firm's ability to segregate these funds. though mf global commodity customers have received 72 cents on the dollar back. the trust that farmers have in the system has been broken because of the firm's

violation of the law. we have new information on the giddse of ajme james en's testimony. we have to get to the bottom of this issue to make sure that farmers receive their funds returned. over 100 of my constituents have their accounts rated by mf global to cover the firm's institutional losses and if anyone was complicity in this, i want to know about this. on may 18, they announced j.p. morgan's return of $168 million i ncash, that your firm held at the time of mf global's liquidation. the funds belong to hundreds of farmers and ranchers. why did it take your firm seven months to return these funds? >> we were banked mf global.

the second they had problems, we immediately went to the trustees and the courts and told them what we have and did not have. we were waiting for them to finish their work. there is no hiding anything. we cooperated every step of the way. >> there was money released initially when mf global started down this path by your firm, but there was $168 million that was held seven months. why? it was their dough. it should have went to them. >> i think we were waiting for the guidance of the court and the trustee. we were not deliberately withholding the money trek >> i know the investigation singled your company up here if it highlighted your ongoing negotiations and potential litigation mr. gidden may bring against j.p. morgan chase. it was clear j.p. morgan had

some vatican concerns about the health of the firm, mf global. your firm was intensely focused on whether collateral proposed by mf global was paid with customer segregated funds. according to the investigation, at your firm took steps to protect itself and its exposure placing mf global on debit alert. mr. dimon, despite repeated attempts by senior risk management officials at your firms, i to determine whether collateral for the $175 million transfer was in compliance with the rules regarding a segregated fund account, mf global did not signed a letter that your firm demanded. without this confirmation, and your suspicions, j.p. morgan chase alternately transferred the funds and accepted the

collateral. can you, were you aware of the effort by senior risk-management officer to seek compliance confirmation from mf global? >> no. >> so why did j.p. morgan chase relent on efforts to secure signatures of the letter and of the transfer -- without insurance? >> we are doing a follow-up letter which is not required. we're asking them to make sure they had done the right thing. >> what you are saying is that even though you had placed them on the alert, and you limited -- you increased collateral requirements, when they ask you to transfer the money there was no conversation about whether this money was segregated funds? you just transferred it? >> they transferred it to us, desperate >> it was within your institution. >> it was coming over draft from the prior day.

>> so the question is that you guys were concerned about mf global. you guys knew what was going down because you put them on debit alert. they had requested money to be pulled out of that was in your facility to be sent to another facility. there was some question by senior management officials and your firm whether this was segregated money, money that farmers were hedging with and hedging was to protect a company in bad -- from bad outcomes. can you tell me if j.p. morgan had any obligation to protect the farmers? >> they gave confirmation and then went bankrupt. >> you have confirmation on this. is that general operating procedure? >> the operating procedure is you do not have to ask at all. it is their responsibility.

we were using excessive precaution. >> even when a company is going belly up? >> yes. that is why we try to make sure. we also tried to help them. >> we appreciate that. my concern here is because there were a lot of farmers that hedged to protect themselves from bad outcomes. and if this money was transferred and it was segregated money, there is a real problem. that is all. it just looking out for my folks. >> i hope they get all their money back. i still believe they will. >> i want to make sure that the individuals that are held responsible are. i want to thank the chairman for his flexibility on the time. thank you for the hearing. >> senator moran. you responded to someone questioned earlier describing that things that were good about

smaller institutions and that things that create problems and larger institution. hubris stands out. how do you manage a company the size of j.p. morgan and overcome that list of adjectives that you described are just a natural occurrence within a large organization? >> they can occur in small organizations, too. >> you are not talking about the senate, surely? >> definitely not. not now. [laughter] look, i think all companies want to have great employees, that always analyze things, challenging yourself, learning from your mistakes. you share reports. i think there are ways you can avoid the negatives of being a big company. hopefully, we foster the right kind of culture at j.p. morgan. we believe we are in business to serve clients. that is job number one and we do it every day in 2000 communities

all around the world. we hope our people believe that and it is in their hearts to do the right thing every day. we ask them to treat people the way you treat your friends or parents. if you see a problem, raise your hand and call the right people. we constantly try to improve our products and services. we lodge legitimate complaints. we tried to acknowledge them and fix them. >> how you manager j.p. morgan really is the business of your board of directors, your shareholders. but it does have consequences to those of us who believe in a free market system, its merits, and i hope that that -- i have this sense and i hope it is the case that that is the responsibility that you understand in protecting the free enterprise bsystem, how j.p. morgan conducts themselves. what behavior day exhibit matters and our ability to be an advocate for free market system

that creates jobs and economic opportunity and allows americans to pursue the american dream. anything i am missing? >> i could not agree more. >> our ranking member, senator shelby talks often about sufficient capital as the greatest deterrent to words too agree withl, and i that. what -- one of the other component involved in trying to make certain that taxpayers are not responsible for the demise of a company like yours, a financial institution is the living will. would you describe to me what process has j.p. morgan gone through to develop that living will, how transparent it is. what role the regulators play. what evidence if we saw the living will develop for j.p. morgan would give me or others satisfaction that your company can be dissolved with out a

call upon taxpayer dollars? >> i agree with most of the people. we have to get rid of anything that looks too big to fail. it is part of the help of the system. we should not prompt a lot. we have to allow them to fail. -- we should not prop them up. we want to make sure they do not damage the american public. a big bank, you want to be in a position where a big bank to be allowed to fail. i would call it bankruptcy. i would call it bankruptcy for a big, though banks. i would have clawed back. i would fire the board and what about the equity and the unsecured -- they would cover the normal bankruptcy. this resolution of the arctic which starts to put the structure in place and the living will, to me, what it means is to give information to regulators that know how to do it. we operate aware of the world. the fdic has taken down a lot of

large banks, including wamu. you may remember american savings bank. it is more complex, updated. they need to know what happens to this legal entity or that off. what will you do if this happens? we have filed recently in an analysis how they go about dismantling at j.p. morgan that does not cost the taxpayer. we are in favor of one other thing that is if the fdic put money in -- banks should be dismantled and the names should be buried in disgrace. old testament justice here. if they cost the fdic money, they should be charged back to the other big banks. today, we pay -- it is a government program paid for 100% by j.p. morgan. during this crisis, we will pay them $5 billion. we are paying the fdic. it puts it on the other big banks to make sure rules are in place so we do not jeopardize

each other could >> if j.p. morgan became a big, dumb banks and was in financial difficulty, is your sense that it would be -- do not want to use the word dissolved. this circumstance would be concluded with j.p. morgan's demise and no cost to the taxpayer. >> yes. that is the objective. >> senator cole. thank you, mr. chairman. i understand j.p. morgan is lending more money to businesses and i appreciate that. however, your bank lending is not keeping pace with the deposits to are taking in. last year j.p. morgan reported it had $1.10 trillion in deposits. this of course is more deposits than any other bank in the united states. but the other big banks

reported loan to deposit ratios that are 10 to% 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 to deposit ratio lower than your ppeer banks because you are prioritizing these risky trading activities over lending? can we hope that you are going to focus more on lending in the american market? >> we are making all the good loans weekend. we are a global money-center bank. we have deposits from governments or around the world, from sovereign entities, from large corporations that can be taken out tomorrow. we have to keep liquidity. we have several hundred billion dollars right now invested in central banks in case the biggest companies call us up and

say send me $5 billion. we are a bank for people who can pay us. and we need a huge liquidity fund. >> the records indicate that your record is on loan to deposit ratios, your other big banks, their reported loan to deposit ratios are 10% to 20% higher than yours. that would seem to not square with your statement that you're wanting to lend but you do not have the customer. >> our middle-market loans are up to all% on average. our small business loans are up 52% said. corporations have a lot of choices out there. our mortgage was $40 billion, which was a huge number of new mortgages. what i am saying is we are not like all other banks. we need to keep a lot of cash around to deal with the immediate cash demands. when you talk about some of the biggest companies in the world, they can move $10 billion in the

day. >> i appreciate that. one final comment. the biggest banks with whom you are competing are generally described in the same way you describe yours. and their loan to deposit ratios are higher than yours. >> they are different for historical reasons. >> senate offices like ours often hear constituents who are trying to get a modification on their home loand to stave of foreclosures carrot they come to was because they are having trouble getting through to their lender. sadly is often common for constituents to say that the bank lost their paperwork. four years since the crisis began. , we are hearing about these mixups. as a constituent, who had along with j.p. morgan noted recently "i do not want to lose my house

because they cannot keep their paperwork straight." why have banks been unable to sort out these paperwork problems? >> i would agree. they should not lose a whole because we failed in their paper work. i will follow up on that one right away. we hired 20,000 people to deal with default modifications. we offered modifications of 1.2 million loans. we offered alternatives to foreclosures. we are doing a better, faster today. we put in more systems to deal with it. i have to confess we were not good that when the problems started. we were overwhelmed. >> i am sure we all agreed that the cio o ffice carries the complicated transactions. your employees are the smartest people in the industry to work for you. your bank undertakes such a complicated business on the 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 paper work promptly. it is the plight of the american homeowner -- should have the same attention that the bank gives to its cio office? >> yes. it should. we should do it properly and for anyone in this room that has issues that were not followed up, constituents, send it to meet or to our governor that will take care of it right away. >> thank you. >> senator. i think this has been instructive to the public. i think you told senator shelby that the purpose of hedging is to burn a lot of revenue in the event of a crisis. and i think you said that hedging worked to an extent in2008 for your company.

can you quantify the extent to which hedging worked in 2008? >> i do not recall the 2000 a year, but the synthetic credit portfolio did earn several billion dollars of income in the three-four years before it lost some of it. we can follow up. >> i think that is probably what we need to do. with the volcker rule, you said, you said you did not know what the volcker rule is. boy, if you don't, we don't. i think you know how it is being drafted. how would that have affected the cio's ability to do that hedging in 2008 and protect several billion dollars' worth of losses? >> i think you are allowed to portfolio head under the current structure. what it morphed into -- i think we should step back for one second. the senator will agree with me.

the important part of the volcker rule isn't portfolio hedging. it is the ability to effectively raise capital for companies and clients and investors. and we have the widest, best, the deepest and most transparent capital markets in the world. the capital markets of america are part of the great american economic business engine. we have the best and the world. we had some problems. we should recognize the best. how does that benefit you all that we have the best in capital markets? the cost of buying or selling shares stock is 1/10th of what it was years ago. the cost of doing is what is 1 /10th of what it was years ago. they do it at a cheaper price. which means a day -- fidelity and pimco, are doing things cheaper. that is a good thing for them. it allows corporations to issue

debt cheaper and quicker. a large corporation wants to issue $5 billion? it can be done in midday are around the world. they get a better deal at a cheaper price. the liquidity in the market keeps the spread low and benefits investors and issuers. the secondary markets and the primary markets are directly related. if the costs are lower here, if consumers and investors are educated about companies and we spend $1 billion educating companies, then the issuers can do it. the investor is not fidelity. it is the person fidelity is investing four. those are retirees, mothers, veterans, state municipal plans. it is a good thing. the volcker rule had so many pieces to it. don't think of it as binary. think of it as traffic laws. some cars should go 65. some should not. some lights should be bright. we have the widest, the cheapest

and best capital markets in the world. it would be a shame to shed that out of anger. all of these securities are different. if we are going to make liquid securities, we need to own that. we cannot turn them over quickly. we need to buy securities in anticipation of investor demand. we need to buy securities from you that we cannot sell to robert you want to sell right now. you are our client. we make a little bit of money every time it happens. not a lot. we do not take a lot of speculation. all we ask is go to the detail to make sure we get it right, that we end up with the widest, best, the bis capital in the world. i do not want to be sitting here in 20 years figuring out why it is elsewhere? >> i hope you can appreciate that i have five minutes. >> i'm sorry. >> second round here. ou told senator corker,

the financial system is a safer today. you cannot say dodd-frank helped at all. you went on to say that the regulation regime is not necessarily stronger today but it is more complex and you do not know what the jurisdiction is. have i paraphrase your testimony correctly? >> i think some of the thing dodd-frank as of made is safer, but the most important thing is higher capital, better risk management and a lot of the things that cause the problem do not exist anymore. that was because of market. subprime mortgages. >> you said something else that caught me by surprise and that was his testimony about that nobody got all of the pri arties in a room, democrats and republicans and talked about

what was needed and what needed to be fixed. did i hear you correctly? >> yes. >> did you volunteer to be part of that conversation? >> yes. we spoke to a lot of people. so all lot of people were interested. our folks did a lot of research carro. i know anger led to that. it would have been better with more collaboration. >> i'm going to follow up with a question for the record, but let me ask this question about the living will. are you telling this committee that j.p. morgan chase has a living will that is approved by government regulators? >> no. it has been drafted and given to the regulators. they will be responding to this,

several iterations to get it right. the have to coordinate with foreign entities. it will take a bit of time. >> in 2008-2009, your company benefited from half a trillion dollars in low-cost federal law, $25 in tarp loans. untold billions through the bailout aig that address your exposure to derivatives. with all that in mind, would n't j.p. morgan have gone down without the massive federal intervention directly and indirectly in 2008? >> i think you were misinformed. i think that misinformation is leading to the problems we are having today. j.p. morgan took tarp because we were asked to by the secretary of the treasury. the fdic in the room.

tim geithner, and ben bernanke. we did not need tarp. -- we wered that = told, take this tarp and stop the system from going down. they said, please use these facilities. and were not bailed out by aig. aig itself, we have a direct loss of $2 billion. we would have been ok. >> you have a difference of opinion with analysts of the situation whose feltt the aig bailout benefit you. this is not your hearing. i also only have five minutes. so let's agree to disagree but i think many analysts reached the conclusion if you applied that old testament justice in 2008, j.p. morgan would have gone down

and you would of been out of a job. it goes to the enormous frustration and how many companies in the history of the planet have been offered half a trillion dollars in low interest loans? not many. but some basic concept behind the volcker firewall is banks are in the lending business. do you share that basic philosophical idea? >> we are not in the hedge fund business. >> i want to turn to report. jamie dimon was elevated from treasury to chief investment officer, had reported directly to him, -- to seek profit by speculating in higher-yielding assets such as credit derivatives, according to half a dozen former executives of the company. that sounds like offering a hedge fund and doing so at your direction with government

insured deposits. >> here are the facts. we have $350 billion in assets. the average rate on aa plus. the average rating is two year. the average yield is 2.7%. those are characteristics of a very conservative portfolio. in addition, a we have $150 billion sitting in central banks. those deposits are considered conservative, not aggressive. in this other area, yes there is legitimate complaint. gu>> david olson said, this is jamie's new vision for the company. you disagree that was your instruction in building a cio unit. you disagree? >> i do not know what he means.

>> here is the general picture. it is one which the assets in cio expanded fivefold over four- fivefolyear period. . . .

. .

[captioning performed by national captioning institute] [captions copyright national cable satellite corp. 2012] >> finally, i hope today's hearing can reveal what lessons mr. jamie dimon and j.p. morgan chase and others have learned. this hearing will serve a valuable purpose if it prevents others from performing similar actions. and mr. dimon's own money was lost, but it was never heard from j.p. morgan chase who lost

$2 billion of the taxpayers money. there's a private lawsuit also thus far. >> this morning, opening statements will be limited to the chairman and the ranking member to allow more time for questions from the committee members. i will note that senator warner is a valuable member of this committee is absent to attend his daughter's graduation, but he will be submitting a statement and questions for the record. 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 institute our witness. mr. jamie dimon as the chairman of the board and president and

chief executive officer at j.p. morgan chase & co. mr. dimon, your full written statement will be included in the hearing record. please begin your testimony. >> chairman johnson, ranking member sell bi -- shelby i am here to talk about losses. these losses have generated considerable attention and while we're still reviewing the facts, i will do everything i can to explain. j.p. morgan chase provide financial services for businesses including deposit accounts, loans, capital mortgage advice and fundraising and other investments. let me start by explaining what the chief investment office does. like many banks, we have more

deposits than loans. at quarter end we held nearly a trillion in deposits and more in loans. excess cash was invested including mortgage-backed securities, high-quality securities and corporate debt and other overseas assets, and managing the assets and liabilities of the consolidated entities. in short it's to manage a nearly $250 billion portfolio. it also maintains a smaller synthetic credit portfolio whose original intent was to hedge against a systemic event like the financial crisis or euro zone situation. so what happened?

in december of 2011 as part of a firmwide effort we instructed t.i.o. to reduce risk-weighted assets and associated risks, to achieve this in a portfolio, they could have simply reduced the existing positions, instead, starting in mid january it embarked on a strategy that entail any positions that it did believe offset the existing ones. this strategy, however, ended up in a hard-to-manage risk. rather than protect the firm, it created new and potentially larger risks. as a result, we let a lot of people down, and we are sorry for it. let me tell you how it went wrong. these are not excuses. these are reasons. we believe what went wrong

these are detailed written testimony. strategy for reducing the synthetic portfolio was poorly conceived and in hindsight they did not tons risk they took. it should have been specific to that portfolio and much more gran your, i.e. only allowing a certain amount of risk on each risk being taken. it's gotten more scrutiny including myself, and a in response to this incident we've already taken important actions we've appointed entirely new leadership and we've made aggressive -- though it does not reduce the losses already incurred, it reduces the probability and magnitude of potential future losses.

we are also conducting an extensive review of this incident which our board of directors is overseeing. when we make mistakes we take responsibility and are often our own worst critic. we can never say we won't make mistakes, but we do believe this was an isolated event. we will not make light of these losses, but they should be put into perspective. we will lose some of our shareholder's money but no client or taxpayers' money was lost because of this. at quarter's end we will o'in loan reserves. regulatory capital standards, as of march 31, 2012, our ratio was 10.4%. our estimated tier one ratio is

at 8.2%. both are among the highest levels in the banking sector and we expect both these numbers to be higher at the end of the year. all our lines of business remain profitable and we continue to serve businesses. we expect our quarter to be solidly profitable. in short, they cushioned us against unexpected loss in one area of our business. while this is embarrassing, it will not detract us from our noigs serve clients in their communities around the globe. j.p. morgan chase raised capital and provided credit of over $1.8 trillion for consumer and commercial customers, up 18% from the prior year and also provided credit to u.s.

small businesses up 15% over the prior year and in the face of economic head winds we made the decision to step up and only bank to commit to lend billions to the states of california, new jersey and illinois. all of these activities come with risk, and just as we remain focused on serving our clients, we also remain focused on guarding against this incident in the future. we will emerge a strongers, smarter and better company. i'd also like to speak directly for a moment to our 260,000 employees, many of whom are probably watching today. i want all of them to know how proud i am of this company and all they do every day for their clients and communities. thank you and i welcome any

questions you might have. >> thank you, mr. dimon, for your testimony. as you begin questions, i ask the court to put 5:00 minutes on the clock for each member. >> mr. dimon, there was clearly a breakdown in risk management at your firm. what did you do when you made your -- in a teapot comment? why were you willing to be so -- months before publicly announcing the losses when it appears you did not have a full incing of the trading strategy? >> let me first say when i made that statement, i was dead wrong. i had been on the road and i called and had spoken to our risk officers, c.f.o., and they were looking into it.

there was some issues -- and i was assured by them, and i have the right to rely on them that they thought this was a small, isolated issue. they look at things like, how bad can it get and stretch it. and in no way did it look like it would get used as it did after april 3. >> mr. dimon, there were throorts the c.a.o. had scrapped the risk limit that would have record limits if they had exceeded $20 million. is this true? and if so, why was the limit removed? >> there was no loss of $20 million. >> what do you mean $20 million with an m? >> oh, million? >> no. i am unaware of a $20 million

loss limit. they had their own limits on credit, risk and exposure. march, some of those limits were triggered and that the point asked to stop taking risk heavily into the area. sometimes triggers loinlts do get hit. people then decide what to do about it. >> there have been concerns raised about the changes made in the risk model. when were regulators notified? why was the risk model changed? and does this change the true risks of the trading activity? >> so what i am aware of is some time in 2011 the c.i.o. asked to update their models partly -- model reviews are

done by an independent group. they start the process six months earlier, and in january did in fact put a new model. i should note that models change all the time and always adjust to try to be better. the models are run and approved by the model review group and implemented in january and did increase the amount of risk as it was able to take. on april 13, we're still unaware that the model might have contributed to the problem, so when we found out later on, we went back to the old model. so the old model was more accurate in hind site than we thought the new model was going to be. >> it isal suggested there were multiple warnings at the control of the c.a.o. that in your testimony states your

trading strategy was not reviewed outside c.a.o. you do, -- did you, mr. dimon, make the decision to accept the c.a.o. over any review of risk control outside of the unit? or why was no one watching? >> i think the first error we made was the c.a.u.'s had done so well for so long that there was a little bit of complacency. they did have their own risk committee and the risk committee was supposed to vet and overview. but that independent vet should have challenged more rigorously this synthetic portfolio. the synthetic portfolio itself should always have more scrutiny. they should have gotten the limits right from the start. >> mr. dimon, is the paid

structure as employees for the c.i.o. incentivize risky behavior that led to the massive trading loss instead of those who were reduced to bank risks. >> will you seek fallbacks from traders, management and executives involved in this trading debacle? >> i think when you speak of compensation, j.p. morgan to startwith, we did not have the five or six years special sevrens packages for change of control and parachutes. there was no one on the c.i.o. paid on the formula. they were not allowed to do what they wanted. they can't take too much high yield exposure. they were paid for what they

did for the whole company. when we pay people we look at their performance, the company's performance and their performance includes recruiting, training, integrity, all the things we need to do to make it a better company. so i don't believe the compensation made this problem worse. but and like i said -- your second question was corebacks. when the board finishes a review, the appropriate time to actually make those decisions, before you finish your final review you can expect to take proper corrective action, and i would say, likely, and it's subject to board, but it's likely -- >> mr. dimon, so that we would have some idea of what happened , could you explain a little

farther what really happened without divulging your proprietary interest. we don't want you to do that. in other words, you were managing risk. what were you managing? >> the biggest risk we take is loans. the excess deposits, we have a $250 billion portfolio. its average rate is double-a-plus and there's an unrealized earth of $7 billion and we also have $150 billion invested in cash in places around the world. >> but in this particular case, explain to us without getting into your proprietary area, what you were doing and what went wrong? >> so the synthetic credit

portfolio. >> and by synthetic credit portfolio what do you mean? >> the swaps and those things traded in the market. >> you took a position in them. >> yes. what it was meant to do was earn and maybe make a little bit of money. but if there was a crisis like lehman and euro zone it would reduce risk dramatically by making money. the in fact during 2008 and 2009, it did in fact invest in one of those. >> were you investing or hedging? >> i would say hedging at the time. and -- >> if credit went bad? >> if credit went really bad, this would do better. this would do well. that was original intent.

in january, february, march, we askedhem to do to reduce the risk. they created a far larger portfolio that had far more risk in it and they were far more complex risk and on april 5 we were not aware of that but shortly after we were and we then made an announcement and looked bat risk. >> to detail what really happened. we're talking in general terms now, would you feel better in a closed hearing or would you not like to divulge things because you still have an interest in proprietary interest. >> i would prefer not to divulge things because we told our shareholders on july 3 we intend to make far more disclosure about what happened and what we have done to reduce risk in the portfolio. >> i guess the question comes

up, is this hedging or proprietary trading? according to some press reports there's question about whether the chief investment office was supposed to be hedging risks or earning a profit. it's been reported this office contributed to nearly $4 million of your all-world profits. what was your expectation for this c.i.o. unit? was it supposed to hedge? >> the whole c.i. unit invests money and earns income. like i said, that's a broad array of diversified -- that is used to branch out and pay our people, so yes, it's supposed to earn a lot of revenue if there was a crisis. i refer to that as a hedge.

it was protecting the biggest risk of the company. there's two major risks of the j.p. morgan chase, dramatically rising interest rates and global type of credit crisis. those are the two biggest risks we face. so the hedge was meant to improve our safety and soundness, not make it worse. >> what went wrong? the way hedge was contrived or events beyond your control? >> i think the way it was contrived, it changed into something i cannot publicly defend. >> lessons learned. what have you as a c.e.o. of j.p. morgan, which is our largest bank, what have you learned from this debacle? >> i think that no matter how good you are, how confident people are, never, ever, get complacent in risk. challenge everything, make sure

those in risk committee are always asking about things and that you have granular limits saying when you make your mark. including things like liquidity risks, they are out of your control. we had those disciplines in place elsewhere, but we didn't have it here, and that's what caused the problem. >> thank you. >> senator shurma, thank you and foong and thank you for coming. my fist question is about risk committees. i was a proponent in dodd frank about increasing corporate governments and sought to having included a provision requiring all banks with over $10 billion in assets and non-bank financial firms and have a separate risk committee on the board that includes at

least one management expert >> as you know some questions have been asked about oversight in your -- you already had one, so you didn't need legislation to do it. but what went wrong with the committee and what can you suggest to the regulators as they form rules about the committee? why didn't you its job? >> well, the risk committee does ooh lot of work in conjunction to the audit committee and i think it's a little unrealistic for the committee to capture something like this. i would point out this risk committee took this company through the most difficult financial crisis of all time with flying colors, so the risk committee -- i would -- since

recently, we've had two new directors which also have sneerns financial markets. >> ok. so you teal risk committee, this was too small of an temperature for them? just give me a little more text for this. >> i think the risk committee reviews a lot of issues, regulations, requirements, they take the lead of management. >> to the step we were misinformed, we were misinforming them. >> ok. second question goes to the broader context. i think what frightens most people about what happened is not its effect on j.p. morgan chase but i think the question that bothers most people is what's to stop this from happening again and maybe being

a larger loss of the same time. but a well whalsed institution smaller than -- firms like lehman brothers. so were we just lucky that we found out about this one when we did? what is your assessment, as someone who knows financial industry, about the danger of this type of thing happening in other institutions that transnot as well capitalized as j.p. morgan chase and the affect on our financial system? >> we do have temperatures -- we do have identity ms already.

we do have items already. a lot of the restraint has already happened. >> what about non-banking institutions that don't have the same requirements but are engaged in similar activities that could cause a problem for the banks like yours? >> final point, the chairman asks this but it's about clawbacks. and i'm good hear there is a clawback policy. it seems to me the appropriate things to do when people make tens of millions of dollars for taking risks, and they do it moorely. and if there's a callback, there's an incentive can you tell us a little bit about the policy that you have for clawbacks. i know you don't want to talk

about individual cases, but tell us how it works, how widespread it is and how mandatory it is and that kind of thing. >> well, there's several layers but for senior people as most are, we can clawback for things even like bad judgment. we can claw back things like stock, care bonuses, so it's extensive the decision was to -- a lot of people walked away with a lot of money. in this particular case the board will review every single person involved and what part they did and didn't do and was it appropriate? >> is there a limit or is it discretionary and second and final question, has it been used thus far in your bank over the time you've had the policy? >> no.

the new policy hasn't been described thus far. it's somewhat limiting over what we paid her over the past two years. >> thank you mr. chairman and mr. dimon. last year testimony we were presented by the regulators, one of the tensions we face here is we want to be sure that we are adequately regulating our financial institutions, but we want to make sure that we also don't have the regulators running our private sector institutions. that testimony last week, conference troller curry from the occ said there were roughly on-site at j.p. morgan chase. is that correct? >> i believe so. yes. people say our primary focus in terms of perspective and policy

so make sure the banks are properly capitalizeded? and what other areas of oversight would be the most effective for us in terms of our regular tori restructure. >> regulators do what they can do but i think you have to give realistic objectives. i don't think realistically they can actually stop something like from happening. it's clearly management mistakes. so i think the most important thing you have to do is high capital, good liquidity standards, proper closures and governing and risk committees. all of those things won't stop mistakes but lit make them fewer and farther between.

i think you are not going to accomplish some of those things. >> thank you. terms of the capital structure and -- one of the things we learned the stret -- 80 billion and still be adequately capitalized, is that correct? >> we will still be adequately capitalized, but i wouldn't be the person standing in front of you right now. we are great at reviewing stress tests. the fed put us through a severe stress test. like 3% of unemployment and crisis in europe and markets as bad as what you saw after the lehman crisis. and we came through that with flying colors and stressed other scenarios. because there were others that you could have said affected

companies like the bank. but so much so to the extent that you never question j.p. morgan. >> well, thank you. and we have that kind of capital. and your current cure one capital is approximately $128 billion? >> i don't know the number offhand, but sounds approximately correct, yes. >> with regards to the volcker rule, some said it's not possible to distinguish between appropriate trading and hedging. if what we implemented, the posts baseball not on banks like yours. and if so how will we make that didges? >> i think it will be very hard to make a bright line distinction between trading and hedging. because you can look at almost everything we do and call it the other.

every loan we make, it's because of money. if we buy treasury bonds, we lose money, i lose money. i understand the intent of the volcker rule. i completely understand that. i think the devil is in the detail with how these rules are written to allow the good of the capital markets and not the bad. >> i'm happy to talk more on capital markets. tell me for a minute how you would describe that, what is a proper hedge in the volcker rule? >> something that i think should be asloud to protect the company in bad outcomes. >> or you can be exactly right. you can analyze that. so i do believe you should be allowed to have -- probes and think of the thing you do in

the growing short credit. >> thank you. >> senator reid. >> thank you mr. chairman. i think this is a very important hearing, because the issues as they are raised go right to the capability of large institutions to manage risks and complimenting that is the ability of regulators to oversight. i think it also is a strong case, in my view, for a very clear but very strong volcker rule. and also for standing up finally a director at the austin financial research, i know i've talked to chairman johnson and also ranking member shelby about that. let me ask you a question. this goes to rest management. in your proxy materials, risk

management seems to be the operation of the c.i.l. was this -- i know there were several changes, but investigating the c.i.o., the chief investment officer? >> we have a risk committee and the heads point to the head of the risk of the committee and the risk committees and head of the risk exposure will be out there. obviously that chain of command didn't work in this case either. so you can blame it on anyone in that chain that if we had been paying more attention to why there wasn't more -- we could have caught this and stopped it at this point.

there's an independent model review group that looks at a change in models. models are constantly being changed to -- and they never are totally adequate in capturing changes in businesses, concentration, liquidity and/or geopolitics. things like that. we don't trun business on models. models are one input. we should be looking at lots of other things to make sure you manage your risk properly. >> did you share or did the eoc inquire about the modeling in changing. for the -- for the record, was there -- >> we took it out and -- >> why didn't you change the model firm, why? >> well, the firm has hundred

of models. this one is very specific to a synthetic performance portfolio. >> let me get back to the e.o.c., did you bring it to their change? >> they often look at models. from models they actually do in extensive detail, i don't know about this one. >> if one of the practice sincere it's the chief investment officer's responsibility so look at the bar which changes more than other risk and their job as risk management and not generating profits by investing deposits. it seems that their model was loosened up considerably, giving them opportunity to engage in more risky activities. is that your conclusion? >> maybe i can. it puts in a thraveg allows

them to take more risk. we don't sazz of today believe in nefarious purposes. we believe it was done proper live by the independent modeling group. but once we saw that it didn't reflect current model we went back to the current model. >> the credit default swaps were first made to protect your loans outstand snling that was in the 2007-2008 situation which is a classic hedging. credit is so bad that you want be on the other side to ensure yourself against it. but then in 2003 the vet was switched, and now you started righter than protecting your credit exposures, so selling it

for credit protection. k4 changed immediately a bet on the directional market unrelated to your actual sort of credit exposure to europe, which looks a lot like the appropriate trading designed to carry as much profit as you can generate. which seems to be if this is simply a risk operation -- how can you be on both sides of the transaction and claim you're hedging? >> i think i have been clear which is the intent i'm not going to try to defend. under any name, whatever you call it, i will not defend it. it violated common sense in my opinion. i do believe people are doing it and thought they were maintaining a shore against a high-yield credit. but we now know they were wrong. >> but that leaves us in a

situation of how do we build in? build in rules and regulations that would prevent well-intentioned, extremely bright people from doing things that are detrimental. first of all, you've lost several billions of dollars and frankly the deposits that are ensured by the federal government and second you've lost a significant amount of value to your shareholders, and if there was one in place, they may not have been able to do this, because it clearly doesn't seem to be hedging customer risks or even their overall exposure or maximum exposure. >> i don't know what the volcker rule is. it hasn't been written yet and may well stop portfolio's that i'm morphed into. then it would have --

>> it's possible. i just don't know. >> thank you, very much. >> senator, >> thank you, mr. chairman, for having the hearing and mr. dimon for being here. and i wish we would have had one of these hearings prior to financial regulation and a lot of people focused in on this committee on issues that are relevant. mr. dimon, you mentioned the biggest risk a bank takes is making loans, is that correct? >> yes. >> that's the largest risk, and you have $7 billion in loans outstanding, zphrect >> yes. >> what would happen if you -- what would happen if you didn't have the ability to hedge that risk in ways that make sense not the way you did it? >> i think there are two things. one is smarle. which you might reduce the amount of risk you're taking?

>> now >> you can make fewer loans or less loans. more than that, you wouldn't be able to protect the company from a systemic event. we know they happen, so to me, i want to survive good times and bad times. you know, j.p. morgan's balance sheet allowed us to do good anything 2008 and 2009. if we couldn't protect ourselves i think we would have a hard timeal protecting clients. >> talking to regulators about why they to -- >> i would look at regulations like one of continues improvement. always get better. clarity. cleaner. but i think it's hard to have unrealistic expectations to capture things likethis.

>> a banker is always going to be ahead of a regulator, basically, and you're giving them the information used to regulate, so it's not easy to think the regulator is going to capture this. one of your peers at a large, large institution was in yesterday saying dodd frank really missed the mark. wed that huge amount of regulation taking place at the institutions and what we should have done is look at regulating the markets themselves. much of what happens in the markets takes place outside of the anatomies. let me ask you a question, is dodd -- we supported some elements. >> i know what you supported. has it made our financial system safer? >> i think parts of it in conjunction with higher capital

including -- is safer today than it was in 2007. >> i'm talking about -- i understand we have larger capital and all banks and boards are causing that to happen. i'm talking about the regular tori foreseen congress put in place, has it made our system safer? >> i don't know. >> ok. as i look back, we looked at the 20 largest institutions in the world. citizens 1990's. the japanese meltdown that occurred, 16 of the 20 are either government-owned or have had a significant amount of taxpayer money injected into them. so you look at what we have done, and people are coming out with all kinds of models now. tough hain i can model, glass steagalls being talked about. will you share with the

committee what sew sy the good an institution like yours is, and what a our financial institution would be like without these highly -- institutions and you're refound in as being one of the most -- one of the best c.e.o.'s in the country for financial institutions. you met this as a blip on the radar screen, but are these becoming too complex and with all the injections, what does that say about a an institution like yours? >> we have from small depeens large $27 million businesses. the top businesses employ 30 million and the other 26 million companies or so, there's a place for large companies and small companies. for people like us, we bank

some of the companies around the world, in 40 different countries. we can do $5 billion rolvers or raise money for america's fortune 100 companies. we are the largest banker to banks. we extend something like $23 billion in credit to smaller banks. and they need some of that. there's community banks. we can't do all the things community banks can do in their communities. there are some negative sides. the size of scale, whether it brings diversification. our diversification was a source of strength not weakness in this crisis. some of the things you don't want us to do, there's some negatives.

greed, arrogance, human being russ, lack of attention to detail. but if you do a good job, your clients are being served, and you win their business. so if we weren't doing some of these things for large global american companies, somebody else would. that's all. they buy these services because they need them not because we want them to buy them. we provide huge credit lines to them. >> so you believe a highly -complex service, you are providing because people need them and would buy them from someone else if you weren't there. we're quizzing you, 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 disappointment i've had is that we never

actually sat down republicans, democrats, businesses, and had real detailed conversations on what went wrong and what needs to be fixed. we still haven't fixed the mortgage markets, which is critical for the united states of america. we still haven't fixed some of the other credit parks. a lot of things, no subprime. no sid. and we could have a great financial system. americans built this machine as best in the world. it is the best in the world. we are all blessed to have it. and we should focus and get it working again as opposed to constantly shooting each other. >> thank you for calling the hearing and thank you for being here. >> thank you mr. chairman. you know, i listen to this, and i paraphrase shakespeare, a hedge or not a hedge, that's the real question.

and it seems to me that you call these trades that lost anywhere between $2 billion and $4 billion economic hedges, a temperature pist to the teapot which i now see that you said you regret. but really a hedge, as i understand it, doesn't create a loss without a corresponding gain. that's why you're hedging. and what seems to me that happens here is that you were pursuing a synthetic loan portfolio and selling c.d.s.'s, the crisis of 2008. and so really, you know, when you reduce a hedge or hedge a hedge, isn't that really gambling? >> i don't believe so, no. >> so this transaction that you said morphed, what did it morph

into, russian are you let? >> the morph is something i can't justify, that was just too risky for our company. >> too risky for your company which is one of the nation's finest, largest, well-capitalized banks. if it's too risky for your company, what stops this from being in the future too risky -- it ultimately creates a risk on the bank that takes that bank into the possibility of a run and ultimately becomes the collective responsibility of each and every american. that's what we're trying to prevent here. so i heard you talk about the balance sheet, and i'm glad to hear you say to senator schumer that we shouldn't take comfort. but in saying so, one way to think about this is i wonder

what your views do you regret calling the efforts to require banks to hold more money, quote unamerican," and "putting the nail in our coffin"? today you state to fort tres balance sheet of your bank as a way to prevent against the challenges, yet you railed against us when we were in fact trying to pursue greater capitalization of these banks. is that a regret you have? >> no. i support higher reform and higher capital and liquidity and oversight committees and going to clearing houses and supported proper transparency and supported a lot of things you requested. and we did not fight. when i mentioned the anti-american thing, i was talking about between dodd-frank and bozzal, the things that were being skewed against american banks. and we, american banks can't

have preferred stock? american banks -- that the requirement for banks to hold more money was unamerican? >> i did not. >> well, you know, i'd be happy to look at that again. i think you might want to review that. because 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 tax parpe doesn't become responsible. i think about the balance sheet you talk about. and i'd like to remind you that that balance sheet has a mote that was dug by taxpayers to the tune of $25 billion in bailout money in more than $250 billion in loans from the fed. so it seems to me that the american people are a big part

of helping to make your banks healthy. and the one thing that they -- that they would seek in return is to ensure that you're not working against the very so that you can reduce the risk so your shareholders can prosper and you can prosper and it will not be on the american taxpayer. >> i want a strong financial system like you do. we have supported a lot. there are thousands of rules and regulations. in giving informed advice, there are some we think don't make sense, and we think we're entitled to tell you about the ones that we don't think make sense. >> i think you're entitled to that. i also think the american people after making investments to yours and others that they

don't have to reach into their pocket gentle. >> senator? senator demint. >> i appreciate you voluntarily coming in to talk. with talk to is important that we talk about things happening in the industry. it helps us as we look forward and hopefully it will confront -- contribute to a best practice in the industry and we appreciate your continuous cooperation. we can hardly sit in judgment of your losing $2 billion. we lose twice that every day here in washington. we plan to continue to do that every day. it is comforting to know that even with a $2 billion loss in a trade last year, your company still had in $19 billion profit. we lost over $1 trillion in that same period. if we had a call back provision, none of us would be getting paid

here. the intent today is not to sit in judgment but to maybe understand better what happened. some of the questions have been very helpful. as you can tell, there's a temptation every time something goes a mess that we want to add a regulation. we have surrounded the banking industry with so many regulations and we still seem to have problems here and there. i think we need to recognize that you are a very big bank, the biggest in the world. you've got very big profits and periodically will have big losses. we need to look at that as part of doing business but also in the context of making sure, as the senator just said, that we

don't create additional risk for the taxpayer which you appear to be in much better physical shape than we are as a country. when no risk is required to make a profit. you are dealing with a lot of capital you have to put to work which certainly will experience profits and losses and general you done pretty well. i want to follow up on senator corker asking about the dodd- frank regulation which a lot of us are concerned about. a lot of us are frustrated bank managers and want to manage your business for you. we're not capable of doing that for what we have been given to manage. i would like to come away from the hearing today with some ideas of what you think we need to do, what we may be need to take apart the we have already done, to allow the industry to operate better and at the same time not put the american taxpayer at risk. we are honestly looking for some ideas as we look over the next year and hopefully we will be 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. we set up a system with more and more regulators, don't know who has jurisdiction over these areas. sometimes we deal with four and five regulators. i would propose a simple, clean regulatory system with intelligent design and that is not what we did. we created a complex system that no one can adjudicate between the various regulatory agencies and is not clear to me has the responsibility or the authority. >> in many industries i have worked in, they get together as peer groups to evaluate best practices and share information with each other. is that something you regularly do with your peers, other banks around the world, as to how you deal with risk and how this committee's work? is that going on?

>> we used to do more. we're constantly asking for feedback from regulators and send them a lot of analysis and detail. there is less collaboration among banks and regulators and among legislators than there used to be. it has become more adversarial. >> as we have seen, laws and regulations are not necessarily improving things. some of the things you have done voluntarily and some of the capital requirements, and i think it best practice, if we can 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 just leave you with anyone think, if you can 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 as a government institution.

thank you. >> senator brown. >> you have some 19,000 employees in the columbus area who are also my constituency 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 and london make too many risky bets. i want to ask you a series of brief questions. if you can possibly give a yes or no answer, i would appreciate that. to start with, if you could just give a yes or no, did you personally approve of the chief investment officer's trading strategy? >> no, i was aware but i did not approve the. >> did you personally monitor the chief investment officer? >> generally, yes. >> last week i asked in a

hearing about a series of questions of the occ about their oversight or lack of oversight of the trades in question and i got their answer this morning. their response was okay but a bid inadequate. they say they have five examiners and london who essentially divide part of their time examining your operations, the portfolio of assets in question. it is reportedly about $200 million which is bigger than the vast majority of banks in the united states. in april, one of your executives told investors that the treaty question were fully transparent to the regulators as part of our normalize reporting. the occ letter says the occ examiners were unaware of the level of risk occurring at your chief investment officer until april. was the occ told about the trades taking place in your cio office prior to the april 6 report?

>> we trto