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Senior executives at JPMorgan Chase appeared on Capitol Hill today. They were asked by a Senate subcommittee to explain how the firm lost more than $6 billion last year in a failed hedging strategy. The testimony comes one day after the subcommittee released a report saying the bank misled regulators and the public about the size of the losses. NPR's Jim Zarroli tells us more.
JIM ZARROLI, BYLINE: JPMorgan Chase CEO Jamie Dimon has already acknowledged that the bank screwed up big time by letting its traders lose so much money. And the firm has produced its own detailed mea culpa on what's been called the London whale incident. But the man who chairs the subcommittee, Michigan Senator Carl Levin, has continued to pursue the matter. Levin says the losses that JPMorgan Chase underscore how big a threat derivatives trades are to the financial system.
SENATOR CARL LEVIN: The whale trades demonstrate how credit derivatives, when purchased in massive quantities with complex components, can become a runaway train barreling through every risk limit.
ZARROLI: Yesterday, the subcommittee issued a 300-page report on the trades. The report says that as the losses began to grow early last year, the traders in the London-based unit took steps to conceal what was happening from regulators and the public. Today, Ina Drew, who formerly headed the unit, said she, too, had been in the dark about the losses.
INA DREW: Some members of the London team failed to value positions properly and in good faith. They minimized, reported and projected losses and hid from me important information regarding the true risks of the book.
ZARROLI: Drew is a central figure in the case. The Senate report says that when federal regulators began to raise questions about her unit's portfolio, Drew called to chew them out and assure them that the bank knew what it was doing. Today, looking pained and uncomfortable, Drew said she had been assured by the bank's risk control department that the losses were manageable.
DREW: The risk modeling group is an independent group staffed by very well-trained and educated PhDs who run the models. And I'm certainly very disappointed that it was not reviewed properly and delivered to me in poor form.
ZARROLI: When the scale of the losses became clear, Drew was among those executives who would lose their jobs. And the bank has worked hard to convince regulators and the public that it has learned a hard lesson. Executive Michael Cavanagh, who also testified today, was tapped to conduct an internal investigation.
MICHAEL CAVANAGH: Some of what we found was frankly very disappointing and does not reflect our institution at its best. That said, we have addressed the issues head on and are determined to become a better company because of this experience.
ZARROLI: Cavanagh said JPMorgan Chase has, quote, "refocused" the London unit was responsible for the trades and put more resources into risk management. But that wasn't enough for Arizona Senator John McCain, who expressed some skepticism that bank officials had paid enough of a penalty. At one point, Vice Chairman Douglas Braunstein told McCain that the bank's board had cut the pay of CEO Dimon and other executives.
DOUGLAS BRAUNSTEIN: They've clawed back compensation and they've reduced compensation for selected individuals.
SENATOR JOHN MCCAIN: For example, your compensation was reduced?
BRAUNSTEIN: Yes, Senator.
MCCAIN: From what to what?
BRAUNSTEIN: I moved from nine-and-a-half million in compensation in 2011 to five million in 2012.
ZARROLI: The Senate report also raises serious questions about the role of bank regulators. As the losses were mounting, the report said the bank simply stopped turning over data about the trades to the comptroller of the currency as it was required to do. And the comptroller's office didn't begin asking questions until it was too late. A spokesman for the office said it had been misinformed by the bank and that hampered its supervisory efforts. Jim Zarroli, NPR News. Transcript provided by NPR, Copyright NPR.