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EXAMINING BANK SUPERVISION AND 

RISK MANAGEMENT IN LIGHT OF 

JPMORGAN CHASE’S TRADING LOSS 

HEARING 

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

JUNE 19, 2012 

Printed for the use of the Committee on Financial Services 

Serial No. 112–136 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

SPENCER BACHUS, Alabama, Chairman 

JEB HENSARLING, Texas, Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, North Carolina 

JUDY BIGGERT, Illinois 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

SCOTT GARRETT, New Jersey 

RANDY NEUGEBAUER, Texas 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

MICHELE BACHMANN, Minnesota 

THADDEUS G. McCOTTER, Michigan 

KEVIN McCARTHY, California 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

MICHAEL G. FITZPATRICK, Pennsylvania 

LYNN A. WESTMORELAND, Georgia 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

NAN A. S. HAYWORTH, New York 

JAMES B. RENACCI, Ohio 

ROBERT HURT, Virginia 

ROBERT J. DOLD, Illinois 

DAVID SCHWEIKERT, Arizona 

MICHAEL G. GRIMM, New York 

FRANCISCO ‘‘QUICO’’ CANSECO, Texas 

STEVE STIVERS, Ohio 

STEPHEN LEE FINCHER, Tennessee 

BARNEY FRANK, Massachusetts, Ranking 

Member 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JOE DONNELLY, Indiana 

ANDRE ́ CARSON, Indiana 

JAMES A. HIMES, Connecticut 

GARY C. PETERS, Michigan 

JOHN C. CARNEY, JR., Delaware 

JAMES H. CLINGER, Staff Director and Chief Counsel 

(III) 

C O N T E N T S 

Page 

Hearing held on: 

June 19, 2012 .................................................................................................... 1 

Appendix: 

June 19, 2012 .................................................................................................... 83 

WITNESSES 

TUESDAY, JUNE 19, 2012 

Alvarez, Scott G., General Counsel, Board of Governors of the Federal Reserve System (Fed) ............................................................................................... 16 

Curry, Hon. Thomas J., Comptroller of the Currency, Office of the Comptroller of the Currency (OCC) ............................................................................. 9 

Dimon, Jamie, Chairman and Chief Executive Officer, JPMorgan Chase & 

Co. .......................................................................................................................... 40 

Gensler, Hon. Gary F., Chairman, Commodity Futures Trading Commission 

(CFTC) ................................................................................................................... 12 

Gruenberg, Hon. Martin J., Acting Chairman, Federal Deposit Insurance 

Corporation (FDIC) .............................................................................................. 14 

Schapiro, Hon. Mary L., Chairman, U.S. Securities and Exchange Commission (SEC) ............................................................................................................. 11 

APPENDIX 

Prepared statements: 

Baca, Hon. Joe .................................................................................................. 84 

Fitzpatrick, Hon. Michael ................................................................................ 85 

Alvarez, Scott G. ............................................................................................... 86 

Curry, Hon. Thomas J. ..................................................................................... 94 

Dimon, Jamie .................................................................................................... 110 

Gensler, Hon. Gary F. ...................................................................................... 114 

Gruenberg, Hon. Martin J. .............................................................................. 129 

Schapiro, Hon. Mary L. .................................................................................... 133 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Bachus, Hon. Spencer: 

Text of Title III of H.R. 3310, the Consumer Protection and Regulatory 

Enhancement Act .......................................................................................... 139 

Sherman, Hon. Brad: 

Bloomberg editorial entitled, ‘‘Dear Mr. Dimon, Is Your Bank Getting 

Corporate Welfare?’’ ...................................................................................... 160 

Alvarez, Scott: 

Written responses to questions submitted by Chairman Bachus ................. 163 

Written responses to questions submitted by Representative 

Luetkemeyer .................................................................................................. 171 

Curry, Hon. Thomas J.: 

Written responses to questions submitted by Chairman Bachus ................. 172 

Written responses to questions submitted by Representative 

Luetkemeyer .................................................................................................. 177 

Dimon, Jamie: 

Written responses to questions submitted by Chairman Bachus ................. 178 

Gruenberg, Hon. Martin J.: 

Written responses to questions submitted by Chairman Bachus ................. 181 

Page

IV 

Gruenberg, Hon. Martin J.—Continued 

Written responses to questions submitted by Representative 

Luetkemeyer .................................................................................................. 185 

Schapiro, Hon. Mary L.: 

Written responses to questions submitted by Chairman Bachus ................. 186 

Written responses to questions submitted by Representative 

Luetkemeyer .................................................................................................. 188 

(1) 

EXAMINING BANK SUPERVISION AND 

RISK MANAGEMENT IN LIGHT OF 

JPMORGAN CHASE’S TRADING LOSS 

Tuesday, June 19, 2012 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON FINANCIAL SERVICES, 

Washington, D.C. 

The committee met, pursuant to notice, at 9:30 a.m., in room 

2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the committee] presiding. 

Members present: Representatives Bachus, Hensarling, Royce, 

Lucas, Manzullo, Jones, Biggert, Capito, Garrett, Neugebauer, 

McHenry, Pearce, Posey, Fitzpatrick, Westmoreland, Luetkemeyer, 

Huizenga, Duffy, Hayworth, Renacci, Hurt, Dold, Schweikert, 

Grimm, Canseco, Stivers, Fincher; Frank, Waters, Maloney, Gutierrez, Velazquez, Watt, Ackerman, Sherman, Meeks, Capuano, 

Hinojosa, Clay, Baca, Lynch, Miller of North Carolina, Scott, 

Green, Cleaver, Moore, Ellison, Perlmutter, Donnelly, Carson, 

Himes, Peters, and Carney. 

Chairman BACHUS. The committee is called to order. This hearing will come to order. 

Opening statements will be limited to 10 minutes on each side 

as previously agreed with the ranking minority member. 

Today, the committee meets to examine bank supervision and 

risk management in light of the recent trading loss at JPMorgan 

Chase (JPMC). When America’s largest bank reveals it has suffered an unexpected loss of more than $2 billion, that understandably generates concern and raises questions not only about the 

bank’s risk management controls and corporate governance but 

also the action or inaction, as the case may be, of the regulators. 

While the size of the reported loss is a small fraction, just one 

one-thousandth of JPMorgan’s total assets, this episode serves as 

a reminder that no institution, no matter how well-managed, is immune from mistakes that are, to use Mr. Dimon’s words, ‘‘stupid, 

sloppy, and the result of bad judgment.’’ But, even more importantly, this should remind all of us about the importance of making 

sure it is the bank and the shareholders, not the taxpayers, who 

pay for such mistakes. 

Fortunately, these losses are not being borne by the taxpayers or 

customers or clients of the bank, but by JPMorgan and the shareholders. 

Since the losses were disclosed, the company has lost $23 billion 

in market capitalization and suffered reputational harm in the 

2 

marketplace; and employees involved in the problematic trades 

have lost their jobs, at least some of them. 

This is how the system is supposed to work: Those who take the 

risk are the ones who suffer the loss or realize the gain. It stands 

in sharp contrast to the regime of taxpayer-funded bailouts with 

privatized profits and socialized losses we have experienced in the 

cases of AIG, GM, Fannie Mae, Freddie Mac, and Solyndra—could 

we have order among some of the staff and the audience? Thank 

you. 

Because the bank has more than sufficient capital, taxpayers are 

protected from a bailout, and the overall financial system is protected from being brought down by the mistakes of an institution 

that is deemed too-big-to-fail. That is why the most important lesson to be learned from this incident has nothing to do with any the 

400-plus rules found in the 2,300 page Dodd-Frank Act. The most 

important lesson is how central capital is to the safety and soundness of individual banks and our overall financial system. There is 

no capital or liquidity problem at JPMorgan, and I think that is a 

primary concern of the regulators. You are to be complimented that 

you have ensured that there is sufficient capital at that institution. 

A bank with sufficient capital is able to absorb losses, whether 

the losses are caused by external factors beyond the institution’s 

control or internal problems caused by poor risk management. A 

bank with sufficient capital is not a threat to the financial system 

even if regulators fail to do their jobs. And a bank with sufficient 

capital can take risks without putting taxpayers in jeopardy. 

Just as JPMorgan should be and is being held accountable for its 

risk management failures, accountability must also be demanded of 

the Federal regulators who oversee the bank’s activities. Unfortunately, because Dodd-Frank failed to consolidate and streamline 

the current convoluted and chaotic regulatory structure as House 

Republicans proposed, achieving regulator accountability is every 

bit as important now as during the height of the financial crisis. 

How inefficient and fragmented is the current regulatory framework? Sitting before us today are five different regulators, all of 

whom have some supervisory responsibility over these trades and 

several of whom have examiners embedded in JPMorgan but none 

of whom, apparently, was either aware of the bank’s hedging strategy or raised concerns. 

Perhaps complexity of the trades of the regulatory structure and 

of the rules itself makes it impossible for any individual regulator 

to adequately do their job. After all, the Volcker Rule proposal is 

by itself staggering in its length and complexity. And more than a 

month after the loss was disclosed, the regulators cannot say 

whether the Volcker Rule would have prevented JPMorgan from 

making these trades. 

Contrast this complexity with the simplicity of capital. Capital is 

our greatest protection against the systemic risk posed by institutions that are too-big-to-fail. 

I’m pleased we will have the opportunity to discuss this today 

with our witnesses, and I thank each of them for being here. 

Before closing, once again I want to emphasize the point that 

JPMorgan and its shareholders—not the bank’s clients, not the depositors, and more importantly, not the taxpayers—are the ones 

3 

paying for the bank’s mistakes. This is how the system is supposed 

to work, and it has. 

I now recognize the ranking member for his opening statement. 

Mr. FRANK. I will begin by confessing that my memory appears 

to have failed me with regard to the proposals from my Republican 

colleagues to supervisory consolidation. I do know that the structure we inherited when we took over in 2007 was a little bit more 

complex than the current one. We did in our legislation abolish the 

OTS—or, rather, merge it with the OCC. But I do not remember 

during the 12 years of Republican rule that any such consolidation 

proposal came forward. I apologize for the lapse in memory. I am 

sure they will remind me of it if one existed. 

Nor do I remember a significant proposal to consolidate during 

the consideration of the bill. 

I acknowledge there was a major problem here. The biggest problem is that we have a separate SEC and CFTC sharing jurisdiction 

over derivatives. I would like to have been able to get rid of that. 

I do not think it has ever been politically possible, given the cultural differences within our country that it reflects. 

Now on to more serious subjects. To me, this is not a hearing 

about JPMorgan Chase. They are an example of the larger issue, 

which is the effort by my Republican colleagues, with help from 

some in the industry, to re-deregulate derivatives. That has been 

a drive that they have made. 

Now they haven’t done it head on, because they do believe there 

is some popularity in the country for the notion that there should 

be some regulation, that we should undo the error of 2000, when 

Senator Gramm led the charge for a total de-regulation. 

But here is where we are today. As we sit here now, the Appropriations Committee will be voting shortly on the budget proposed 

for next year for the Commodities Futures Trading Commission 

(CFTC) which will, incredibly to me, reduce the amount they have 

from this year to next year. So while there was going to be criticism of the CFTC for not doing rules quickly enough, for not doing 

enough at MF Global, for not washing the windows of people’s cars, 

and all other things, this Republican Majority is prepared to reduce 

their funding. They will be given by the Republicans $180 million— 

I stress ‘‘million’’ because with regard to derivatives, that is the 

only time it is ‘‘million’’ and not ‘‘billion.’’ The Senate fortunately 

has acted to do the full funding, and that is one of the issues. 

Secondly, as Mr. Gensler addresses in his testimony, this committee, over my objection and the objections of many of us, voted 

to exempt from regulation the derivatives transactions conducted 

by the foreign subsidiary and American institution, i.e., JPMorgan 

Chase’s London operation, AIG, and others. So there were other 

bills that they have been trying to put forward, too. Some take 

small pieces and make some sense. Some try to lock in what could 

be done better, more flexibly administratively. 

But let’s be clear: This is the issue. And the relevance of 

JPMorgan Chase is that it shows this. JPMorgan Chase is considered to be a very well-run bank. If in a very well-run bank, you 

can get this loss of several billion dollars—$3 billion and counting, 

we are told—in a fairly short period of time, it is an indication of 

the problem with derivatives. 

4 

JPMorgan Chase, Mr. Dimon tells us, has a fortress balance 

sheet. But not every institution has a fortress balance sheet. Some 

institutions may have a picket fence balance sheet or a chain link 

balance sheet. And, yes, we would like all of them to get up there, 

but we are not all there yet. 

So the notion that we should underfund the main regulator on 

derivatives, that we should exempt foreign subsidiaries from it, as 

Mr. Gensler has pointed out incentive for American institutions to 

move overseas, these are very grave errors. And that is the question. 

And the very fact that JPMorgan Chase and Mr. Dimon, a very 

well-regarded chief executive, was taken by surprise on this, it got 

out of his control, I believe that if you look at the various lines of 

business of JPMorgan Chase and other banks, you would find it 

would be unlikely that this could happen in any other line of business, that derivatives are particularly complex, highly leveraged, 

and—until our legislation is fully implemented, if the CFTC is ever 

given the ability financially to do it—obscure. 

And that is the point. This is an example and, yes, we are not 

micromanaging JPMorgan Chase. What we are saying is the fact 

that Mr. Dimon and this bank were taken by surprise and were not 

able—lost so much money so quickly in derivatives, didn’t fully understand what they were doing—and I think it is relevant—and 

then made the choice when they were confronted with a problem 

not to try to wind the position down but in fact to expand the use 

of derivatives so that good derivatives would come to the aid of bad 

derivatives, multiplying the error, these are arguments for the kind 

of regulation we need. 

As I said, it did not cause a systemic problem here, but waiting 

until it happens in an institution or in a pattern that causes systemic problems would be a very grave error. So I intend to focus 

on this, and I believe many on our side will. 

The question is, does this not argue against the proposal to deregulate derivatives? And what we see on the part of our Republican colleagues is a systemic, piece-by-piece, bite-by-bite effort to 

render us unable to regulate derivatives, to go right back to where 

we were before the terrible crisis of 2008. 

Chairman BACHUS. I thank the ranking member. 

The chairwoman of the Subcommittee on Financial Institutions, 

Mrs. Capito is recognized for 1 minute. 

Mrs. CAPITO. Thank you, Mr. Chairman. 

We are here today to learn about how the risk management 

lapses at JPMorgan led to over $2 billion in losses. Normally, the 

losses of a private company would not be something that would 

come before congressional hearings. However, we know that DoddFrank failed to end too-big-to-fail and in fact codified it into law. 

Therefore, institutions like JPMorgan are still viewed by market 

participants as being systemically important firms that may be 

bailed out by taxpayers in times of extreme distress. 

Although no taxpayer dollars were at risk in this case, as long 

as too-big-to-fail exists in our markets, this committee should be 

vigilant in oversight to ensure regulators and private firms are employing sufficient risk management models. 

5 

We know the $2 billion loss did not pose a threat to the system 

or the firm because as of March 31, 2012, they were holding $128 

billion of Tier 1 Capital. The questions I have: A less-well-capitalized firm, could they survive the loss? Is there transparency in the 

system? As far as the regulators go, there are five regulators here 

to talk about this, but why was this not seen by all five? Why was 

it not shared if it was seen? 

I yield back. 

Chairman BACHUS. Thank you. 

Ms. Waters, the ranking member of the Capital Markets Subcommittee. 

Ms. WATERS. Thank you very much, Mr. Chairman. I thank you 

for this hearing. 

I think that Mr. Frank has set the tone and direction for this 

hearing, and I would like to continue in that vein. 

Before we get into the specifics of the circumstances surrounding 

JPMorgan Chase’s trading loss, I think it is important to remember 

the context underlying this hearing. We are approaching the 4-year 

anniversary of the most significant financial crisis since the Great 

Depression. Millions of American families have lost their homes to 

foreclosures, many of which were completed with robo-signed or 

otherwise fraudulent paperwork. For those who remain in their 

homes, individuals have lost trillions of dollars in housing wealth, 

as well as losses to their retirement accounts and college funds. So 

it is within this context that we hold this hearing today. 

Let’s make no mistake. This is not just about a $2 billion or $3 

billion dollar trading loss at JPMorgan Chase. It is about the $10 

billion or the $15 billion or the $50 billion loss that could come 

next, either at JPMorgan or any other bank that is backed by the 

U.S. taxpayer, if we don’t stand up for financial reform. 

Fortunately, we passed Dodd-Frank to respond to this crisis. But, 

admittedly, nearly 2 years since the passage of the Act, we are still 

waiting for many of its provisions to be finalized. 

Industry complains about all the lingering uncertainty over 

Dodd-Frank, but the truth is that the industry lobbying is a central 

reason for these delays. As I have said before, there is a death-bya-thousand-cuts approach to undermining financial reform, which 

includes pushing bills to undermine Dodd-Frank right here in Congress, lobbying our agencies to weaken the rules, and suing our 

regulators when they don’t like the rules they eventually do put 

forward. 

Many of my Republican colleagues here at the House are 

complicit in this effort by failing to give the regulators the funding 

they need do their jobs. So I want to implore the regulators here 

today to resist the pressure they face to weaken the rules and get 

their work done and finish their rulemaking. Otherwise, we may 

sit here a year from now wishing that we would have acted just 

a bit faster to prevent the next financial blowup. 

I yield back the balance of my time. 

Chairman BACHUS. Thank you. 

Next, the chairman of the Subcommittee on Capital Markets, Mr. 

Garrett, for 1 minute. 

Mr. GARRETT. I thank the Chair. 

6 

The recent trading loss at JPMorgan is obviously regrettable, 

and our banking supervisors in charge should be examined themselves and asked what exactly happened. But, I am a little surprised still about the hemming and hawing that we have heard by 

my colleagues on the other side of the aisle. When a private business loses money, when the institution that we are all in right here 

is losing billions of dollars literally every day—there was no shortage of outrage from my friends on the other side of the aisle when 

the private sector loses money. 

So it makes you wonder, where was the outrage when Bear 

Stearns was bailed out with billions of dollars, and Republicans 

asked the former chairman for a committee hearing to hold a discussion to look into it, and we never had the hearing. 

Where is the outrage when Fannie Mae and Freddie Mac lose a 

billion dollars every quarter now, and there is still no outrage. 

Where was the outrage from the other side of the aisle when over 

half a billion dollars of loss to the President’s green energy tax policy like Solyndra, where is the outrage? 

A $2 billion loss is certainly significant, but in a capital society, 

that sometimes happens. Unfortunately, my colleagues on the other 

side of the aisle continue to demonize losses in the private sector 

but fail to take a look inwardly at the losses sustained to the taxpayers every day here in Congress. 

I yield back. 

Chairman BACHUS. Thank you. 

Mr. Frank, for 30 seconds. 

Mr. FRANK. Yes. It is interesting that the previous speaker 

talked about Fannie and Freddie and started to say—I would like 

to listen to the tape; he didn’t finish the sentence—we are no further then we were before. The gentleman is the chairman of the 

subcommittee that has jurisdiction over Fannie Mae and Freddie 

Mac and has been since January of last year, and nothing has come 

to the full committee to change that. So when the gentleman laments the problems in Fannie Mae and Freddie Mac as continuing, 

he is, I guess, confessing his inability to do anything about it. 

In fact, when we were in power, we did accede to the wishes of 

the Bush Administration that put Fannie and Freddie in a conservatorship. That is as far as it went. And since January of last 

year, under the gentleman’s chairmanship of the subcommittee, 

nothing has happened. 

I yield back. 

Chairman BACHUS. Mr. Neugebauer, for 1 minute. 

Mr. NEUGEBAUER. I thank the chairman. 

I think the point has been made that taxpayers didn’t lose any 

money. The shareholders lost $23 billion in market value. A colleague from New Jersey pointed out that today, local taxpayers will 

go $3.6 billion in the hole. 

I think the two items that I want to focus on during this hearing 

are, one, the regulatory issue, where we had embedded regulators 

in these entities and we didn’t seem to catch this issue. And it is 

a point that I have been trying to make in a number of hearings 

we have had in my committee is that, when we have regulatory 

failure, it brings to question—a lot of people call for more regulaVerDate Nov 24 2008 15:49 Mar 13, 2013 Jkt 076107 PO 00000 Frm 00010 Fmt 6633 Sfmt 6633 K:\DOCS\76107.TXT TERRI
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tions and more regulators. The question is, don’t we just need the 

regulators to do their job? 

And I think the other issue that is concerning is the disclosure 

and transparency of some of these trades and what members of the 

executive management of these companies are saying. We had, just 

a few days before this problem became a real issue, the CEO saying this is like a tempest in a teapot. We also had the CFO of MF 

Global saying, just a few days before that company went bankrupt, 

that they have never been in better shape. 

So I think these kind of issues are important issues that we need 

to discuss today. 

Chairman BACHUS. Mrs. Maloney for 1 minute. 

Mrs. MALONEY. Thank you, and welcome to the regulators. 

Since the financial crisis, we have worked to improve regulation 

of the financial industry. The basic questions today are: Are we on 

the right track to prevent another 2008 from happening? Do regulators now have the tools to prevent another crisis? And are CEOs 

managing their institutions with the lessons they learned from 

2008? Why were the losses incurred in the London unit? Could 

they have been incurred in New York as easily? By every indication, JPMorgan Chase is a well-managed firm. So if this trading 

loss could happen there, it could happen at another large financial 

institution. 

Mr. Dimon testified last week that there were parts of DoddFrank he supported and parts that needed to be clarified, not overturned. I think the industry, regulators, and policymakers can 

agree that the Volcker Rule, including the market-making provision, needs to be as clear and straightforward as possible; and I believe it should be put in place as soon as possible. 

Thank you. 

Chairman BACHUS. Thank you. 

Mr. Hensarling, vice chairman of the committee, for 2 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman; and thank you for 

holding a very important hearing. 

I would like to associate first my comments with that of the gentleman of New Jersey. I do find it somewhat interesting, in an institution that unfortunately now witnesses serial trillion dollar annual deficits, as an order of magnitude of $2 billion, although certainly a significant sum, seems to pale in comparison; and so I am 

somewhat curious about certain Members’ levels of outrage. 

When the news broke about the $2 billion trading loss at 

JPMorgan, many said, ‘‘I told you so. We needed the Volcker Rule.’’ 

Some of us also may reflect, ‘‘I told you so.’’ Maybe we don’t need 

institutions in America that are too-big-to-fail. 

But, unfortunately, Mr. Chairman, as you well know, DoddFrank has codified too-big-to-fail. With the ability to designate systemically important financial institutions, we codify too-big-to-fail 

into Federal law. Empowering the FDIC to wind down these institutions and allowing them to borrow the FDIC up to the book value 

of the institution from taxpayers, an amount that could be outstanding, in the trillions of dollars again, we have codified too-bigto-fail. And, Mr. Chairman, before we get too far down the DoddFrank road, it is time for this Nation to reexamine this. 

8 

In addition, I think we should be very careful about outlawing 

risk. Without risk, we do not have a rate of return. Without a rate 

of return, we do not have investment and we do not have jobs in 

an economy that 31⁄2 years after the President has taken office still 

suffers and our constituents are still in search of jobs. 

So I thank you for calling the hearing. I look forward to hearing 

the testimony of the witnesses. Thank you. 

Chairman BACHUS. Thank you. 

Mr. FRANK. How much time do we have remaining? 

Chairman BACHUS. One minute. 

Mr. FRANK. Mr. Capuano. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Mr. Chairman, I had a wonderful opening statement, but I guess 

I have been thrown off it. 

If you keep saying the same thing over and over and over, regardless of whether it is true or not, apparently it will become fact. 

I want the Red Sox to win, so the Red Sox are going to win. But 

they are still in last place. 

You can say it all day long, but Dodd-Frank did not codify toobig-to-fail. Just the opposite. It prevented it from happening in the 

future. 

And it is amazing. Where was the outrage? You must have 

missed the hearings we had. It made me a movie star, Mr. Garrett. 

‘‘Inside Job’’ made me a movie star by expressing the outrage of the 

American people when we were on that side of the aisle in the Majority passing the most important bill in a lifetime in the DoddFrank bill to express outrage the way we are supposed to through 

legislation. The legislation that you and your friends have decided 

to vote against, to try to kill at every opportunity, to underfund, 

to make sure that the regulators cannot do their job, and you won’t 

even give them the time to put the regulations in place to see if 

they happen. 

The truth is I am not outraged by this particular loss, because 

the numbers are relatively small in comparison to other things. 

However, I do think it is important to ask thoughtful, insightful 

questions about what happened— 

Chairman BACHUS. Thank you. 

Mr. CAPUANO. —why they happened, and how we can prevent 

them from happening in a bigger way in the future. That is the 

outrage. 

Chairman BACHUS. Thank you. 

I can see we are not quite ready to break into a ‘‘Kumbaya’’ moment. Welcome to the serenity of the Financial Services Committee. 

This concludes our opening statements, and without objection, all 

Members’ written statements will be made a part of the record. 

The Chair wishes to remind our guests that the manifestation of 

approval or disapproval, including the use of signs and placards, is 

a violation of the rules which govern the committee; and the Chair 

wishes to thank our guests in advance for their cooperation in 

maintaining order and decorum. 

Let me say that there is agreement, I think, among all the panel 

that your agencies are all functioning under an increased workload, 

a greatly increased workload, and that you are facing many chalVerDate Nov 24 2008 15:49 Mar 13, 2013 Jkt 076107 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 K:\DOCS\76107.TXT TERRI
9 

lenges with not only the economy but with adopting new rules and 

increased supervision, and that you are functioning under budgetary restraints. Particularly, I think the SEC and the CFTC, your 

workload has greatly increased, and your budget doesn’t reflect it. 

Mr. FRANK. Mr. Chairman, parliamentary inquiry? Are we going 

to hear the opening statements? 

Chairman BACHUS. Yes, we will do that right now. 

Mr. FRANK. Is there time for opening statements? 

Chairman BACHUS. Oh, right now would be great. 

Mr. FRANK. Okay. I thought you seemed to be— 

Chairman BACHUS. Oh, no, not at all. I was just introducing the 

first panel, thanking them for their attendance, and acknowledging 

that they— 

Mr. FRANK. Yes, but that shows preferences. 

Chairman BACHUS. Well, it is the prerogative of the Chair. 

Mr. FRANK. Hold on, Mr. Chairman. The Chair is under the same 

time limits as any other Member. 

Chairman BACHUS. I am saying if you introduce the panel—you 

wish to protest. 

All right. We will go forward and remind the witnesses that, 

without objection, your written statements will be made a part of 

the record, and you will each be recognized for a 5-minute summary of your testimony. 

Our first panelist is Thomas Curry, Comptroller of the Currency. 

This is your first appearance before our committee since you were 

sworn in as Comptroller in April, and we look forward to a productive working relationship with you, as we did at the FDIC, and we 

welcome your attendance. 

Thank you, Mr. Curry. 

STATEMENT OF THE HONORABLE THOMAS J. CURRY, COMPTROLLER OF THE CURRENCY, OFFICE OF THE COMPTROLLER OF THE CURRENCY (OCC) 

Mr. CURRY. Thank you, Chairman Bachus, Ranking Member 

Frank, and committee members. I appreciate this opportunity to 

discuss the OCC’s perspectives on JPMorgan Chase’s losses. My 

written testimony also includes background on our approach to supervising large banks and our efforts to raise supervisory expectations on these institutions. This material provides important context for understanding how we are increasing our awareness of 

risks facing banks and the banking system, ensuring these risks 

are understood and well-managed, and raising our expectations for 

governance and oversight, capital, reserves, and liquidity. 

It will take some time to achieve these objectives, and we must 

be vigilant in maintaining our course. That course leads towards 

strong, effective supervision and towards improved soundness of 

our banking system so that it can fairly and effectively serve its 

customers and communities. 

The OCC is the primary regulator of JPMC’s national bank 

where the transactions leading to its losses occurred, and we are 

responsible for the prudential supervision of the bank. In early 

April, information became available indicating risks in certain activities conducted within its Chief Investment Office. In response, 

OCC examiners met with bank management to discuss the bank’s 

10 

transactions and the current state of the position. OCC examiners 

directed the bank to provide additional details regarding the transactions, their scope, and risk. 

Our examiners were in the process of evaluating the bank’s current position and strategy for risk reduction when, at the end of 

April and during the first days of May, the value of the position 

deteriorated rapidly. As the positions deteriorated, discussions 

turned to corrective actions and steps necessary to mitigate and reduce the bank’s position. 

In response to these events, we have undertaken a two-pronged 

review of our supervisory activities. The first component focuses on 

evaluating the adequacy of current risk controls at the bank informed by their application to the positions at issue. We are actively assessing the quality of management and risk management, 

board oversight, the types and reasonableness of risk measurement 

metrics and limits, the model governance review process, and the 

quality of work by the independent risk management team and internal auditors. 

We are also assessing the adequacy of the information and reporting provided to bank management and to the OCC. Quality supervision is dependent on the quality of information available to 

examiners. The second component evaluates the lessons learned 

from this episode that could enhance risk management processes at 

this and other banks. Consistent with our supervisory policy of 

heightened expectations for large banks, we are demanding that 

the bank adhere to the highest risk management standards. 

We are not limiting our inquiry to the particular transactions at 

issue. We are assessing the adequacy of risk management throughout the bank. We are using these events to broadly evaluate the 

effectiveness of the bank’s risk management within its CIO function and to identify ways to improve our supervision. If corrective 

action is warranted, we will pursue appropriate informal or formal 

remedial action. 

While the losses raise serious questions and may affect the 

bank’s earnings, these losses do not present a solvency issue. 

JPMC’s national bank has approximately $1.8 trillion in assets and 

$101 billion in Tier 1 common capital. It has improved its capital 

reserves and liquidity since the financial crisis, and those levels are 

sufficient to absorb this loss. 

It is also worth noting that this loss does not threaten the broader financial system. 

There has been much discussion about whether these JPMC activities would be permissible under the proposed Volcker Rule. 

While it is premature to reach any conclusion before our review is 

complete, this episode will certainly help focus our thinking on 

these issues and help regulators ask fresh questions. 

Before closing, I want to stress my commitment to strong supervision and to taking every opportunity to improve how we accomplish our mission. This commitment will be a theme that runs 

throughout my tenure as Comptroller of the Currency, and I look 

forward to answering your questions. 

Thank you. 

[The prepared statement of Comptroller Curry can be found on 

page 94 of the appendix.] 

11 

Chairman BACHUS. Thank you, Comptroller, for that excellent 

statement. 

SEC Chairman Schapiro, you are recognized for your 5-minute 

statement. And happy birthday. 

Ms. SCHAPIRO. Thank you. 

Mr. FRANK. Mr. Chairman, I ask unanimous consent that we silently insert ‘‘Happy Birthday’’ into the record. 

STATEMENT OF THE HONORABLE MARY L. SCHAPIRO, CHAIRMAN, U.S. SECURITIES AND EXCHANGE COMMISSION (SEC) 

Ms. SCHAPIRO. Thank you very much. 

Chairman Bachus, Ranking Member Frank, and members of the 

committee, I appreciate the opportunity to testify on behalf of the 

Securities and Exchange Commission regarding the significant 

trading losses announced last month by JPMorgan Chase. 

On May 10, 2012, JPMorgan Chase, a bank holding company with $2.3 trillion in consolidated assets, announced it had incurred 

a $2 billion loss stemming from trades executed by its Chief Investment Office. The company also stated that it could face additional 

losses. 

The losses reported by JPMorgan appear to have occurred in the 

bank’s London branch and perhaps in other affiliates, but not in 

the broker-dealer subsidiary that is directly supervised by the SEC. 

Nevertheless, as a publicly held company, JPMorgan is subject to 

SEC reporting requirements and must disclose certain market 

risks in its annual and quarterly reports. This report includes lineitem requirements for disclosure of specific information about risk 

as well as principles-based disclosure about the risks and uncertainty companies face. 

Although the Commission does not discuss investigations publicly, I can say that in cases of this nature, the SEC’s primary authority relates to the appropriateness and completeness of the entity’s financial reporting and other public disclosures and its financial accounting and internal controls over financial reporting. 

Under an SEC rule that requires quantitative market risk disclosure, companies are permitted to use one of three alternatives to 

disclose these risks. One of those options is Value at Risk, or VaR, 

disclosure that expresses the potential loss in future earnings, fair 

values or cash flows of market-sensitive instruments over a selected period of time and the likelihood of losses resulting from 

changes in market factors. 

Market risk must be disclosed annually as of the end of the company’s fiscal year. In addition, on a quarterly basis, the company 

is required to provide discussion and analysis of the sources and 

effects of any material changes in the market risk reported at the 

close of the previous year. 

If a company chooses to use VaR to comply with its market risk 

exposure requirement, it must also disclose any changes to key 

model characteristics and to the assumptions and parameters used 

as well as reasons for the change. Changes to the scope of the instruments included within the model and the reasons for those 

changes must be disclosed as well. 

The company also must provide qualitative disclosure of primary 

market risk exposures and how it manages such risks. Like the 

12 

quantitative disclosure, qualitative disclosures are required annually, with material changes reported quarterly. 

Generally Accepted Accounting Principles (GAAP) also necessitate detailed information about derivative instruments in the 

notes to the financial statements. The mandated disclosures include aggregating information regarding volume, fair value, maturity and credit risk, qualitative information about the entity’s objective in holding the instruments, and a discussion of risk management. 

If there are compensation policies and practices that create risk 

and are reasonably likely to have a material adverse affect on the 

company, the SEC’s rules also call for disclosure of the policies or 

practices as they relate to risk management and risk-taking incentives in the company’s annual proxy statement. 

Our rules also require that the proxy statement contains specific 

disclosure of the board’s role in risk oversight. 

In addition, certain principles-based rules require disclosure of a 

broad range of risks, including a discussion of known trends, 

events, demands, commitments, and uncertainty that are reasonably likely to have a material effect on financial condition or operating performance. 

This provision would mandate disclosure, for example, if a company was experiencing trading losses that are different from past 

experience and, as a result, its current year results are likely to be 

materially different from the past. 

Similarly, SEC rules require companies to describe the material 

risks they face and how particular risks affect the company. All 

disclosures must be complete and not misleading. 

In conclusion, although the trading losses of JPMorgan do not 

appear to have occurred in an entity directly supervised by the 

SEC, the examination and review of the causes and implications of 

the trading losses are ongoing. Once we have a fuller understanding of these issues, we will be in a better position to determine whether additional regulatory or legislative action is appropriate. 

And I am, of course, pleased to answer your questions. 

[The prepared statement of Chairman Schapiro can be found on 

page 133 of the appendix.] 

Chairman BACHUS. Thank you, Chairman Schapiro, for that 

thoughtful and informative opening statement. 

At this time, I recognize CFTC Chairman Gary Gensler, who has 

been before our committee many, many times, and we welcome you 

back. 

Mr. GENSLER. I think it is my 8th time in this job, and maybe 

a half dozen times in my earlier job. 

STATEMENT OF THE THE HONORABLE GARY F. GENSLER, 

CHAIRMAN, COMMODITY FUTURES TRADING COMMISSION 

(CFTC) 

Mr. GENSLER. Thank you, Chairman Bachus, Ranking Member 

Frank, and members of the committee. 

When I hand one of my three daughters the car keys, I sleep better knowing that there are common-sense rules of the road. There 

are stop signs, traffic lights, and speed limits. There are prohibiVerDate Nov 24 2008 15:49 Mar 13, 2013 Jkt 076107 PO 00000 Frm 00016 Fmt 6633 Sfmt 6633 K:\DOCS\76107.TXT TERRI
13 

tions against drunk driving, and there are cops on the street to enforce all of these rules and keep my daughters safe. 

Similarly, when my mom and dad, neither of whom worked in finance or even completed college, invested their savings, our family 

benefited from the securities markets common-sense rules of the 

road. 

It was during the Great Depression that President Roosevelt 

asked Congress to put in place rules to bring transparency to the 

securities markets as well as the futures markets and protect investors against fraud, manipulation, and other abuses. I believe 

these critical reforms of the 1930s are at the foundation of our 

strong capital markets and many decades of economic growth. 

Swaps subsequently emerged in the 1980s. They provide producers and merchants a means to lock in a price of a commodity, 

an interest rate, or a currency rate; and our economy benefits from 

a well-functioning swaps market, as it is essential that companies 

have the ability to manage their risk. 

The swaps marketplace, however, lacked necessary street lamps 

to bring it out of the shadows or traffic signals to protect the public 

from a financial crash. In 2008, swaps, in a particular credit default, concentrated risk in the financial institutions and contributed to the financial crisis and the worst economic crisis Americans 

have experienced since the Great Depression. 

Congress responded with the Dodd-Frank Act, bringing commonsense rules of the roads to the swaps marketplace. 

With regard to the credit default swaps index products traded by 

JPMorgan Chase, the CFTC is currently midstream in standing up 

reforms that promote transparency and lower risk in this marketplace. The CFTC has made significant progress in implementing 

the law’s historic reforms, completing 33 key roles. But 4 years 

after the financial crisis, and yes, 2 years since the passage of 

Dodd-Frank, I think it is time that we finish the job and complete 

the nearly 20 remaining rules. 

And we must not forget the lessons of the 2008 crisis and earlier. 

Swaps executed offshore by U.S. financial institutions can send risk 

straight back to our shores. It was true with the London and Cayman Island affiliates of AIG, of Lehman Brothers, of Citigroup, and 

of Bear Stearns. Yes, they all were in London and the Cayman Islands. And, yes, a decade earlier, Long-Term Capital Management, 

which this committee had hearings on, that, too, was booking its 

$1.2 trillion in derivatives where? The Cayman Islands, offshore. 

The recent events of JPMorgan Chase, where it executed swaps 

through its London branch, are a stark reminder of this reality of 

modern finance. For the public to be protected, swaps market reform should cover transactions with these overseas branches, overseas affiliates guaranteed here in the United States, or even something called a conduit affiliate. 

I think failing to do so would mean American jobs and markets 

would likely move offshore. They would. They would go where 

there is lower cost, and lower regulation. 

But, particularly in the crisis, where would the risk come? Right 

back to our shores. Right back to the American taxpayers. 

14 

Dodd-Frank was successful in closing one London loophole for exchanges. Why would we leave another loophole for the dealers behind? 

Some in the financial community have suggested we retreat. 

Some in Congress even suggested cutting the funding of market 

oversight. But the ever-growing financial storm clouds hanging 

over Europe and lessons from the crisis should guide us. Now is the 

time to bring common-sense rules of the road to the swap market. 

Eight million Americans lost their jobs, millions of families lost 

their homes, and small businesses across the country folded when 

financial institutions were permitted to drive on dimly-lit swaps 

roads which had no rules, no cops. I think we would all sleep better 

if the complex roads of the swaps market were well-lit with transparency, had rules to lower risk to the bystanders, the American 

public, and that the agency tasked with overseeing them had 

enough funding to police them. Otherwise, I would say, hold onto 

your car keys. 

[The prepared statement of Chairman Gensler can be found on 

page 114 of the appendix.] 

Chairman BACHUS. Thank you, Chairman Gensler. 

At this time, I recognize Acting Chairman Martin Gruenberg, 

who most of us know did an excellent job as Chief Counsel for Senator Sarbanes and did excellent work on Sarbanes-Oxley. I think 

you have been with the FDIC for about 7 years, and Chairman 

since last year. So we welcome you back before the committee, and 

we always welcome your testimony. 

STATEMENT OF THE THE HONORABLE MARTIN J. 

GRUENBERG, ACTING CHAIRMAN, FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC) 

Mr. GRUENBERG. Thank you very much, Mr. Chairman. 

Chairman Bachus, Ranking Member Frank, and members of the 

committee, thank you for the opportunity to testify this morning on 

behalf of the Federal Deposit Insurance Corporation on bank supervision and risk management as it concerns recent trading losses at 

JPMorgan Chase. 

The recent losses at JPMorgan Chase revealed certain risks that 

reside within Large Complex Financial Institutions. They also 

highlighted the significance of effective risk controls and governance at these institutions. 

The four FDIC-insured subsidiaries of the JPMorgan Chase firm 

have nearly $2 trillion in assets and $842 billion in domestic deposits. As the deposit insurer and backup supervisor of JPMorgan 

Chase, the FDIC staff works through the primary Federal regulators—the Comptroller of the Currency and the Federal Reserve 

System—to obtain information necessary to monitor the risk within 

the institution. 

The FDIC maintains an on-site presence at the firm, which currently consists of a permanent staff of four professionals. The FDIC 

staff engages in risk monitoring of the firm through cooperation 

with the primary Federal regulators. Following the disclosure of 

JPMorgan Chase’s losses, the FDIC has added temporary staff to 

assist in our current review. The team is working with the institution’s primary Federal regulators to investigate both the cirVerDate Nov 24 2008 15:49 Mar 13, 2013 Jkt 076107 PO 00000 Frm 00018 Fmt 6633 Sfmt 6633 K:\DOCS\76107.TXT TERRI
15 

cumstances that led to the losses and the institution’s ongoing efforts to manage the risks at the firm. The agencies are conducting 

an in-depth review of both the risk measurement tools used by the 

firm and the governance and limit structures in place within the 

Chief Investment Office unit where the losses occurred. Following 

this review, we will work with the primary regulators to address 

any inadequate risk management practices that are identified. 

Following the announcement of these losses in May, the FDIC 

joined the OCC and the New York Federal Reserve Bank in daily 

meetings with the firm. Initially, these meetings focused on getting 

an understanding of the events leading up to the escalating losses 

in the CIO synthetic credit portfolio. The FDIC has continued to 

participate in these daily meetings between the firm and its primary regulators. We are looking at the strength of the CIO’s risk 

management, governance, and control frameworks, including the 

setting and monitoring of risk limits. The FDIC is also reviewing 

the quality of CIO risk reporting that has historically been made 

available to firm management and the regulators. 

Our discussions have also focused on the quality and consistency 

of the models used in the CIO as well as the approval and validation processes surrounding them. Although the focus of this review 

is on the circumstances that led to the losses, the FDIC is also 

working with JPMorgan Chase’s primary Federal regulators to assess any other potential gaps within the firm’s overall risk management practices. 

As a general matter, and apart from the specifics of this situation, evaluating the quality of financial institutions’ risk management practices, internal controls, and governance is an important 

focus of safety and soundness examinations conducted by the Federal banking agencies. On-site examinations provide an opportunity 

for supervisors to evaluate the quality of the loan and securities 

portfolios, underwriting practices, credit review and administration, establishment of and adherence to risk limits, and other matters pertinent to the risk profile of an institution. 

One important element of risk management is that senior management and the Board receives accurate and timely information 

about the risks to which a firm is exposed. Timely risk-related information is needed by institution management to support decision 

making and to satisfy the disclosure requirements and is an important element to supervisory review. 

Without speaking to the specifics of the case for which a review 

is currently under way, the recent losses attest to the speed with 

which risks can materialize in a large complex derivative portfolio. 

The recent losses also highlight that it is important for financial 

regulatory agencies to have access to timely risk-related information about derivatives and other market-sensitive exposures, to 

analyze the data effectively, and to regularly share findings and observations. 

Thank you, and I would be pleased to respond to your questions. 

[The prepared statement of Acting Chairman Gruenberg can be 

found on page 129 of the appendix.] 

Chairman BACHUS. Thank you, Chairman Gruenberg. 

16 

And, as he said, these are ongoing examinations and investigations, and there is some restraint on their part from giving conclusions. 

Our next witness is Federal Reserve General Counsel Alvarez. 

Before you begin, Mr. Alvarez, I want to thank you for being 

with us today. As many of the panel and our members know, the 

Federal Open Market Committee is meeting this morning. Normally, representatives of the Fed do not testify while the FOMC is 

meeting to discuss monetary policy. And we very much appreciate 

the Fed’s willingness to accommodate the committee by making its 

General Counsel available to testify this morning. 

But the Chair reminds Members that Mr. Alvarez is here to testify about the Fed’s supervision of JPMorgan Chase, and he will 

not entertain questions on the monetary policy issues on which the 

FOMC is meeting today. Members will have a chance in the next 

few weeks to question Chairman Bernanke about monetary policy 

during our semiannual Humphrey Hawkins hearing. 

Mr. FRANK. Mr. Chairman, let me just thank you for making that 

statement, and I would like to reinforce that and ask all the Members to please respect that. 

Chairman BACHUS. Thank you. I thank the ranking member. 

General Counsel Alvarez, you are now recognized. 

STATEMENT OF SCOTT G. ALVAREZ, GENERAL COUNSEL, 

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

(FED) 

Mr. ALVAREZ. Chairman Bachus, Ranking Member Frank, and 

members of the committee, thank you for the opportunity to testify 

this morning. 

Last month, JPMorgan Chase announced significant trading 

losses on credit derivative positions in its Chief Investment Office. 

These trading losses arose out of a complex synthetic credit portfolio that was primarily composed of long and short credit default 

swap positions on a number of different credit assets and indices. 

JPMC has stated that a combination of risk management failures 

and execution errors and the complexity and illiquidity of the positions led to the losses. 

In response to these significant trading losses, the Federal Reserve has been assisting the OCC in the oversight of JPMC’s efforts 

to manage and de-risk the CIO portfolio. We are also working 

closely with the OCC and the FDIC to help ensure that any risk 

management failures, governance weaknesses, or other potential 

problems that may have given rise to the CIO losses are promptly 

and appropriately addressed. 

In addition, the Federal Reserve continues to evaluate whether 

any weaknesses exposed by this incident may be present in other 

parts of the firm engaged in similar activities. While we have to 

date found no evidence that they are, this work is not yet complete. 

This incident is a strong remainder of the fundamental importance of capital requirements, especially for the largest banking 

firms. The purpose of capital is to absorb unanticipated as well as 

anticipated losses. With strong capital, business losses are borne by 

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17 

payers; and the large and absolute dollar terms need not threaten 

the safety and soundness of the firm. 

For precisely this reason, over the past several weeks the Federal 

Reserve, the Comptroller of the Currency, and the FDIC have jointly finalized reforms that will materially strengthen the market risk 

capital requirements applicable to the largest, most complicated 

banking firms. 

We have also proposed changes to implement the Basel III capital reforms and the new capital requirements in the Dodd-Frank 

Act. Importantly, many of these reforms specifically address and 

strengthen the capital requirements applicable to trading activities 

and positions, including complex derivatives. 

The stress tests are supervisory complements to these improvements to the regulatory capital framework. The most recent stress 

test conducted by the Federal Reserve demonstrated that 15 of the 

19 largest banking firms in the United States would maintain capital above prescribed standards, even in a very stressed economic 

scenario. The Tier 1 common ratio for these firms, which compares 

high-quality capital to risk-weighted assets, has doubled during the 

past 3 years to a weighted average of 10.9 percent at the end of 

the first quarter of 2012, from 5.4 percent at the end of the first 

quarter of 2009. 

The trading losses announced by JPMC have also focused attention on the Volcker Rule provision of the Dodd-Frank Act, which 

contains an exemption from the ban on proprietary trading to allow 

risk-mitigating hedging activities. The agencies have jointly proposed rules that would incorporate the terms of the statutory exemption. 

Importantly, the agencies have also proposed to add requirements designed to enhance the risk management of hedging activities. Among these added restrictions are a requirement for formal 

policies and procedures governing hedging activities, hedging instruments, and hedging strategies, a formal governance process, 

documentation requirements, internal audits, and requirements 

that incentive compensation paid to traders engaged in hedging not 

reward proprietary trading. 

The Federal Reserve has received many comments on this proposal, including comments informed by the trading losses occurring 

within JPMC’s CIO. We will consider all of these comments carefully as we work with the other agencies to finalize the regulations 

implementing the Volcker Rule. 

Thank you very much, and I would be pleased to answer your 

questions. 

[The prepared statement of General Counsel Alvarez can be 

found on page 86 of the appendix.] 

Chairman BACHUS. Thank you, Counsel. 

Before I begin my 5 minutes, let me say to all Members, if you 

don’t get your question completed before the 5 minutes is over, you 

will be stopped right there. Only if you have your question out and 

the witness is responding, will you be allowed to have an answer 

to that question. 

Comptroller Curry, you testified before the Senate Banking Committee 2 weeks ago about the risk management deficiencies at 

JPMorgan Chase and your agency supervision of the institution. As 

18 

your review of this matter has continued, have you learned anything new over the last 2 weeks about what led to these losses? 

And, in your view, were there appropriate risk controls in place at 

the Chief Investment Office where the relevant trades took place? 

Mr. CURRY. Thank you, Mr. Chairman. 

We are continuing our review of the facts surrounding the trading loss at JPMC. However, we do believe as a preliminary matter 

that there are apparent serious risk-management weaknesses or 

failures at the bank. We are attempting, as I mentioned, to continue to examine the root causes for those failures and to determine whether or not there are other weaknesses elsewhere in the 

bank besides the Chief Investment Office. 

Ultimately, we are looking to ensure that we also learn how to 

improve our supervisory processes and examination practices to 

make sure that we have a better handle on emerging or similar 

risks in the institutions that we supervise, particularly our large 

bank area of supervision. 

Chairman BACHUS. Thank you. 

During the April 13, 2012, analyst call during which JPMorgan 

Chase officials initially dismissed the significance of the London 

Whale trade, the firm’s chief financial officer, Douglas Braunstein, 

stated, ‘‘We are very comfortable with our positions as they are 

held today, and I would add all of those positions are fully transparent to the regulators. They review them, have access to them 

at any point in time, and get the information on those positions on 

a regular and recurring basis as part of our normalized reporting.’’ 

Is Mr. Braunstein’s description of the regulators’ access to information about the positions being taken by the firm at any given 

time accurate? 

Mr. CURRY. Generally, we have wide access to the management 

reports that the bank itself has given for a variety of its activities, 

including the activities of the CIO office. What we are looking at 

presently is whether or not that reporting was sufficiently granular 

or not to disclose both to us and to the bank itself the size and the 

complexity and the potential risk of the positions that they took 

with their synthetic credit book. 

Chairman BACHUS. All right. So the OCC failed to identify the 

risk inherent in these positions until after the fact, although you 

did have access to the information, because the descriptions were 

not transparent? 

Mr. CURRY. In hindsight, if the reporting were more robust or 

granular, we believe we may have had an inkling of the size and 

potential complexity and risk of the position. What we are looking 

at on a prospective basis is to ensure that there is a robustness to 

the risk management reporting within the CIO’s office and 

throughout the bank. And that is one of the lessons learned here. 

Chairman BACHUS. Thank you. 

I guess if there is proprietary information, you have to guard 

that and make sure that there is no disclosure. 

Mr. CURRY. Absolutely. 

Chairman BACHUS. Counsel Alvarez, one of the things about the 

JPMorgan Chase loss that I am having difficulty with is which regulators are responsible for what. I know the OCC regulates the national bank where the chief investment officer is located, but the 

19 

Federal Reserve regulates the holding company. What specifically 

did the Federal Reserve do in supervising the holding company 

that could have prevented a sudden loss like this from happening? 

And particularly, what responsibility does the New York Fed have 

for supervising JPMorgan? 

Mr. ALVAREZ. Mr. Chairman, it is true that the setup for regulation of these institutions is divided among different institutions 

and the Federal Reserve is the holding company supervisor. But I 

don’t think that it was a result of—that the difference in point of 

views or the division of responsibility played a role in this particular case. 

We have been working very closely with the other regulators to 

understand the risks here. I think what has happened here is actually more a breakdown in the risk management of the organization 

itself. The firm has acknowledged that. We are working with the 

firm and the other regulators to make sure they repair those riskmanagement problems. 

As I mentioned before, one of the things the Federal Reserve has 

focused on a lot as the consolidated supervisor is making sure these 

institutions have adequate capital. That is the best backstop here 

to any supervisory or management failure, for that matter; and 

there is adequate capital in this case to absorb the losses and make 

sure the shareholders and not the taxpayers absorb those losses. 

Chairman BACHUS. Thank you. 

Mr. Frank, for 5 minutes. 

Mr. FRANK. I will pick up on that point about the divided authority. Because I want to stress again, despite the opening statement 

comment by my colleague, the chairman, I am aware of no proposal 

that came from either side for a consolidation beyond where we already were. 

We did put the OCC and the OTS together. But to go further 

would require—to take the example just given, you either take 

holding company supervision away from the Federal Reserve or put 

the Federal Reserve in charge of what the OCC now does. I don’t 

remember anyone proposing that. 

One of the things people need to remember is that we have a 

more complex structure in the banking area in part because you 

have the dual banking system, and we had State-chartered banks 

resistant to being regulated by the regulator of the Federal banks. 

As to the SEC and the CFTC, I agree. It is because the Midwest 

hates the coast and the coast thinks they can put something over 

on the Midwest, and that is why we have two agencies where we 

ought to have one. And anybody who wants to propose to merge 

them, I am with you. Because I am leaving and don’t have to deal 

with the flak. 

And I appreciate what Mr. Alvarez said, that you have been able 

to work together. One of the things I know from Mr. Alvarez is, 

when he talks on page six about what they are doing in the Volcker 

Rule, in addition to is it in or out, one of the things that seems to 

be very useful are the rules you are proposing for hedging. 

Because one of the debates here is, as I read some of what Mr. 

Dimon says, it seems to me he can be interpreted as saying that 

if the bank is afraid of losing money from a certain set of events 

in the world, anything they do to make money somewhere else 

20 

counts as a hedge because it would be an offset against that loss. 

And you talk in your testimony here about requiring more specific 

hedging activities that meet a more traditional definition of a 

hedge, and I think that would be useful. 

But let me now just go to Mr. Gensler. If the legislation that 

passed this committee on extraterritoriality were to become law, 

and it went to the Agriculture Committee and they pulled it from 

the agenda, if that had become law, what would the effect have 

been on the transactions of JPMorgan Chase? 

Mr. GENSLER. I think it would be a major retreat from reform. 

And, as I understand it, these trades were executed in London in 

a branch, and they would not be covered. 

Mr. FRANK. So that if that bill became law, those trades in London would be totally outside the supervision insofar as derivatives? 

They presumably would be subject to some bank supervision, but 

they would be not subject to anything about derivatives? 

Mr. GENSLER. I believe so. It depends on how one provision in 

that statute is interpreted. But, yes, I believe so. 

Mr. FRANK. And if the provisions of the Reform Act were fully 

implemented—and they have been held up in part because you had 

that three-to-two situation, and that is what is there. You have 

comments. You have been sued a couple of times. People flood you 

with comments, threaten to sue you if you don’t edit them carefully, and then don’t give you enough people to read them. So it is 

a little hard for me to be upset at you. 

Mr. GENSLER. Thank you. 

Mr. FRANK. But if the provisions of the bill had been fully implemented, what would the impact of that have been on the trades? 

Leaving aside the Volcker Rule, and I want to stress the Volcker 

Rule is only a part of this. If all we did was enforce a tough Volcker 

Rule and drove derivatives out of banks in an unregulated fashion, 

that wouldn’t make anybody any better off either. 

So take the non-Volcker Rule derivative provisions of the bill. If 

they had been fully implemented, if you had been given the staff, 

or when they are fully implemented, would that have had any impact on these trades? 

Mr. GENSLER. I think there would still be risk in the bank, but 

they would be more transparent to their managers up the stream. 

The trades themselves, because they were largely in credit default swap indices, would be in central clearing, not only for the 

bank but for the hedge funds that were on the other side, and they 

would have transparent pricing out to the public. 

So risk tends to be better managed when you have public market 

transparency. I think Chairman Neugebauer said that earlier, too. 

I think transparency helps a great deal. 

Mr. FRANK. I am glad you mentioned that. Because it stresses 

that much of what we tried to do in the derivative field outside of 

the Volcker Rule was to bring more market activity there. 

And I must say I have found that some of my friends in the financial community regard competition and openness as a great 

spectator sport; they like to see other people engage in it, but they 

often have reasons why their own business is too delicate and too 

complex and too obscure to survive it. 

21 

It does seem to me that if this was in effect, Mr. Dimon and his 

people might have learned about some of this earlier. Is that possible? 

Mr. GENSLER. I think that is right, even because of an internal 

business conduct rule, risk management rule we passed earlier this 

year. It has to go up the chain, and they have to manage these. 

But I do think transparency would have lowered the risk and also 

central clearing for the hedge funds as well as the bank. 

Mr. FRANK. Let me ask, finally, on the Volcker Rule, and I know 

it is still being considered, one of the things that I think Mr. Dimon 

acknowledges led to a problem here, when it turned out that some 

of the transactions in the hedge were going bad, rather than try 

to withdraw from them and diminish them to cut the losses, they 

expanded them and got themselves into more difficulty. To the extent that the Volcker Rule defines hedges more narrowly and more 

specifically and it doesn’t become a license to just do all kinds of 

things because if they make money they have offset losses, I think 

we will be much better off. 

But, Mr. Chairman, my time has expired; and I appreciate that. 

Chairman BACHUS. Thank you. 

I would like to ask unanimous consent to correct the record by 

submitting H.R. 3311, which House Republicans on the Financial 

Services Committee sponsored, which would have consolidated the 

bank supervisory responsibilities of the OTS, the Office of the 

Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Federal Reserve into a new agency, and also 

would have established a new Office of Consumer Protection within 

that agency. 

Mr. FRANK. Reserving the right to object, Mr. Chairman, when 

was that introduced? 

Chairman BACHUS. In March of 2009. 

Mr. FRANK. Further inquiry: now that you are in the Majority, 

have we had a hearing on that? Are we moving on that? 

Chairman BACHUS. Well, you were the chairman. 

Mr. FRANK. No. But now, you are the chairman, and you have 

been for a year-and-a-half. Have we taken any action on that bill? 

Have you reintroduced it in this Congress? 

Chairman BACHUS. No. We are having trouble enough dealing 

with Dodd-Frank. 

Mr. FRANK. Well, but that deals with it. So you have not reintroduced it in this Congress. 

Chairman BACHUS. Thank you. 

Mr. Hensarling for 5 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman; and I appreciate 

your comments on Dodd-Frank. During its passage, many of us 

were told it would end the specter of too-big-to-fail. Many of us 

thought, frankly, the opposite might be true, that the big would get 

bigger, the small would become fewer, and the taxpayer would get 

poorer. 

Chairman Gruenberg, I have looked at the FDIC’s Q-1 banking 

profile—not that I expect you to memorize this—and if I have my 

citation right, page 7, table 3(a) says that the cost of funding earning assets for institutions greater than $10 billion is 22 basis points 

less than institutions with between $1 billion and $10 billion in asVerDate Nov 24 2008 15:49 Mar 13, 2013 Jkt 076107 PO 00000 Frm 00025 Fmt 6633 Sfmt 6633 K:\DOCS\76107.TXT TERRI
22 

sets. Are you familiar with this data? Does this sound about right 

to you? 

Mr. GRUENBERG. In general, yes, sir. 

Mr. HENSARLING. If I recall from memory—and I don’t have the 

data at my fingertips—Fannie and Freddie, given their implicit 

government guarantee, enjoyed roughly a similar funding advantage. Maybe it was 30 basis points. So here we are almost 2 years 

after the passage of Dodd-Frank, and yet we see these larger banks 

still enjoying a funding differential advantage over their smaller 

competitors. If the legislation had ended the specter of too-big-tofail, wouldn’t we have expected this funding difference to narrow? 

Mr. GRUENBERG. I think that is clearly an objective, Congressman. And we are seeing among some of the rating agencies downgrades of some of the large institutions because of the reduced expectation of public support in the event of failure, and actually we 

view that as a positive development and a core objective of the legislation. 

Mr. HENSARLING. Isn’t it true that since the passage of DoddFrank, the five largest banks have indeed grown larger? In fact, 

Mr. Alvarez, I am not sure you are familiar with the report, but 

the Dallas Fed in its recent annual report said, ‘‘For all its bluster, 

Dodd-Frank leaves too-big-to-fail entrenched.’’ 

I believe this is Federal Reserve data, and I will quote from a 

Bloomberg report quoting the data: ‘‘Two years after President 

Barack Obama vowed to eliminate the danger of financial institutions that are too-big-to-fail, the nation’s largest banks are bigger 

than they were before the financial meltdown.’’ It goes on to list 

them—JPMorgan, Bank of America—and says, ‘‘They held more 

than $8.5 trillion in assets at the end of 2011, equal to 56 percent 

of the U.S. economy, according to the Federal Reserve.’’ 

Mr. Alvarez, does that sound accurate to you? 

Mr. ALVAREZ. Recall, Congressman, that during the financial crisis there were some mergers of troubled institutions. So JPMorgan, 

for example— 

Mr. HENSARLING. Let’s start out with the basic question. Is the 

data accurate or is it not accurate? 

Mr. ALVAREZ. I don’t know the data that you have. The general 

idea sounds right, but I am pointing out the reason I think that 

it sounds right is because there were some acquisitions of troubled 

firms. JPMorgan bought WaMu. Bank of America bought Merrill 

Lynch. And there were various mergers during the crisis to shoreup troubled firms. 

Mr. HENSARLING. Back to you, Mr. Gruenberg, and my fear of 

the taxpayer potentially getting poorer. The Congressional Budget 

Office (CBO) has estimated that the Orderly Liquidation Authority 

contained within Dodd-Frank could weigh in at roughly $22 billion 

of taxpayer money. That is how they have scored it. Have you read 

CBO’s report in this regard? Do you have a comment? 

Mr. GRUENBERG. I am aware of it, Congressman. I guess the 

point I would make is that the assumption behind that report is 

that there would be large up-front borrowing in the event of the 

failure of a systemic institution borrowing from the Treasury. 

I guess two points to make: One, the Dodd-Frank Act, as you 

know, prohibits the use of any taxpayer money in the event of a 

23 

failure of a systemic institution. Any use of Treasury funds would 

have to be paid for out of the assets of the failed company. 

Mr. HENSARLING. I see I am out of time, but I believe that by 

definition, Treasury funds are taxpayer funds, and if you don’t 

have a bailout, I don’t think you need the taxpayer funds. Thank 

you. 

Chairman BACHUS. Ms. Waters for 5 minutes. 

Ms. WATERS. Thank you very much. 

Continuing with questions about the foreign branches and the affiliates of U.S. banks and this attempt to basically exclude them 

from Dodd-Frank, when risk is taken in a London branch of a 

bank, does that risk stay in London, Mr. Gensler? 

Mr. GENSLER. No, generally, it doesn’t. It can in calm waters, but 

in crisis—AIG was in London. Citigroup set up their special purpose vehicles, called SPVs, in London. So, often, it comes right back 

here crashing to our shores. 

And to Vice Chairman Hensarling, if the American taxpayer 

bails out JPMorgan, they would be bailing out that London entity 

as well. Let’s hope that doesn’t happen, but it would be London as 

well. 

Ms. WATERS. This risk that was taken by the Whale in London, a $100 billion trade, could it effectively have the same kind of impact in the United States? 

Mr. GENSLER. If it were so large to bring down that institution, 

yes. In a crisis, generally there is a run on the whole institution, 

and it is hard, it is almost impossible to sever off a limb—if I can 

use that expression—even if it is overseas. 

Ms. WATERS. Chairman Schapiro, we have heard Chairman 

Gensler outline his approach to extraterritoriality. What can we expect from the SEC on this issue? Do you basically agree with him? 

And when can we expect it? 

Ms. SCHAPIRO. Congresswoman, I do agree with respect to the 

potential reach of the rules to the London branch of a U.S. bank 

in this instance. I think he is right about that. 

With respect to the extraterritoriality more broadly, the SEC has 

been working very closely with the CFTC staff, but our Commission has not yet approved anything, so I can’t speak definitively 

about what we will do. But our plan is to issue a release that holistically looks at the extraterritorial application of each and every 

Dodd-Frank rule and allow commentors the opportunity to give us 

their views on the entire approach when all the rules have been 

proposed for comment. So we hope this will occur sometime later 

this summer. 

Ms. WATERS. Additionally, how did JPMorgan Chase’s compensation structure figure in this trading loss? Were traders incented to 

take inappropriate risk? Dodd-Frank Section 956 empowers the 

regulators to review compensation structures that encourage inappropriate risk-taking at financial institutions. This rule is currently 

a year overdue. When can we expect the SEC and other regulators 

to act on it? 

Ms. SCHAPIRO. That is a joint rule among seven different agencies. And you are right. It has two general prohibitions: one is 

against excessive compensation; and the other is against compensation arrangements that incent employees to take risks that could 

24 

present material financial loss to the company. And, for companies 

over $50 billion in total consolidated assets, there is a proposed requirement for a deferral for 3 years of 50 percent of an executive 

officer’s compensation and a requirement for the board’s direct engagement in approving the compensation, policies, and plans with 

respect to risk-takers within the firm. 

I would say we are working very closely together to try to finalize 

the rule among the seven agencies. We have received a lot of comment letters. I don’t have for you a specific date when it will be 

done. 

But I will also say that since I arrived, the SEC has put into 

place a set of rules that require disclosure about compensation 

plans that can expose a company to material adverse financial consequences by employees who are taking outsized risk, and that disclosure is already happening. 

Ms. WATERS. So I guess I need to ask everyone, how long do we 

have to wait for the rule on this? 

Mr. CURRY. I would hope, from the OCC’s perspective, that we 

could accomplish a final rule as quickly as possible, Congresswoman. 

Mr. GRUENBERG. Congresswoman, we strongly agree this rule 

should have a high priority, and we should try to move on it as 

quickly as we can. 

Mr. ALVAREZ. We, too, are working on it, but the Federal Reserve 

also put in place guidance that was very much along the lines of 

this rule before the Dodd-Frank Act was passed, so we are working 

hard with the other agencies to turn it into a rule for all. 

Ms. WATERS. Thank you very much, Mr. Chairman. I yield back. 

Chairman BACHUS. Thank you. 

Mr. Royce for 5 minutes. 

Mr. ROYCE. Thank you. 

Mr. Curry, as you know, my view in terms of the meltdown is 

that a big part of it was caused by the overleveraging of the GSEs, 

Fannie Mae and Freddie Mac, that was 100 to 1. When the housing 

market turned, that destroyed the GSEs. The investment banks 

being allowed to leverage at 30 to 1, they were doomed once the 

market turned. AIG was 170 to 1. 

I think that this incident of the JPMorgan Chase trading losses 

really brings front and center this issue again that capital is king. 

Capital is the ultimate buffer to protect against those unforeseen 

losses. It protects against the flawed risk models that the bank 

might have. It also protects against the mistakes the regulatory 

community might make. It protects against the asset bubbles that 

might have been caused by the regulatory community setting—the 

Fed setting the interest rate too low for too long and helping to 

cause that bubble. 

But the bottom line is, if you have the ratios right, you can survive the storm. And now that, in the view of a number of economists, we have institutionalized this too-big-to-fail problem with 

Dodd-Frank, the reality is that the only thing standing between the 

taxpayer and the failure of these institutions and the massive 

amounts of additional capital that would be required is the enforcement on these capital ratios. 

25 

And that is what I wanted to go to, because investors are losing 

confidence in major banks’ risk-weighted asset models, if we believe 

the financial press on this. There is a recent study of 130 institutional investors that found that 63 percent have less faith in bank 

models than they did 1 year ago; 83 percent want to get rid of what 

they call ‘‘model discretion.’’ That is what I want to go to here. 

Because, as we move forward, the Basel Committee, prior to 

Basel III, made this observation that capital levels in American 

banks employing their own internal ratings approach would experience a capital reduction of 7 to 27 percent, while those adhering 

to the standardized approach would actually experience a 2 percent 

increase in capital demands. 

So my question to you is, what is the benefit of continuing to rely 

on this internal approach as opposed to the standardized approach? 

Mr. CURRY. To answer your question, Congressman, I agree with 

you wholeheartedly that the importance of capital—it is the cushion that protects against errors of risk management, which is the 

primary bulwark against loss, or of risk of insolvency with an institution. 

In terms of—you have cited two issues: one issue with respect to 

the risk-weighting of assets; and one with respect to the use of 

models in setting capital levels. 

The issue of models and their use in capital is a key component 

of the capital regulations, and it is also a focus of the OCC in terms 

of its review and approval of banks’ internal models for capital purposes. We have formal guidance that we issued a year ago emphasizing the importance of making sure the models are appropriately 

designed, monitored, and updated; and that is essential if we are 

going to continue to rely on models as a key component of the capital ratios. 

Mr. ROYCE. Here is my point: If institutional investors are demanding a move away from model discretion, and especially when 

you consider that the banks likely to use this less standardized 

model are the biggest banks, thus compounding their advantage 

out in the marketplace, it seems to me that during the crisis, we 

have seen where these models have failed, and it seems to me that 

it is pretty clear going forward that you have the discretion now 

to solve that problem, and while we are talking about the benefits 

of capital, the conversation shouldn’t end there. 

I would hope that this incident at JPMorgan reinforces the notion that internal risk models often fail, and that when it comes to 

mandating capital levels, we would be well-served to focus our efforts on a simpler metric like minimum leverage ratios. Think 

about that going forward, if you would, minimum leverage ratios 

as an answer to this problem. 

Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. 

Mrs. Maloney? 

Mrs. MALONEY. Thank you very much, Mr. Chairman. 

Some financial institutions have told me that they have terminated their proprietary trading desks. I would like to ask Mr. 

Curry, to what extent have financial institutions already begun to 

spin-off their proprietary trading desks in advance of the Volcker 

26 

Rule becoming effective? How many have taken those steps and 

terminated it? And can you list those financial institutions? 

Mr. CURRY. Thank you, Congresswoman. 

I believe that is the practice among many banks, but the actual 

activities of engaging in the prohibited proprietary trading and private equity investments or investments in hedge funds are also 

done at the holding company, which we don’t supervise at the OCC. 

So I believe that is the trend within the industry, to move away 

in advance of the effective date of the Volcker Rule. 

Mrs. MALONEY. Is there added benefit to doing this because they 

are legally required to? What role is the OCC playing in this process? 

Mr. CURRY. We are not directing institutions to take specific actions with respect to those activities. The Federal Reserve, I believe, has issued some guidance that we signed onto in terms of the 

conformance period in which they should take appropriate steps to 

conform with the Volcker Rule. 

Mrs. MALONEY. Can you list those financial institutions that 

have terminated these activities? 

Mr. CURRY. I would have to get back to you, Congresswoman. 

Mrs. MALONEY. Okay, thank you. 

I would like to ask the regulators about a disturbing pattern in 

the last few years of London literally becoming the center of financial trading disasters: AIG was bailed out, their financial products 

division, to the tune of $184 billion; the trade losses in Lehman are 

historical; the losses in UBS trading. It seems to be that every big 

trading disaster happens in London, and I would like to know why? 

Why is it happening in London and not the United States? 

Mr. Gensler, and then Mr. Curry and Mr. Alvarez, if you could 

give us some insights. It is a pattern that is happening. 

Mr. GENSLER. I think that, with all respect, because I worked in 

New York, in your great City, they do have some time zone advantages, that they are between Asia and the United States, that we 

can’t repeal the globe. 

But I also think that large financial institutions—and I used to 

do a little of this as a business matter—set up legal entities wherever they can. They set up hundreds if not thousands of legal entities to find the lower regulatory regimes or tax regimes to set up. 

And it is a disturbing pattern, but it is a very real pattern. 

Mrs. MALONEY. So is there a lower regulatory regime? Is there 

a lower tax structure? I have asked others, and they have said 

there is not. So I would like to know, is there a lower standard for 

non-U.S. trading activities? 

Mr. GENSLER. I would say, just in terms of the derivatives regime, that Europe has done an excellent job and just passed legislation similar to Dodd-Frank. But it is not up and running yet, and 

it does not yet have the pieces of transparency, public market 

transparency, that this Congress adopted. So there is still quite a 

debate. 

And I think if we were to leave the London branches of the U.S. 

banks or even the guaranteed affiliates out, it would be, so to 

speak, another loophole and a retreat from reform, where risk 

would come crashing back to our taxpayers and our Federal Reserve. 

27 

This was a bank that has Federal Reserve discount window access and the FDIC insures its deposits. Why would we leave the 

branches out? I just don’t understand why we would do that. 

Mrs. MALONEY. Mr. Curry, how will Dodd-Frank allocate examiner resources? I read or heard in the last hearing with the Senate 

there were only five examiners from the OCC in London but hundreds in JPMorgan and other facilities. Basically, will this impact 

what happened and what is happening with other challenges? Will 

this impact how you allocate your examiner resources? And your 

comments on why London? 

Mr. CURRY. In terms of our London presence of the OCC, we will 

use our experience here and our review of JPMorgan Chase to reevaluate the numbers and strength of the personnel in our London 

office. Our focus is really the London office is a branch of the bank, 

so that is our jurisdictional hook for the activity over there. 

We do have 65 individuals in the headquarters of JPMorgan 

Chase to supervise that entity. We also bring to bear in our targeted examinations and overall supervision of the bank the entire 

strength of the OCC in terms of expertise and numbers of examiners, which is close to 2,500 individuals. Those are brought in as 

needed into any particular area. So the number five may be misleading as to our ability to leverage our activities. 

We would also look to coordinate with the market regulators in 

terms of any issues that would affect both the branch and their jurisdiction. 

Chairman BACHUS. Thank you, Comptroller. 

Mrs. Capito for 5 minutes. 

Mrs. CAPITO. Thank you, Mr. Chairman. 

I would like to talk a little bit about the issue of transparency. 

We have just heard Comptroller Curry say that there are over 65 

Federal examiners at JPMorgan. The Federal Reserve has examiners. Mr. Gruenberg has some folks there as well. With all these 

people there, I am wondering, how was this missed? 

In the April 13, 2012, analyst call, the chief financial officer at 

JPMorgan said, ‘‘We are very comfortable with our positions. They 

are healthy. I would add all these positions are fully transparent 

to the regulators. They review them, have access to them at any 

point in time, can get information on these positions on a regular 

and recurring basis.’’ Is that a true statement? 

Mr. CURRY. We are in the process of reviewing what exactly happened. That is one of the prongs of our review, how that position 

within the Chief Investment Office developed and whether or not 

there were appropriate controls in place. Our understanding is that 

neither the management or the bank was fully aware of the scope 

of that investment and that we were initially relying upon the information that was available to the bank. 

Mrs. CAPITO. Right. You are relying on the information available 

to the bank. 

Mr. CURRY. Which is a critical component of risk management 

and the supervision of these institutions. There needs to be a 

strong architecture that has controls in place and vigorous and 

granular reporting, and that is really an area that we are looking 

into, is whether the reporting structure that was present in the 

28 

CIO office met the standards that we expect and that JPMorgan 

would have in other aspects or areas of its business. 

Mrs. CAPITO. We would know that—the CIO, the office there, obviously has additional offices all throughout the country and the 

world who have additional offices all throughout the country and 

the world; and is the expectation that all the information is going 

to bleed up to—I suppose that is the system, but I think we see 

that is not exactly what was happening here. 

Mr. CURRY. By way of background, the CIO office is centrally located within the New York headquarters of the bank. 

Mrs. CAPITO. Right. 

Mr. CURRY. There were trading activities that were conducted in 

other locations—a handful of locations, including London. But in 

terms of the management controls, recordkeeping, key personnel; 

they were predominantly within the New York office, and that is 

where our focus has been. 

Mrs. CAPITO. Let me talk about communications between the five 

examiners in cases of these very large, and I am going to call them 

too-big-to-fail institutions. What kind of controls do you have for 

your communications? Do you regularly use the FSOC for communication? What are your protocols that you have put in place, since 

we know that was one of the major failures in 2008? 

I will ask Mr. Alvarez if he has a comment on that. 

Mr. ALVAREZ. Sure. We have set up a variety of ways of communicating with the other agencies. The FSOC is certainly one of the 

mechanisms. 

But for large institutions, we have supervisory colleges that include all the relevant supervisors. We meet regularly to talk about 

issues of concern. The examiners in the field also talk with each 

other. We talk with the OCC examiners at the national bank, we 

talk with the FDIC, with the SEC when there is a broker-dealer 

involved in the organization. So, we have actually quite a matrix 

of communication. 

Mrs. CAPITO. You have described a matrix of communication, but 

then I think it has come to light that, even with the matrix of communication, nobody was catching it. Nobody was seeing it. We 

know the hedge funders saw it eventually, because that is—at least 

the periphery that I read—that is the indicator. But, is the communication really working and are you communicating—is the information not as robust and as granular as it needs to be? 

Mr. ALVAREZ. So to keep this a little bit in context, there were 

significant changes in the portfolio, the CIO portfolio, in the first 

quarter of 2012, and those changes were very significant contributors to this loss. 

As the company itself has mentioned, the reports that the company generated, the kind of review and risk management it had in 

place had serious flaws to it. We had access to that information, 

but to the extent it was flawed and its own management didn’t 

have a good handle on the information and understanding the risk, 

that would make it more difficult for us as well. So we have to rely 

on information that we get from the organization itself. If that is 

flawed, it is going to be a problem for us. 

Mrs. CAPITO. So that is Mr. Gensler’s three daughters with the 

keys to the car. Thank you. 

29 

Chairman BACHUS. Thank you. 

Let me say this: Regular order will return when the second panel 

comes on. But in fairness to the Members who have been here the 

whole time, at least on the Republican side—I have no control over 

the Minority—we are going to continue down the row. We are not 

going to come back up, in fairness to all our members. So we will 

continue down the row. 

Ms. Velazquez, I want to acknowledge the loss of your mother. 

Ms. VELAZQUEZ. Thank you. 

Chairman BACHUS. The members of the committee express our 

sympathy, and I recognize you for 5 minutes. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Chairman Schapiro, it has come to light that JPMorgan Chase 

changed its value-to-risk model a number of times over the past 6 

months which led to its investments appearing less risky than they 

really were. Are there penalties for failing to disclose these changes 

to investors and the SEC? 

Ms. SCHAPIRO. Thank you. 

I think Mr. Dimon actually testified in the Senate that they 

change their Value at Risk models all the time. The area we are 

focused on and concerned about is a change with respect to the 

VaR model they used for their earnings release on April 13th that 

had the effect, yes, of understating the Value at Risk. 

Our rules do require that changes to the Value at Risk model, 

the assumptions and parameters, have to be disclosed. So part of 

what we are investigating is the extent of that disclosure, whether 

it was adequate, among other things. 

Ms. VELAZQUEZ. And if you conclude that basically the rules were 

broken— 

Ms. SCHAPIRO. There could be, yes. 

Ms. VELAZQUEZ. Okay. So let me ask you, these penalties apparently were not enough to prevent JPMorgan from such activities. 

So I just would like for you to explain to us how should these penalties be structured to deter such behavior going forward, if that 

was the case? 

Ms. SCHAPIRO. I think first, we really need to finish the investigation and see the full scope of conduct, if any, that potentially 

violates the Federal securities laws; and then the Commission 

would make a determination about what the appropriate sanction 

is to deter such conduct in the future and to remediate the violations. 

It is hard to say what that number would be as a penalty, whether there would be potentially a requirement that they bring in a 

special consultant to help them rework their financial reporting 

controls and whether there could be other sanctions. We have a 

pretty wide panoply of sanctions that are available to us, but until 

we have completed an investigation and understand whether we 

have simply a VaR model change that is not disclosed or we have 

risk-management issues or other disclosure shortcomings or failures, it is hard for me to guess where we might land. 

Ms. VELAZQUEZ. Okay, thank you. 

Chairman Gruenberg, proprietary trading was just one among 

many factors that contributed to the financial crisis in 2008, and 

opponents of the proposed Volcker Rule have argued that it will do 

30 

more harm than good. In light of JPMorgan’s loss, if the proposed 

rule were delayed or otherwise scaled back, will other measures in 

Dodd-Frank such as increased capital requirements and new controls on derivatives be sufficient in themselves to mitigate the risks 

posed by proprietary trading? 

Mr. GRUENBERG. In the first instance, Congresswoman, that is 

not a choice for us to make. The law is the law, and we have an 

obligation to implement it, both in regard to the capital requirements and in regard to the Volcker Rule. We certainly agree that 

capital requirements are very important, but the provisions of the 

Volcker Rule are also the law of the land, and we have an obligation to implement those as well. 

Ms. VELAZQUEZ. So you believe that increased capital requirements and new controls on derivatives will be sufficient? 

Mr. GRUENBERG. I think the provisions of the Volcker Rule, particularly requiring the reporting, the recordkeeping, the governance 

provisions relating to proprietary trading are really quite important in order to focus the attention of both management and the 

regulators on this activity; and I think that would be actually a 

valuable complement to the capital and other prudential requirements of Dodd-Frank. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. 

Mr. Neugebauer for 5 minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Mr. Curry, the Bloomberg article came out on April 6th. When 

did you have knowledge that there was a problem with this portfolio? 

Mr. CURRY. The size and complexity of the portfolio at JPMorgan 

Chase became clearer to us at that point in time. After that, we 

began to ramp up our discussions with bank management and our 

presence— 

Mr. NEUGEBAUER. What day would that have been? 

Mr. CURRY. I believe it was around the 9th, when I assumed office. 

Mr. NEUGEBAUER. So April 9th you were having pretty extensive 

conversations with management about this position? 

Mr. CURRY. That is when we became aware of the potential significance of the situation. 

Mr. NEUGEBAUER. Ms. Schapiro, do you have any recollection of 

when your agency began to have some concern about this issue? 

Ms. SCHAPIRO. It would have been around that same time when 

the articles began to appear. 

But, again, because this was not in the broker-dealer, we 

wouldn’t have had people focused particularly on that. 

Mr. NEUGEBAUER. Mr. Gensler? 

Mr. GENSLER. Again, when the articles about the London Whale 

started to run, as we are just midstream standing up our reforms 

for credit derivatives. But we do oversee and see daily the risk in 

the clearinghouse. ICE Clear Credit and ICE Clear Europe have 

some of these indices in there. Even this IG-9 one is in there. 

Mr. NEUGEBAUER. Mr. Gruenberg? 

Mr. GRUENBERG. In that same time period. 

Mr. NEUGEBAUER. And Mr. Alvarez? 

31 

Mr. ALVAREZ. We were informed by the firm at the same time 

as they informed the OCC. 

Mr. NEUGEBAUER. So, I want to fast-forward then to April 13th 

when Mr. Dimon said that, ‘‘This has been blown way out of proportion. This is a tempest in a teapot.’’ Did you find that comment 

a little interesting, the fact that you were—I guess all of these regulators were activating some action that was stimulated—did you 

think that was an interesting— 

Mr. CURRY. At that point in time, we were still trying to determine the underlying strategy and its ramifications to the bank’s financial position. 

Mr. NEUGEBAUER. But would you have called that a tempest in 

a teapot? 

Mr. CURRY. I would not have had information at the time to 

make a conclusion one way or the other. 

Mr. NEUGEBAUER. Ms. Schapiro, do you have a comment on that? 

Ms. SCHAPIRO. It is part of the context, I think, for the review. 

If you look at the fact that the VaR number really didn’t change 

for the earnings release—and, by the way, VaR is not required to 

be disclosed in the earnings release, but if you choose to speak to 

it you must speak truthfully and completely. The fact that the VaR 

number didn’t change much at all from year end to the earnings 

release is part of the context of whether it truly was a tempest in 

a teapot or there was more there. 

When the Q-1 statements came out on May 10th, we saw that 

VaR doubled because they reverted back to the old VaR model. 

Again, it is part of the context of how you view those statements. 

Mr. NEUGEBAUER. I think particularly in your area of oversight, 

the statements CEOs make are relevant. Is that— 

Ms. SCHAPIRO. They are always part of what we look at when we 

are looking at issues exactly like this, yes. 

Mr. NEUGEBAUER. And so when—I can understand, if you are a 

CEO of a company and you have some bad news out there, you are 

trying to tamp that down. But there is also a fiduciary responsibility, I guess—if we are going to talk about disclosure and transparency—for whatever information and statements are coming out 

of that organization to be accurate or a fair reflection. Would you 

agree with that? 

Ms. SCHAPIRO. That is right. If you choose to speak, you absolutely must speak truthfully and completely and not allow yourself 

to leave any kind of misleading impression from the information 

that you are putting out. 

Mr. NEUGEBAUER. And is there a certain amount of duty, whoever the spokesman is, whether it is Mr. Dimon or the CFO, whoever is making the speech, to make sure that the team thinks this 

is an accurate statement? 

Ms. SCHAPIRO. I don’t know about their internal processes for 

preparing— 

Mr. NEUGEBAUER. I am not asking about that. But if you are 

going to make a statement, say on behalf of the SEC, don’t you ask 

your people, is this a fair representation? 

Ms. SCHAPIRO. Yes, I do. 

Mr. NEUGEBAUER. So there is a certain amount of duty to do 

that? 

32 

Ms. SCHAPIRO. Again, the duty under the Federal securities laws 

is to speak completely and truthfully. How people arrive at what 

they decide is a truthful and complete statement is a matter of 

their internal deliberations and discussions, I think. 

Chairman BACHUS. Thank you. 

Mr. Capuano for 5 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Mr. Chairman, first, I would like to just point out that anybody 

who is interested in breaking up some of these large institutions 

should sign on to H.R. 1489, which would reinstitute the GlassSteagall Act, which I voted against repealing in the first place. It 

was repealed by a bill called the Gramm-Leach-Bliley Act, and I recall there were three Republicans who sponsored that Act to repeal 

Glass-Steagall that allowed the beasts of Wall Street to come into 

existence. So anybody who has another idea on how to limit the 

size, I totally agree with that concern. 

To the panel, I would just like to say the comments on transparency are appropriate, but in preparing for this hearing, this is 

very complicated stuff, very difficult stuff, and I try to read as 

much as I can. The problem is on this particular hearing, all I 

could get was news reports, and the only news reports I could get 

were all based on assumptions and educated guesses. Even the 

Congressional Research Service, which is very good on these 

things, had to piece it together. There is just not enough transparency from your agencies to allow outside people to make a comment on what might have happened. 

I would encourage you to, if you can’t come to conclusions—I am 

not suggesting you should do that rapidly—but at least whatever 

facts you unveil to yourself, make them public as soon as you can 

so that the greater public can engage in a discussion which will enlighten our thought as to what might happen. 

I have so many questions in 5 minutes. I guess, Mr. Curry, I will 

start with you. This is only a $2 billion item. Is there anything that you have 

learned thus far that would have limited it just to $2 billion? Could 

it not have been a $20 billion loss? 

Mr. CURRY. Part of our review process now is to look at the 

unwinding of their position and our review process, along with the 

other Federal bank agencies— 

Mr. CAPUANO. But could it have been $20 billion? Not necessarily 

this one, but is there anything that would have prevented it? 

Mr. CURRY. No. That is the concern from a supervisory standpoint, is that this is the result of an apparent lapse in vigorous risk 

management. 

Mr. CAPUANO. So it could have been $20 billion? 

Mr. CURRY. And that is really the regulatory concern— 

Mr. CAPUANO. And it could have been $200 billion. 

Mr. CURRY. In another institution and under other circumstances, possibly. 

Mr. CAPUANO. Is there anything in any of the regulations, anything you found thus far, that would limit this loss only to 

JPMorgan? 

Mr. CURRY. We have surveyed the other large banks that we supervise, and we do not believe that any of those banks— 

33 

Mr. CAPUANO. But they could have? 

Mr. CURRY. They do not—we believe they do not engage in similar— 

Mr. CAPUANO. But they could have— 

Mr. CURRY. That is really why— 

Mr. CAPUANO. I don’t know why you are being so resistant. I am 

not after you. You would know it if I were. 

Mr. CURRY. We view that as being a very serious issue, and that 

is why it is the focus of our— 

Mr. CAPUANO. So it could have been a $20 billion item, it could 

have been a $200 billion item, it could have been every other major 

large bank, and it could have been other counterparties, which is 

my concern. 

I guess what I would like to find out—I read your testimony, and 

you did say that thus far you have found no one else engaging in 

this activity. But, again, for me, the biggest question here is not 

necessarily what happened in this instance, other than the way it 

might enlighten us or educate us as to what could happen. 

And I guess what I am asking is to be sure that when everything 

is said and done, it is not just focused—and this is not just for you, 

Mr. Curry, I intend to ask the rest of the panel—on one instance, 

one event, that lost $2 billion for a bank that apparently could handle it. It is whether it could have shaken the system again. 

Are you confident yet that what you have found, what your reaction might be, would be to tell us that the system is now sound? 

Mr. CURRY. We do not believe that the system is at risk from this 

situation, and that is why, again, we are focusing on making sure 

that all of the institutions we supervise have rigorous— 

Mr. CAPUANO. Thank you. 

Ms. Schapiro, do you feel the same way? Is the system sound, 

based on what you have found thus far? 

Ms. SCHAPIRO. I think the system is sounder than it was, but I 

think we really have to get the Title VII regulatory regime in place 

that will give us access to the kind of information we need and the 

public needs to impart some greater— 

Mr. CAPUANO. Thank you. 

Mr. Gensler? 

Mr. GENSLER. I think the American public still isn’t safe on these 

roads until we get the transparency and get the rules of the road 

in place, and that is why I made the analogy to my daughters and 

the keys to the car. I think the American public were bystanders 

to some taking on excess of risk in 2008, and we still haven’t— 

Mr. CAPUANO. But based on what you found in this instance, I 

understand, but in this instance, is there any indication that what 

happened here might expose—not necessarily by JPMorgan but by 

anybody else—a risk to the system? 

Mr. GENSLER. I think it still exposes risks broadly in our regulatory system that we are not covering London and also in credit 

derivative products, that we have not yet finished the tasking. 

Mr. CAPUANO. I actually want to jump to London, because I 

think your testimony was very important. On page 9, if I recall, I 

want to read back to you what you said, which I think is very good, 

because I want to follow up Mrs. Maloney. The whole London thing 

34 

has been bothering me. With Mr. Neugebauer, we have been chasing a lot of the MF Global stuff. It seems all about London, AIG— 

Chairman BACHUS. Your time has expired, but you go ahead and 

read his statement. 

Mr. CAPUANO. The statement was very simply that Section 

722(d) of the Dodd-Frank says that if it has a direct and significant 

connection with activities in or an effect on the commerce of the 

United States that you do have oversight. 

Would you agree that statement allows you to regulate some of 

the things that go on overseas? 

Chairman BACHUS. Thank you. 

Mr. Luetkemeyer for 5 minutes. 

Mr. LUETKEMEYER. Thank you, Mr. Chairman. 

It is an interesting debate we are having here, the discussion 

this morning, from the standpoint that over the last 4 or 5 years, 

the American public has finally found out what actually goes on in 

banking and financial service institutions. They manage risk, and 

that is how the whole system works. A lot of folks just didn’t know 

what went on behind the doors and in boardrooms and offices of 

banks and financial institutions, but now they do. Every day, they 

manage risk. They take risks. Sometimes, they win. Sometimes, 

they lose. 

So today, we are discussing an entity that took a risk and lost, 

and I think that the things we are working on, and you, ladies and 

gentlemen of the panel here, have to find a way to walk that fine 

line to keep from taking all the risk away—the ability to take risk 

from these institutions—otherwise, perhaps they won’t do any investing and, therefore, the whole system collapses and stops—or 

find a way to pass that risk on to other entities, in other words, 

the taxpayers, which is what the too-big-to-fail doctrine does, which 

is not the way to go either. 

So it is interesting, the fine line you are trying to walk. I appreciate that, and I thank you for your service and for trying to do 

that. 

Mr. Curry, to follow up on the gentleman from California’s remarks earlier with regards to capital, you made some comments in 

your testimony here that the Tier I common capital of the larger 

banks has gone from 5.2 percent to 7 percent now; and in some 

rough figures that I got from, I think, your testimony or Mr. Alvarez here, it looks like Tier I capital for—in fact, it was your testimony—Tier I capital for JPMorgan is 5.7 percent. Is that probably 

accurate? 

Mr. CURRY. Yes. 

Mr. LUETKEMEYER. So, therefore, they are below average. Is that 

what you are saying? 

Mr. CURRY. No. No, I am sorry. They meet existing minimum 

capital requirements for banks. 

Mr. LUETKEMEYER. You said the Tier I capital average now is 7 

percent for the same size, and they are only at— 

Mr. CURRY. I think my testimony refers to bank level of capital 

and bank holding company capital, and that may be part of the 

confusion. 

Mr. LEUTKEMEYER. Okay. All right. 

Are they well-capitalized, in your judgment? 

35 

Mr. CURRY. Yes, they are. 

Mr. LEUTKEMEYER. Okay. What was their capital account prior 

to—well, back in 2008? 

Mr. CURRY. I can’t recall offhand, but it has increased since then. 

That has been the overall objective of our heightened supervision 

program, is to increase the level of capital and put it in reserves. 

Mr. LEUTKEMEYER. Okay. So by increasing their capital, they 

have made more money. Could they have done that by taking extraordinary risks or could they do that through the normal management practices of running their operation, in your judgment? 

Mr. CURRY. No. We expect banks to be in the business of taking 

manageable risks and having effective internal controls over those 

material risks within their organization, and then ultimately we 

look to capital as being the cushion for those risks that occur. 

Mr. LEUTKEMEYER. Okay. Mr. Gruenberg, right now, the investment banking portion of JPMorgan is underneath their main bank 

which would be covered by FDIC insurance, is that correct? Are 

they an FDIC-insured bank? First question. 

Mr. GRUENBERG. JPMorgan is an FDIC-insured bank. 

Mr. LEUTKEMEYER. Is their investment bank under their main 

bank umbrella so they would be part of— 

Mr. GRUENBERG. They are a separate affiliate. 

Mr. LUETKEMEYER. They are a separate affiliate. Their investment bank is separate, so therefore there are no FDIC insurance 

dollars at risk with this particular activity that took place? 

Mr. GRUENBERG. I believe the activity in this case, Congressman, 

was in a branch of the bank itself, not in the affiliated investment 

company. 

Mr. LEUTKEMEYER. A lot of banks have a lot of branches, and 

some of those branches are covered, and some of them aren’t, based 

on their activities. And my question is, were the activities that 

were taking place in this situation part of the umbrella that was 

underneath the main bank and therefore deposit insurance exposed? 

Mr. GRUENBERG. Yes. 

Mr. LEUTKEMEYER. They were. 

Mr. GRUENBERG. Yes, sir. 

Mr. LEUTKEMEYER. So, in other words, the deposit insurance, if 

this had gone bad and caused a major problem with the bank, deposit insurance would have to kick in and take care of this? 

Mr. GRUENBERG. If this activity did occur in the bank, yes. 

Mr. LEUTKEMEYER. What is your opinion of that? 

Mr. GRUENBERG. That is the issue, frankly, that is raised here. 

Mr. LUETKEMEYER. Is that a grave concern to you? 

Mr. GRUENBERG. I think it is a serious question that is raised. 

It is why this inquiry is going forward. I think we need to understand— 

Mr. LUETKEMEYER. We have a situation with the banking structure that we have right now that is to me a real problem from the 

standpoint that you have these big entities that have this enormous exposure. Do you feel that they are paying their fair share 

based on the risks that they are taking and the exposure to the 

fund, compared to the rest of the banks which don’t do this? 

36 

Mr. GRUENBERG. In terms of deposit insurance premiums? Is 

that the issue? 

Mr. LUETKEMEYER. Right. 

Mr. GRUENBERG. For these large institutions, we do have a riskbased deposit insurance system specifically targeted for the large 

institutions. It is true that the kind of trading activity that occurred here is taken into consideration in setting the deposit insurance premiums for these large institutions. 

Mr. LUETKEMEYER. Okay, I see my time has expired. Thank you. 

Chairman BACHUS. Thank you. 

Mr. Lynch is recognized for 5 minutes. 

Mr. LYNCH. Thank you, Mr. Chairman. 

Also, I want to thank the witnesses for attending and helping the 

committee with its work. 

If not for the exposure to the taxpayer, we probably wouldn’t be 

here, but I do want to note that, starting back in the fall of 2008, 

JPMorgan and a bunch of other Wall Street banks received about 

$700 billion from the American taxpayer. JPMorgan Chase itself 

received $25 billion in those TARP loans. All told, the amount of 

emergency Federal Reserve lending support to JPMorgan exceeded 

$456 billion, and I note that a November of 2011 Bloomberg article 

estimates that the bank made nearly $458 million in profit from 

those emergency loans from the Fed. 

In addition, JPMorgan Chase has access to the Fed discount window and its depository base, some of which funded these proprietary trades, which are FDIC- and taxpayer-insured. 

So there is a lot of exposure here for the taxpayer, and that is 

why it defies logic that we would allow an institution with that 

type of support from the taxpayer to act in this way. 

Mr. Gensler, I enjoyed your opening remarks. I thought your testimony was great. I have two girls myself, so I have empathy for 

you in giving your car keys out. 

But I do note that in Mr. Dimon’s testimony earlier in the previous hearings on the Senate side, he basically confirmed those reports that these trades, while they were managed I guess in the 

New York office, they were actually executed in JPMorgan’s London office, and I guess you are saying some of these were executed 

in the Cayman Islands as well, is that correct? 

Mr. GENSLER. I don’t know about the Cayman Islands, except I 

know in other circumstances Bear Stearns was in the Cayman Islands, and Long-Term Capital Management was in the Cayman Islands. So there were other circumstances. 

But the JPMorgan Chase Chief Investment Office trades, as I 

understand, executed or entered into out of London was in the 

branch. And to Representative Luetkemeyer’s question, the deposit 

insurance fund, as we heard from Mr. Gruenberg, was at risk. 

Mr. LYNCH. We also heard prior testimony that—and, actually, 

this was in discussions of legislation that would limit margin and 

clearing requirements for overseas derivatives trading—that a substantial percentage of JPMorgan Chase’s derivatives business has 

moved to London or is in the process of moving to London. Is that 

correct? 

Mr. GRUENBERG. They are a very significant operation out of 

London, and they operate as a branch in many countries, and they 

37 

have advocated to this Commission that it not be covered by DoddFrank reforms. I have a different view, and I hope that the Commission will vote to get public comment this Thursday, that we 

don’t, in essence, create another London loophole. 

Mr. LYNCH. Right. That is what I want to ask you about. How 

does your oversight toolbox differ when trades are executed 

through London, in this instance, as opposed to in the United 

States? What are those London loopholes that you have described? 

Mr. GENSLER. Congress has given us some discretion to interpret 

a provision of the Act, Section 722(d), as to where is the reach of 

the Act. And if it has a direct and significant effect on the commerce or activities here in the United States, then it is covered. So 

that is the debate that is going on, is an interpretation of a very 

critical part of Dodd-Frank. I believe that, to answer the question, 

these would be under part of the direct and significant effect on 

U.S. commerce or activities. 

Mr. LYNCH. One last question, I have about a minute left. On 

May 18, 2012, Morgan Stanley issued a research note estimating 

the JPMorgan Chase losses could reach as high as $5.2 billion, and 

the report also contains some analysis of how such trading losses 

might have occurred. This is assuming that they were right and 

there is a limited amount of information on this, but this is assuming that was a CDX IG 9 that you mentioned before, which is a 

more standardized derivative that is approved for clearing both in 

the United States and Europe. 

There are estimates that the losses could reach as high as $5.2 

billion. Do you think that is somewhat accurate or not? 

Mr. CURRY. We are still reviewing with our examinations with 

the bank the scope of the potential losses, but our focus is to monitor the de-risking of their precision. 

Chairman BACHUS. Thank you. Mr. Lynch? 

Mr. LYNCH. I am just trying to get an estimate here whether $5.2 

billion is accurate or not accurate. A simple yes or no? 

Chairman BACHUS. Mr. Lynch, let me say this, no one knows. 

Mr. LYNCH. That is why we have the witnesses, so they can testify, not so you can answer for them. 

Chairman BACHUS. But your time is up. 

Mr. Curry? If you know how much the loss will be? 

Mr. CURRY. That is a matter we are still reviewing in our examination activity. 

Chairman BACHUS. Thank you. Mr. Pearce? 

Mr. PEARCE. Thank you, Mr. Chairman. Mr. Alvarez, if we are 

going to look at derivatives trading and especially overseas derivatives trading, and we are going to prioritize the risk that these 

major firms face, would that particular activity be in the middle or 

at the top? Is that a scary, risky thing or is it kind of not very 

risky? What priority should we be looking at when we consider derivatives trades? 

Mr. ALVAREZ. I am not sure what priority Congress wants to— 

Mr. PEARCE. No, I am saying, you are in charge of risk, that is 

what you say. 

Mr. ALVAREZ. I think from the other perspective, we are taking 

two high-priority approaches. One is, we think it is important for 

firms to have good risk management around— 

38 

Mr. PEARCE. My question is not that. My question is, derivative 

trading itself, is it very high risk? 

Mr. ALVAREZ. It can be if— 

Mr. PEARCE. It can be a very high-risk item, that is all I am trying to establish. 

Chairman BACHUS. Allow the witness to answer the question. 

You are sort of stepping on his answer. 

Mr. PEARCE. Mr. Chairman, I have 5 minutes, if he is going to 

skew off to the side. 

Chairman BACHUS. He is trying to answer your question. 

Mr. PEARCE. My question wasn’t what they are doing and what 

they are doing with risk relation, it was the priority-based, it is the 

difficulty of regulating derivatives, that was my question. What I 

am going to go to next is you guys are the supervisors in charge, 

that is, the consolidated supervisor in charge of all of the people 

who are regulating the activities. And so I see, Mr. Curry said that 

he has people, 65 people on location, these are not just regular people, these are people with 20 more years of experience, skills in key 

risk areas, teams of Ph.D. economists from the OCC. 

He then identifies in the next paragraph that the examination 

teams have three objectives, one of which is the key risks. Derivatives would be a key risk; they are very problematic. So my question is, with the 65 regulators onsite, would you know the name of 

the one who monitors the trading of derivatives? You are the guy 

in charge, you, the Federal Reserve, you say so in your testimony. 

Mr. ALVAREZ. No, we are not the ones in charge of the OCC, we 

are the consolidated supervisor—we supervise the unregulated portions of the holding company and its consolidated activities. But 

the specific activities in the national bank, those 65 examiners you 

are talking about, I am afraid— 

Mr. PEARCE. Mr. Curry, would you have a name of whomever is 

in charge of the derivatives? 

Mr. CURRY. We operate supervision policy where we have a resident examiner in charge of the institution. That individual allocates responsibility for individuals to examine into particular areas 

of the bank. That can change over time, it can also be the result 

of someone being brought in— 

Mr. PEARCE. Do you have a name of who was in charge during 

that time in early April? 

Mr. CURRY. Not at the moment of looking at the derivatives portfolio. 

Mr. PEARCE. Mr. Chairman, my point is that we have 65 geewhiz people, these are top-notch people according to your testimony. We have this stuff going on, they are onsite in order to pay 

attention, and yet I hear from Mr. Alvarez that we are concerned 

with the changes and the portfolio during that period of time. 

What are they doing? Are they sitting there watching? That is 

what they were doing, the SEC and the CFTC were sitting with 

MF Global while they were taking money out of customer accounts. 

They weren’t watching, they weren’t saying a word, they weren’t 

raising an alarm. And here you all are saying you are starting an 

investigation, I thought that was the reason you had people on location in order to watch what is going on. 

39 

You have 65 people. You say in your testimony the key risks are 

what you are monitoring, and yet, Mr. Alvarez finds out, whew, 

you all didn’t call him and tell him. He is alarmed with the 

changes. And I am just thinking, what are we doing here? Why do 

you have these people on location? Mr. Gruenberg, he at least admits that at least we are finally worried about—we are seeing recent losses that reveal certain risks. The entire Nation is aware of 

those risks. I am sitting here saying, what were we doing if you 

are supposed to be regulating? We are all supposed to be out there. 

You have on-site teams and now we are starting investigations, the 

investigation should be that you are talking to your people who are 

on location and finding out if they are doing their job, or they are 

sitting there with their feet on the desk drinking coffee. 

From this side of the table, we ask you all to do this, and yet 

I come here and read all this testimony and it is all kind of angling 

toward the same thing: Nobody is really in charge, nobody is really 

supervising. We are finding out after the fact through press releases or whatever. This gets very frustrating from our point of 

view. 

Mr. CURRY. I understand that, Congressman. That is part of our 

review process is to do a postmortem to see what went wrong in 

this particular case and how the OCC can better perform its duties 

as a supervisor. 

Mr. PEARCE. Thank you, Mr. Chairman. I yield back. 

Chairman BACHUS. I thank you. The Chair thanks the panel for 

their testimony. The Chair notes that some Members may have additional questions for this panel, which they may wish to submit 

in writing. Without objection, the hearing record will remain open 

for 30 days for Members to submit written questions to these witnesses and to place their responses in the record. 

And as a witness noted, this is an ongoing investigation and that 

was one reason that we delayed our hearing until more information 

could be gathered. I think, as Mr. Curry has said, some of the reporting was granular, and it was not appreciated within the firm, 

and it would be pretty difficult to determine some of these things. 

The panel is dismissed. 

And the first panel, if you wish to go out this way, you are welcome to go out through the side door. 

Mr. FRANK. Mr. Chairman, could we ask people who are not 

needed to move? We are going to lose somebody getting a chance 

to question. If people would get outside the door, they are blocking 

the door. We have to get Mr. Dimon. Would the people at the door, 

the Treasury Department officials, please move outside? 

Chairman BACHUS. Would you let Mr. Andrews maybe find a 

place to sit? 

The Chair wishes to remind all our guests that the manifestation 

of approval or disapproval, including the use of signs and placards, 

is a violation of the rules which govern this committee. The Chair 

wishes to thank our guests in advance for their cooperation in 

maintaining order and decorum. 

Our second panel is made up of one witness, Mr. Jamie Dimon, 

the CEO of JPMorgan Chase. And Mr. Dimon, you are recognized 

for 5 minutes. Maybe if the cameras will take a picture and then 

sort of exit? 

40 

Mr. Dimon, you are recognized for 5 minutes, and we welcome 

you to the committee. 

STATEMENT OF JAMIE DIMON, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, JPMORGAN CHASE & CO. 

Mr. DIMON. Thank you, Mr. Chairman. Chairman Bachus, Ranking Member Frank, and members of the committee, I am appearing 

today to discuss recent losses in a portfolio held by JPMorgan 

Chase’s Chief Investment Office. These losses have generated considerable attention, and while we are still reviewing the facts, I 

will explain everything I can to the extent possible. 

JPMorgan Chase’s six lines of business provide a broad array of 

financial products and services to individuals, small and large businesses, governments, and not-for-profits. These include deposit accounts, loans, credit cards, mortgages, capital markets advice, mutual funds, 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 hold approximately $1.1 trillion in deposits and $700 

billion in loans. CIO, along with our Treasury unit, invests excess 

cash in a portfolio that includes Treasuries, agencies, mortgagebacked securities, high-quality securities, corporate debt, and other 

domestic and overseas assets. It also serves as an important vehicle 

for managing assets and liabilities of the consolidated company. 

In short, the bulk of CIO’s responsibilities is to manage an approximately $350 billion portfolio in a conservative manner. 

While their 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 the current Eurozone situation. 

So what happened? In December 2011, as part of a firmwide effort, and in anticipation of new Basel capital requirements, we instructed the CIO to reduce risk rate assets and associated risk. 

To achieve this in the synthetic credit portfolio, the CIO could 

simply have reduced its existing positions. Instead, starting in midJanuary, it embarked on a complex strategy that entailed adding 

positions that it believed would offset the existing ones. This strategy, however, ended up creating a portfolio that was larger, and ultimately resulted in even more complex and hard-to-manage risk. 

This portfolio 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, and we are sorry for it. 

Now, let me turn to what went wrong. We believe a series of 

events led to the difficulties in the synthetic credit portfolio. These 

are detailed in my written testimony, but I will highlight the following: The CIO’s strategy for reducing the synthetic credit portfolio was poorly conceived and poorly vetted. In hindsight, the traders did not have the requisite understanding of the risk they took. 

The risk limits for the synthetic credit portfolio should have been 

specific to the portfolio and much more granular, i.e., only allowing 

lower limits on each specific risk being taken. The CIO, particularly the synthetic credit portfolio should have gotten more scrutiny 

41 

from both senior management and the firmwide risk control function. 

In response to this incident, we have already taken a number of 

important actions to guard against a recurrence. We have appointed an entirely new leadership for the CIO. Importantly, our 

team has made real progress in aggressively analyzing, managing, 

and significantly reducing our risk going forward. Although this 

does not reduce the losses already incurred, and it does not preclude future losses, it does reduce the probability and magnitude 

of future losses. 

We are also conducting an extensive review of this incident 

which our board of directors is independently overseeing. When we 

make mistakes, we take them seriously, and often we are our own 

toughest critic. In the normal course of business, we apply lessons 

learned to the entire firm. So while we can never say we won’t 

make mistakes—in fact, we know we will make mistakes—we do 

believe this to be an isolated event. We will not make light of these 

losses but they should be put into perspective. We will lose some 

of our shareholders’ money, and for that we feel terrible, but no client, customer or taxpayer money was affected by the incident. 

Our fortress balance sheet remains intact. As of quarter end, we 

held $190 billion in equity and well over $30 billion in loan loss reserves. We maintain extremely strong capital ratios far in excess 

of regulatory capital standards. As of March 31st, our Basel I, Tier 

1 common ratio was 10.4 percent, and our estimated Basel III Tier 

1 common ratio was 8.2 percent, both among the highest in the 

banking sector. We expect both of these numbers to be higher by 

the end of year. 

All of our lines of businesses remain profitable and continue to 

serve consumers and businesses. And while there are still 2 weeks 

left in our second quarter, we expect our quarter to be solidly profitable. In short, our strong capital position and diversified business 

model did what they were supposed to do, cushion us against unexpected loss in one area of our business. 

While this incident is embarrassing, it should not and will not 

detract our employees from our main mission: to serve clients, consumers, and companies and their communities around the globe. 

During 2011, JPMorgan raised capital and provided credit of 

over $1.8 trillion for consumer and commercial clients, up 18 percent from the prior year. We provided more than $17 billion of 

credit to U.S. small businesses, up 52 percent over the prior year. 

And over the past 3 years, in the face of significant economic 

headwinds, we made the decision not to retrench but to step up as 

we did with markets in turmoil when we were only bank willing 

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 managing 

the risk of our businesses, particularly given today’s considerable 

global economic and financial volatility. 

Finally, I would like to say that in the face of these recent losses, 

we have come together as a firm, acknowledged our mistakes, and 

committed ourselves to fixing them. We will learn from this inciVerDate Nov 24 2008 15:49 Mar 13, 2013 Jkt 076107 PO 00000 Frm 00045 Fmt 6633 Sfmt 6633 K:\DOCS\76107.TXT TERRI
42 

dent, and my conviction is we will emerge from this moment a 

stronger, smarter, better company. 

I also would like to speak directly for a moment to our 260,000 

employees, many of whom are watching this hearing today. I want 

all of you to know how proud I am of JPMorgan Chase, the company, and how proud I am of what you do every day for your clients and communities around the world. Thank you. I welcome any 

questions you may have. 

[The prepared statement of Mr. Dimon can be found on page 110 

of the appendix.] 

Chairman BACHUS. Thank you, Mr. Dimon. 

And let me say that the first panel unanimously said that 

JPMorgan had sufficient capital, and that there were no liquidity 

problems, and that depositors’ money, clients’ money was certainly 

not at risk. 

Mr. LYNCH. Mr. Chairman, a point of order, are we going to ask 

the witness to take an oath, to speak under oath or has that process been waived here? 

Chairman BACHUS. We have never done that. I see no reason at 

this hearing to do what we have not done in several years. 

Mr. LYNCH. I object to that, sir. 

Chairman BACHUS. I see no reason to place this witness under— 

this is not a criminal proceeding, or even a civil proceeding, and 

he has voluntarily come before us. 

At this time, Mr. Manzullo, for 5 minutes. 

Mr. MANZULLO. Thank you, Mr. Chairman, for calling this hearing. 

Mr. Dimon, on the third to last paragraph of your written testimony, you have written ‘‘all these activities come with a risk. Just 

as we have remained focused on serving our clients, we have also 

remained focused on managing the risk of our business, particularly given today’s considerable global economic and financial volatility.’’ 

I just returned from a conference in Copenhagen with members 

of the EU Parliament discussing the tremendous crisis going on 

with the Eurozone countries. The IMF has estimated that the average debt of the 17 Eurozone countries is about 80 percent of GDP. 

But in the United States, the debt of this country, which includes 

State, local, and Federal, is 107 percent of GDP. And my question 

to you is, what do you think is going to be the bigger story 2 years 

from now in terms of the health and strength of the financial industry, trading losses at JPMorgan or the Eurozone? 

Mr. DIMON. The Eurozone—I am sorry I take up so many people’s time on this loss, because it is rather insignificant in the global scheme of things, and things that you ought to worry about as 

legislators, and what we need to worry about in Europe. Europe is 

a significant event. I am far more worried about Europe than I am 

about this trading position. And I hope the legislators over there 

can overcome their complications and keep the Eurozone alive. 

Mr. MANZULLO. Can you give us a reading, in your opinion, as 

to the impact, for example, on the U.S. economy, should the Greeks 

decide to get out of the Eurozone, go back to the drachma, or 

should the entire Eurozone itself collapse? 

43 

Mr. DIMON. Unfortunately, as a bank, we have to prepare for all 

eventualities, so we are not guessing what might happen. I want 

to make sure we come forward to our shareholders and communities and say, whatever happens we can survive and thrive going 

forward. 

Greece defaulting alone is not the issue; it is Greece leaving the 

Euro and the fallout effect of that might be a bank run in Italy and 

Spain. We see that they are trying to put firewalls in place to stop 

that from happening. If I had to guess at the outcome, I think that 

might work. I think it is important they do that, and hold back a 

crisis, and then they have to go about having a real fiscal treaty 

among the 17 nations of the Euro. So short-term solutions may 

stop a crisis, but it won’t stop—they have to really fix the underlying problems. 

Mr. MANZULLO. Italy has an economy that is 21⁄2 times that of 

Ireland, Portugal, and Greece combined. The Italian banks don’t 

have a liquidity problem, they have a big problem with debt. Could 

you address the impact of debt on nations as it relates to the ability—it as relates to liquidity but more importantly, the overall 

economy? 

Mr. DIMON. The banking—Italy, surprisingly, is actually a very 

wealthy nation and they have the wherewithal to meet their debt, 

but they are having a crisis of confidence, which is damaging that. 

The banks there own a lot of sovereign debt. Banking systems don’t 

function very well if the sovereign system is not functioning; they 

actually go hand-in-hand. You need to fix both to make the whole 

financial system strong there. 

Mr. MANZULLO. The reason I ask that is that, as you know, the 

EU is our largest trading partner, and your bank is obviously involved in international finance, and it is always important for 

members to be able to glean from people who are on the inside seeing that happen. Can you give—I am not looking for a forecast, but 

how do you see the Eurozone issue as being resolved? 

Mr. DIMON. In Europe, what we see is that the politicians have 

the will, they want to fix it, they talk about no plan B, there is only 

one plan, which is the keep the Euro alive. I think there the way 

is very hard, because you have 17 nations, and 17 parliaments, so 

what our economists think, and a lot of smart people I listen to, 

is that there will be a firewall for Italy and Spain, that you will 

have growth and austerity plans for the southern nations, and that 

the 17 nations will come up with a fiscal treaty which has more 

carrots and sticks in it, and that is believable by the world, and 

will show long-term progress of getting down the debts of Europe. 

Chairman BACHUS. Thank you. Mr. Frank for 5 minutes. 

Mr. FRANK. Mr. Dimon, you said that you want there to be smart 

regulation, as opposed to more regulation. The Commodities Futures Trading Commission’s budget was $200 million for the year, 

and it has been proposed to cut it. The President is supposed to 

raise it to $308 million, not a huge sum. Do you think at the level 

of $180 million, that you can get smart regulation out of the CFTC? 

Mr. DIMON. I have never looked at the CFTC’s budgets, I don’t 

know what they need, and so it would be almost impossible for me 

to comment on it. 

44 

Mr. FRANK. I am disappointed. By the way, the Appropriations 

Committee just voted 27–19 not to give them the additional funds. 

I am surprised because it did seem to me you are well-informed 

about other aspects of what the Federal Government does or 

doesn’t do. And to talk about smart regulation, but in effect to give 

them a pass on the substantial reduction in the CFTC, seems to 

be a mistake. But you answered that. 

The next question is, the legislation that would remove any application—I understand there was a Volcker Rule debate, but as 

you know, over and above the Volcker Rule, there are requirements 

we have put on derivatives trading which you have spoken of somewhat favorably. But there is legislation that would have exempted 

the transactions in question and any other transactions conducted 

overseas, not in this country, from the rules of clearing where possible about transparency. Do you believe that we should enact that 

and exempt the kinds of activities talked about here even when 

conducted by an American institution from these regulations? 

Mr. DIMON. These trades are not exempt from regulations. 

Mr. FRANK. No, I am talking about the regulation—you know 

what I mean, I am talking about the specific rules enacted in the 

financial reform bill that are about to be adopted regarding derivatives, transparency, et cetera. There is a bill, as you know, that 

would exempt derivatives trades overseas, over and above the 

Volcker Rule, whether in a bank or not; there are two sets of rules 

here. Do you believe and are you supportive of the bill that would 

exempt these trades from the rules on derivatives that we hope to 

have in place? 

Mr. DIMON. Yes. 

Mr. FRANK. Why do you think that they are adequately regulated 

elsewhere? Why would you not want the American regulators to 

have an ability to—for instance, transparency, and clearly where 

possible, I thought you were approving of those, why would we 

want to exempt these kind of activities from these rules? 

Mr. DIMON. These trades are visible and regulated by the OCC 

and the Fed. Sixty percent of these trades were, in fact, cleared; 

all of them were fully collateralized. So we are not against rules 

that caused those things. 

Mr. FRANK. Mr. Dimon, excuse me, then they would have met 

the rule. But it does seem to me there were problems with this in 

terms of your knowing about when they happened, about your 

being uninformed about them, or underinformed. But you are in 

favor of exempting these kinds of trades from any American derivatives regulation? 

Mr. DIMON. Not any, prudential they should have, transparency 

they should have. 

Mr. FRANK. Regulation derivatives. Transparency is part of the 

thing you would be exempted from, there is no legal requirement 

for transparency other than that—once again, I am disappointed. 

Let me ask you—we have a time issue. You said because you 

have a fortress balance sheet, these were not a threat. What about 

institutions whose balance sheets are less impregnable, as I said, 

a couple chain link, maybe a picket fence or two. Should we have 

rules since we don’t legislate just for JPMorgan Chase, is there a 

danger that this kind of activity in a financial institution and inVerDate Nov 24 2008 15:49 Mar 13, 2013 Jkt 076107 PO 00000 Frm 00048 Fmt 6633 Sfmt 6633 K:\DOCS\76107.TXT TERRI
45 

sured institution with less in a strong balance sheet might cause 

some problems? 

Mr. DIMON. I don’t know, but I think you should all take comfort 

in the fact that all American banks are better capitalized. The system is far stronger today— 

Mr. FRANK. I appreciate that, but that wasn’t the question I 

asked. And we can’t assume it will be that way forever, and there 

are some who are resisting the capitalization. So if you were not 

as well-capitalized, would this have had some problems in it that 

we didn’t have because of your balance—you said you have a fortress balance sheet, which assumes there is something special 

about the way you are that made us have to worry about it. But 

we can’t assume that is going to be the case for every financial institution. 

Mr. DIMON. But I also said we would be solidly profitable this 

quarter, so relative to— 

Mr. FRANK. That is not the question, Mr. Dimon. Please don’t filibuster. Let me ask you now. 

I am sorry, Mr. Chairman, I asked a specific questions. Mr. 

Dimon knows full well what we are talking about. You did say finally that there would be some clawbacks for compensation. You 

have also taken some responsibility here, will the clawbacks for 

compensation—is your compensation on the table for consideration 

of clawbacks? 

Mr. DIMON. Yes, all of the—this whole action should be reviewed 

by the board. 

Mr. FRANK. Yours is a specific question. 

Mr. DIMON. My compensation is 100 percent up to my board. 

Mr. FRANK. Mr. Dimon, you said there are going to be clawbacks 

for people responsible. Is your compensation in the pot that is 

going to be considered for that? 

Mr. DIMON. They will do what they see as appropriate. I can’t 

tell my board what to do. 

Chairman BACHUS. Thank you. Mrs. Biggert for 5 minutes. 

Mrs. BIGGERT. Thank you, Mr. Chairman. Mr. Dimon— 

Chairman BACHUS. Let me explain to the witness, because it is 

a little bit of an unusual procedure. The Republican side elected to 

go in order and not to come back up to the top to allow all the 

Members to ask questions. The Democratic Members are starting 

over. 

Mr. FRANK. Let me say, Mr. Chairman, not entirely, with modifications for people who were here and not here. 

Chairman BACHUS. Yes, that is fine. Thank you. Mrs. Biggert for 

5 minutes. 

Mrs. BIGGERT. Thank you. Mr. Dimon, what went wrong with 

JPMorgan’s Value at Risk model which is used to estimate losses 

that occur on a particular trade or in a portfolio? The press has reported that JPMorgan changed its model which allowed its London 

traders to take on more risk, and then JPMorgan changed its 

model again. And then to top it off, this change occurred in January, which seemed to be material in nature but was not included 

in its Value at Risk model. The SEC has said that when a public 

company changes its model, those changes must be disclosed. So 

why exactly were the risk models changed? 

46 

Mr. DIMON. We have hundreds, maybe a thousand models, which 

are periodically changed and updated. The intent is usually to 

make them better. Back in June of the prior year, the CIO and an 

independent model risk group were trying to update and improve 

a model. It was approved, and it was implemented in January. As 

of April 13th, we had no reason to think it wasn’t a better model 

and didn’t better reflect some of the risks that were being taken 

there. Clearly, when things started to go south several weeks later, 

we felt that the new model was not better, and went back to the 

old model which we thought was better. We disclosed that in our 

10-Q, and we told our shareholders on May 10th. 

Mrs. BIGGERT. So it was changed on May 10th, but was there approval? 

Mr. DIMON. There is an independent model review group which 

approved it and we have a review taking place—this is one of the 

things we will go through in a lot of detail and make sure we know 

all the facts exactly as they happened. I should also point out that 

we don’t run trading risk based on one model. There are a lot of 

other things that should determine your decisions. 

Mrs. BIGGERT. Did you think that was adequate disclosure? 

Mr. DIMON. We disclosed what we knew when we knew it. 

Mrs. BIGGERT. Okay. So who was responsible for making the 

change? 

Mr. DIMON. It was approved by an independent model review 

group. Whether it was implemented really well, I don’t know, it is 

still part of the review. 

Mrs. BIGGERT. You don’t know who made the change within the 

company or decided there needed to be a change? 

Mr. DIMON. There are constant changes, people asking for updates and adjustments based upon new facts and new history. 

Mrs. BIGGERT. Do you think that regulators should have noticed 

whether there was adequacy in the reporting? 

Mr. DIMON. Regulators periodically review models and model 

changes, and in this case, I wouldn’t blame that. If we failed to 

pick up its inadequacy, I don’t think we should expect the regulators to pick it up. 

Mrs. BIGGERT. So you don’t think these changes had anything to 

do with what happened? 

Mr. DIMON. I think it may have aggravated what happened. I 

wouldn’t say it was the cause of what happened. 

Mrs. BIGGERT. All right. I yield back. 

Chairman BACHUS. Ms. Waters for 5 minutes. 

Ms. WATERS. Thank you very much, Mr. Chairman. Mr. Dimon, 

I am trying to understand your position relative to Dodd-Frank and 

a number of other issues. I am not going to try to use this as a 

‘‘gotcha’’ moment, and I don’t want to you use this as a way or a 

time that you can basically just give us a lot of information that 

we don’t need. 

You said you support 75 percent of Dodd-Frank, but after your 

testimony last week, and after following your statements in the lobbying of some of the industry over the last 2 years, I really don’t 

know what you really support. When it comes to the most important substantial elements of Dodd-Frank, I am afraid that we don’t 

have your support, even when these reforms would actually benefit 

47 

your firm, your shareholders, and America’s taxpayers by preventing another financial crisis. 

Of the Volcker Rule, in testimony before the Senate last week, 

you called it unnecessary and you asserted that some banks like 

JPMorgan should be treated differently under the rule; they should 

have a higher speed limit. But at the same time, you also conceded 

that the Volcker Rule may have prevented the recent trading losses 

in the CIO. Of capital standards, you told the Senate last week 

that you support higher capital for larger banks, but your chief risk 

officer has testified here in this committee against a capital surcharge for the largest U.S. banks. On Title VII derivatives requirements in Dodd-Frank, you say that you want to work with us to 

implement those reforms, but you work for loopholes through bills 

here in Congress. 

So I want to ask a few questions, and this one requires a simple 

yes-or-no answer. When we think about the losses coming out of 

the CIO in London, did those losses stay in London or did the $30 

billion or more drop in your market value impact your shareholders 

here in the United States? 

Mr. DIMON. Yes, it did affect our shareholders. 

Ms. WATERS. But you have lobbied very strongly and you just answered Mr. Frank that you do believe that the foreign markets 

should be exempt from the extraterritorial regulations that we are 

proposing here. And if this impacted your shareholders here, why 

do you continue to take that position? 

Mr. DIMON. I think I said the overseas operations are regulated 

by the Fed and the OCC, these things went to clearinghouses and 

they collateralized. The reason we are careful about overseas competition is if JPMorgan overseas operates under different rules 

than our foreign competitors, we can no longer provide the best 

products and services to our U.S. clients or our foreign clients. That 

is why we are concerned about extraterritoriality. It is not about 

the protection, but the ability for us to compete. And when we compete, we give our clients, which include major U.S. companies, better deals. They will go elsewhere if we cannot give them the best 

possible deal no matter how much they like us. 

Ms. WATERS. So you take that position, despite the fact that the 

losses do not stay in London? 

Mr. DIMON. Yes. 

Ms. WATERS. And you continue to lobby for exemptions for the 

foreign trades? 

Mr. DIMON. Lobbying is a constitutional right and we have the 

right to have our voice heard. 

Ms. WATERS. I am not questioning your right to lobby. I am questioning what is in the best interest of the American public. While 

the public doesn’t know the full details of this trade, it is clear that 

these trades were not subject to the full panoply of rules we crafted 

under Title VII. I think we all need to be just very, very clear 

about that. And I want to know whether or not you are aware of 

Mr. Gensler’s testimony here today, and what he said about the 

risk that you take in having that kind of exemption, and whether 

or not you agree with Mr. Gensler and what he testified here today 

in any way, any shape, form, or fashion. 

48 

Mr. DIMON. I don’t agree with him. I heard part of it, and I think 

the starting point should be that the United States is the best, 

widest, deepest, most transparent capital market in the world that 

has flaws. We should fix the flaws, we are concerned about some 

of these things making us not the best capital markets in the 

world. The best capital markets in the world in part is what made 

this the best business machine ever, the United States of America. 

We just want to get it right, it is not binary, it is not one thing, 

these are very complex rules. We want to get it right so it works 

for America. 

Chairman BACHUS. Thank you. Mr. Duffy for 5 minutes. 

Mr. DUFFY. Thank you, Mr. Chairman. Mr. Dimon, good morning. I think it is clear that we are not here because a private firm 

lost $2 billion. I think it is clear that we are here because many 

of the American taxpayers are concerned when big banks go bad, 

and they are left holding the loss. It is one of these philosophies 

where we have capitalism on the way up, where you and your firm 

make a lot of money when you do well. And when you fail, we have 

socialism on the way down, and the taxpayers bear the brunt of 

that loss. That is why we sit here today to make sure that taxpayers in Wisconsin don’t bear the loss of big banks on Wall Street. 

So when we look at what is going on, would you say that the regulators are capable of sufficiently regulating a bank the size of 

JPMorgan? 

Mr. DIMON. First of all, I completely agree with the fact that taxpayers should never pay for a big bank failing, totally. So we 

should work on things to make sure that is true. 

Mr. DUFFY. But we will agree, we were a little nervous about it 

when we had TARP and the taxpayers did it just a couple of years 

ago. We are a little gun shy with big bank losses. Are other regulators sufficiently staged to regulate a bank the size of JPMorgan? 

Mr. DIMON. I think the regulators have been challenged with a 

lot of new rules and regulations. I think it’s challenging them to 

get them all done on time. 

Mr. DUFFY. Can they regulate a bank the size of JPMorgan? 

Mr. DIMON. I believe they can, yes. 

Mr. DUFFY. And so, I want to be clear on this, per your testimony, you said that as one of the best and brightest CEOs in this 

industry, held in high esteem, you didn’t know about these trades, 

and you didn’t know about these losses. How do you come forward 

today and say the regulators should have known what one of the 

best CEOs in the industry didn’t know and couldn’t have known? 

Mr. DIMON. I didn’t say that. Remember, we have high capital 

standards, high liquidity standards, far more rules, most banks are 

stronger, there are far more—boards are more engaged, risk management committees are engaged, there are no off-balance sheet vehicles, there are no more subprime mortgages. 

Mr. DUFFY. Mr. Dimon, the system is far healthier, and you have 

to look at regulation in its whole, not the one thing that they might 

have missed. If one of the best CEOs in the industry doesn’t know 

about these trades, how can we expect the regulators to know 

about these trades and protect the American taxpayers? 

Mr. DIMON. I think it would be an unrealistic expectation that 

they would capture everything, some things will get through their 

49 

screen, like some things get through our screen. However, they can 

make it a better system by disseminating that kind of information 

to a lot of other companies, they audit us regularly, they constantly 

are criticizing some of the things we are doing, it makes us a better 

company. I just think we need realistic expectations for regulators. 

Mr. DUFFY. And I would agree. But is it fair to say that a $2.3 

trillion bank is too-big-to-manage? Too-big-to-regulate? Too-big-tocontrol? Is it too complex? Are you too-big-to-fail? 

Mr. DIMON. No, we are not too-big-to-fail. We believe that a bank 

should be bankruptable, and that when the bank fails that the 

clawbacks should be invoked on management, the board should be 

fired, and the company should be slowly dismantled. 

Mr. DUFFY. And who bears the losses? 

Mr. DIMON. In a way, that doesn’t cost the economy anything. 

Mr. DUFFY. Who bears the losses? 

Chairman BACHUS. Mr. Duffy, allow the witness to answer the 

question. 

Mr. DIMON. They are charged back to the other big banks to survive, that is what I believe. 

Mr. DUFFY. If JPMorgan fails, who picks up the tab? 

Mr. DIMON. If JPMorgan fails, I don’t think anyone is going to 

pick up any tab because we have $190 billion of equity, $290 billion 

of unsecured debt, so I don’t think there is any chance we are going 

to fail. If we did, any losses the government would bear should go 

back, be charged to the banks. Just like the FDIC today is charged 

back the banks. JPMorgan is going to spend $5 billion of fees to 

the FDIC to pay for the failure of other banks. 

Mr. DUFFY. So— 

Mr. DIMON. I don’t like the $5 billion, but I think it is appropriate that the American taxpayer doesn’t pay for that guarantee. 

Mr. DUFFY. I thought were you done. The Orderly Liquidation 

Authority would step in and bear the brunt of JP Morgan’s loss 

should you fail, right? 

Mr. DIMON. The loss would mostly be borne by equity and unsecured debt. They might provide temporary funds to keep the company functioning in the short run. 

Mr. DUFFY. But is it fair to say that JPMorgan could have losses 

of a half trillion dollars or a trillion dollars? 

Mr. DIMON. Not unless the Earth is hit by the Moon. 

Mr. DUFFY. Okay. I want to go to your trades that brought us— 

brought you the $2 trillion—I am sorry, the $2 billion to $5 billion 

loss. The dollars that were used to trade, those were dollars that 

were backed up by the FDIC; is that right? 

Mr. DIMON. I am sorry, say that again? 

Mr. DUFFY. The $2 billion to $5 billion loss that you incurred, the 

dollars that were used to make those trades, those were dollars 

that were backed up by the FDIC? 

Mr. DIMON. Yes. 

Mr. DUFFY. Okay. And why then weren’t you taking this excess 

deposit and investing those dollars here with American businesses, 

American consumers, instead of taking those excess dollars backed 

up by the American taxpayers, or the FDIC, and sending them over 

to London to make very complex— 

50 

Mr. DIMON. It is not either/or. We have $700 billion of loans, we 

have $200 billion of short-term investments in central banks 

around the world to handle cash flow for our clients, and we have 

a $350 billion, AA-plus securities portfolio. Any valid loan that 

comes in the door that we can make, small business, middle market where we are, we try to make those loans. 

Chairman BACHUS. Thank you. And let me say, I am sure that 

somewhere in Dodd-Frank, there is a prohibition against the Moon 

striking the Earth. 

Mrs. Maloney? 

Mrs. MALONEY. Thank you, I would like to welcome Mr. Dimon, 

who resides in the district I am privileged to represent. I would 

like to note that he has been a major employer in a number of different financial institutions before joining JPMorgan Chase. 

I would like to ask you, Mr. Dimon, I always thought that you 

loved New York. So why are all these jobs and all this activity taking place in London? I specifically would like to know why were the 

losses incurred in the London unit? They didn’t take place in the 

New York unit. Could they have incurred in New York just as easily? 

We learned in the prior regulatory panel that a substantial portion of the bank’s Chief Investment Office’s activities, including its 

credit derivatives trading, are conducted through the London 

branch, and that other large financial institutions likewise have 

London offices. And I certainly understand that we are in a global 

market and we have to be in global markets around the world, but 

what is it about the regulatory regime of the United Kingdom that 

encourages such a large portion of these activities to take place in 

London as opposed to the United States? 

And I would also say that a large portion of the credit disasters have taken place in London: AIG, we bailed out $184 billion; Lehman; UBS; there is a whole series. And I want to understand why 

all this is taking place, why London? 

Mr. DIMON. The predominant part of the CIO is done in New 

York, but we operate in 100 countries. We are on the ground in 60 

countries, we take deposits in all of those countries, we have to invest in some of those countries, they all have laws, rules, and requirements. That operation could have been in London or somewhere else, sometimes the operation where we have the people, 

so— 

Mrs. MALONEY. Is the regulatory regime lighter in London? Why 

is all the activity overwhelmingly, and all the problems appear to 

be in London? 

Mr. DIMON. I don’t think this activity was in London because regulatory activity is less in London. And most of what we do in London is serving European companies. 

Mrs. MALONEY. What are the lessons that you have learned for 

large financial institutions going forward? Is there any way to ensure against this type of loss where a trader is forced to hedge the 

hedge and cover losses that led to more losses? Is it possible to ensure that legitimate hedges never morph into something else? 

Mr. DIMON. It is not possible to ensure we will never make a 

mistake. Anyone who has ever been in business knows you make 

mistakes, hopefully they are small, hopefully they are few and far 

51 

between, and hopefully they are not life-threatening, and this is 

not life-threatening. We, in this one area, failed to have the granular limits and the rigorous review that we should have. We believe 

it is not true for the rest of the company. We try to be very, very 

disciplined, and we fixed this problem the second we found it. 

Mrs. MALONEY. And were the risk limit rules raised while the 

loss-making position was on the books? 

Mr. DIMON. No, they—sometimes limits hit triggers and it asks 

you for further focus and detail. I think some of the things you 

heard about were when some of these limits were hit, people did 

what they were supposed to do. 

Mrs. MALONEY. Did they raise them? 

Mr. DIMON. They do get raised sometimes, yes. 

Mrs. MALONEY. Why were they raised again? 

Mr. DIMON. I didn’t say they were—I don’t know if they were 

raised. I am saying sometimes they do get raised. 

Mrs. MALONEY. So you don’t know whether they were raised or 

not? 

Mr. DIMON. They might have been, I don’t recall. 

Mrs. MALONEY. Was the loss-making position increased in size 

after it began generating losses? 

Mr. DIMON. What I recall is that they weren’t really increased in 

size after early April. At one point, they stopped taking positions. 

I think that was in late March. 

Mrs. MALONEY. And what was the delay between the start of the 

losses and senior management action? 

Mr. DIMON. Prior to April 13th, there had been some losses, and 

management was looking at it. People looked at stress testing, a 

lot of folks thought of it as an aberrational thing that would come 

back, which happens sometimes. The real losses started later in 

April, late April, like the last week of April. At that point, we 

brought in some top experts again, they dug deep, and we realized 

we had a much more severe problem and that we—that was late 

April that we started— 

Mrs. MALONEY. And what was the delay between the start of the 

losses and disclosure of the losses to the Office of the Comptroller 

of the Currency on-site at JPMorgan Chase? 

Mr. DIMON. I don’t believe there was a delay in the disclosure of 

the losses. We run a regulatory—we try to run the company that— 

what I call open kimono with—the regulators to tell them what we 

know and when we know it. I don’t know exactly what all reports 

they were looking at, but we don’t hide reports from them. They 

do see P&L, so they saw the losses. I do know at one point our CO 

went to see them to explain what had happened prior to April 13th. 

We did not understand the seriousness of it until later in April, on 

April 13th. 

Mrs. MALONEY. My time has expired. 

Chairman BACHUS. Thank you. 

Mr. Schweikert? 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. Forgive me, as I 

have been bouncing around, just so I can get my—put it on the 

record. What is the best model estimate of what the loss is? 

Mr. DIMON. We have not disclosed that because when we make 

disclosures to shareholders, we will disclose the quarter on July 

52 

13th. At that point, we will give a full and fair explanation of what 

went on. I personally feel that this will never be life-threatening 

to the company, and we are going have a solidly profitable quarter, 

and more details to come when we report the quarter. 

Mr. SCHWEIKERT. Mr. Chairman— 

Chairman BACHUS. I will reserve your time, so we can stop the 

clock. I think we all need to realize, and I think if you have read 

the articles on this, the more disclosure that is made, the more 

those betting against the position of JPMorgan can use that to the 

disadvantage of JPMorgan. In fact, I think it is pretty well-established that part of the open disclosure and discussion has precipitated some of those losses. But it is not necessary for him to disclose proprietary information. I think if you read any of these articles, you see that they are managing this, and independent people 

have said the loss could be $6 billion, but that is just an estimate. 

It could be $2 billion, it could be—some estimated it could be less 

than that. 

Mr. SCHWEIKERT. Thank you, Mr. Chairman. 

Chairman BACHUS. Start the clock again. 

Mr. SCHWEIKERT. Being respectful that you will be doing your 

quarterlies very shortly, sir, the second question I was going to ask 

is profit for the quarter, but I guess we will just wait on that one 

too. 

Mr. DIMON. But there will be profits in the quarter. 

Mr. SCHWEIKERT. That was basically the point I was trying to 

head towards is that at least as an institution this is—it is not 

happy that it is shareholders’ money, but it is not devastating. 

Mr. DIMON. Not devastating, not fun either. 

Mr. SCHWEIKERT. And this is actually more of an offshoot, having 

read over some of the Senate testimony. I want to get my head 

around something that is actually all up and down both the financial, the fixed income and the banking community. We are all operating in an environment that literally is zero interest rates, you 

plug in interest rates today and plug in what real inflation, so 

slight movements whether it be caused by cascading Europe or Argentina or some pop Fed policy or fiscal policy here. My understanding is just little bit of movement would be devastating to your 

book of business if you have not hedged that. What scale are you 

hedged for the fear of movements and interest rates a couple of 

ticks up? 

Mr. DIMON. Our biggest exposure is credit and interest rates. 

And we try to manage the portfolio and all interest rates such that 

rising rates don’t hurt us because our biggest, what I call ‘‘fat tail 

risk’’ is rapidly rising rates. In fact, we are positioned today that 

if rates went up, we make more money. It does cost us to do that. 

Mr. SCHWEIKERT. You are heading towards the ultimate question 

here. I am trying to get a sense of the cost to do that type of risk 

management, and that is one of the frustrations I hear lots of discussion going on about, are you doing risk management here or 

here? A lot of folks don’t understand that it is expensive. 

Mr. DIMON. It is expensive, yes. I am guessing now it costs us 

probably over $1 billion a year to be positioned where we are to 

benefit from rising rates as opposed to neutral to rising rates. But 

53 

I think it protects our company, which is why we are there. Again, 

we may be wrong. 

Mr. SCHWEIKERT. And do you have to do excessive amounts of 

hedging in that fashion or buying, we will call it interest rate insurance, it might be an easier way to understand it, because of 

your imbalance in both deposits to the loan portfolio? 

Mr. DIMON. Yes, so the investment portfolio is invested to help 

manage that exposure, which is why it is invested very, what I call 

shorter than most. The average maturity or duration is 3 years. If 

you invest that longer, you can earn more money; having it shorter 

is more conservative. It gives us the ability to reinvest like $40 billion a year at whatever the new current rates are. So that portfolio 

is one of the main things we use to manage interest rate exposure. 

Mr. SCHWEIKERT. So, you were just saying what, 3 years? 

Mr. DIMON. The duration is 3 years of the AFS portfolio, the 

$350 billion portfolio. 

Mr. SCHWEIKERT. And that costs you almost $1 billion a year just 

to insure? 

Mr. DIMON. Just to keep it positioned so that we benefit from rising rates. 

Mr. SCHWEIKERT. In this type of environment—in your understanding, and I know we are all still all working on the mechanics 

of the Volcker Rule, what would have happened in these trades if 

the Volcker Rule was fully implemented as you understand it? 

Mr. DIMON. The Volcker Rule specifically allows portfolio hedging, and I think initially the original intent, it would have been allowed because it was a hedge that would benefit the company in 

a terrible stress like Eurozone. What it morphed into I cannot defend. It violated common sense, and I don’t know if the Volcker 

Rule could have or would have stopped that, if it did it wouldn’t 

bother me. I wouldn’t be sitting here. 

I think the far more important think about the Volcker Rule is 

the ability to make active markets here which keep down spreads 

for everybody, for all investors, and that makes it easier for companies to raise money, and cheaper for investors to invest money. 

Those investors are veterans, retirees, and mothers; they are not 

just people like me. So that is why we think the Volcker Rule has 

to be written carefully to maintain the best capital markets in the 

world and not stifle them. 

Mr. SCHWEIKERT. Okay, in 6 seconds, how do you, as an international organization, hedge against political risk, such as what is 

happening in Argentina, what is happening in Europe, and what 

is happening in other places? What do you have to do and what 

does it cost? 

Mr. DIMON. Well, some places we don’t do that much business in, 

so it is obviously an easy solution. In other places, you have conversations with the board about if you are wrong about a country, 

how much you might be willing to lose. So we do do investments 

in certain countries, but we don’t want any one country or anything 

to damage JPMorgan if we are wrong about our view about that 

country. 

Chairman BACHUS. Thank you. 

Ms. Velazquez for 5 minutes. 

54 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. Mr. Dimon, although 

these trading laws cannot do substantial harm to Morgan Chase’s 

capital position, it very well may have caused the collapse of a 

weaker bank. Do you think separating similar investment activities 

from traditional banking, taking deposits and making loans, is a 

reasonable approach to protecting the fragile economy from bank 

failures? 

Mr. DIMON. I do not. If you look at most of— 

Ms. VELAZQUEZ. I thought so. 

Mr. DIMON. Let me give you some facts to support what I say. 

Early on, mortgage bankers went bankrupt, monoline investment 

banks, Bear Stearns and Lehman, a monoline insurance company 

AIG, WaMu, and IndyMac which were monoline thrift kind of savings companies. Fannie Mae and Freddie Mac, which were the biggest financial disasters of all time, were monoline mortgage insurance type companies. All of that happened and it had nothing to 

do with Glass-Steagall. 

And in other parts of the world that didn’t have Glass-Steagall, 

like Canada, they didn’t have any problem at all because they had 

good banks and good regulations and proper capital levels, et 

cetera. 

Ms. VELAZQUEZ. As you know, the rulemaking to implement the 

Volcker Rule is ongoing, and experts are still debating whether, in 

its current draft, the rule will have prohibited these trades. How 

should, given the lessons learned, the Volcker Rule be implemented 

to account for the complexity of trades like those that cost 

JPMorgan’s loss, and the possibility that they move beyond purely 

hedging risk? 

Mr. DIMON. Look, I am not writing the rules. That is other people’s jobs. But I think I said it was a strategy that was badly vetted, badly implemented, and badly tested. And I would ask companies if you are going to do something like that, properly vet it, 

properly test it, so that it never morphs into something which isn’t 

what it was really intended to do. 

Ms. VELAZQUEZ. Where does the hedging risk stop and risky proprietary trading start? 

Mr. DIMON. I can’t define that for you. I am sorry. 

Ms. VELAZQUEZ. Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. 

Mr. Grimm for 5 minutes. 

Mr. GRIMM. Thank you, Mr. Chairman. 

Good afternoon, Mr. Dimon. 

Just to continue with—we have been hearing a lot about this 

Volcker Rule. We heard before from Ms. Waters that if all of DoddFrank was implemented, it is possible that these trades wouldn’t 

have occurred. 

Would it be safe to say that if you didn’t do any trading at all, 

you wouldn’t have any losses. Is that true? 

Mr. DIMON. Yes. 

Mr. GRIMM. So if we made banks a utility and we couldn’t compete with Europe, that would pretty much clear this up as well. 

Would that be one way to get rid of losses and take all the risk 

out? 

Mr. DIMON. Yes, I think so. 

55 

Mr. GRIMM. Okay. So when we look at—before, we were talking 

about the regulators, and my colleague, Mr. Duffy, was saying—he 

asked you, do you think the regulators can regulate JPMorgan 

Chase? You said yes. And his argument was, why couldn’t they find 

this one trade? 

I think the point is that—again, my humble opinion—regulators 

are there to look overall at the major rules, such as maybe minimum capital requirements, maximum leverage ratios, maybe some 

concentration risk, some rules in place so you are not too concentrated in one area. And those three things combined, regardless 

of whether you have a bad trading day—is it safe to say that we 

could never expect regulators to be able to have foreseen this loss 

of JPMorgan Chase? 

Mr. DIMON. Yes. But I think it is fair to say if regulators do their 

job, the system will be healthier, most banks will be healthier, and 

the chance of having a systemic collapse should be virtually zero. 

Mr. GRIMM. Okay. But would you agree— 

Mr. DIMON. But to expect them to capture any one trade, I just 

think is an unrealistic expectation. 

Mr. GRIMM. Okay. I happen to agree with that. I don’t think regulators will ever be set up to do that for the amount of institutions 

and the amount of trading. And the amount of metrics that would 

need to be put in place to figure out whether something is a proper 

trade or not is an unrealistic goal, and we are setting ourselves up 

for failure. 

I think if we focus—and I want to ask you a question—on things 

like the capital requirements, leverage ratios, making sure there is 

not too much concentration, that is something that regulators can 

actually get their hands around and do a good job at. Would you 

agree with that? 

Mr. DIMON. Yes. 

Mr. GRIMM. Okay. 

Now, if I can get into the weeds a little bit just to understand 

a little bit about your risk models, without divulging your proprietary information, could I just ask, your Value at Risk model, how 

did you calculate it? Was it daily, weekly, monthly? 

Mr. DIMON. I believe it to be daily. 

Mr. GRIMM. Daily. Do you know if it was at a 95 percent concentration, 95 percent confidence? 

Mr. DIMON. I think we look at both 95 and 99 percent. I forget 

what the public disclosures are. 

Mr. GRIMM. Okay. Because my question was going to be, a 95 

percent confidence level is approximately 2 standard deviations. If 

you go to 3, 4, you are talking 98, 99 percent. Would that have 

helped your scenario? I am just curious. Would that have actually 

helped? 

Mr. DIMON. VaR is just a basic statistical thing that shows how 

much volatility there is in a security or a basket of securities. 

There is nothing mystical about VaR. 

The other things which normally help is having limits at a very 

granular level and doing what I would call real stress testing, like 

what happens if rates blow out, what happens if credit spreads 

blow out, what happens if the Eurozone has a crisis, what happens 

if you have a credit crisis in the United States. 

56 

So we do all of these serious things to manage risk. VaR is one 

measure and, in my opinion, not the best of them either. 

Mr. GRIMM. Okay. 

And I want to also go back to make a point. At any point—I 

know that the sums were technically insured by the FDIC—even 

now, having the benefit of having looked at these trades, were the 

taxpayers at risk? 

Mr. DIMON. No. And I believe one of the Fed Governors here is 

saying that the bank can bear $80 billion of risk before the taxpayer might be at risk. 

Mr. GRIMM. And, lastly, I just want to—because I am actually 

trying to get my hands around this—look at some areas of concentration risk. Because we hear a lot about—what I think we are 

doing is trying to turn banks into utilities, and I think there are 

better ways to do it, and maybe looking at concentration risk. 

With the financial meltdown in 2008, much of the concentration 

was in loans. We know it was in subprime. Based on JPMorgan’s 

size, just your size alone, other market participants were able to 

clearly notice your London desk’s activity related to somewhat illiquid credit indexes. 

Do you think reevaluating your concentration risk, especially in 

light of things that are liquid, is something that makes sense for 

the banking institutions overall, besides just JPMorgan? 

Mr. DIMON. Yes, that was one of the flaws here. In this book we 

should have had more granular limits. I didn’t mention this specifically, but one of them would have been specific limits on anything 

that might be illiquid, specific limits on credits, specific limits on 

counterparties. We had some but not all, and they all should have 

been in place. 

Mr. GRIMM. Thank you, and I yield back. 

Chairman BACHUS. Thank you. 

Mr. Ackerman for 5 minutes. 

Mr. ACKERMAN. Thank you. 

If I may, I would like to get back to some very basic concepts. 

In your opinion, is gambling investing? 

Mr. DIMON. No. No, it is not. 

Mr. ACKERMAN. What is the difference between gambling and investing, briefly, if you can? 

Mr. DIMON. I think when you gamble, on average, you lose. The 

house wins. 

Mr. ACKERMAN. That has been my experience with investing. 

Mr. DIMON. I would be happy to get you a better investment advisor and see if we can improve upon your experience. 

Mr. ACKERMAN. You have, in general, except for recently, an excellent track record. 

I would tend to agree with you, but we seem to be treating them 

quite the same. I used to think that all of Wall Street was on the 

level, that it facilitated investing, that it allowed people and institutions to put their money into something that they believed in and 

believed would be helpful and beneficial and grow and make 

money, and especially help the economy and, on the side, create a 

lot of jobs and be good for our country and good for America. 

Now, a lot of what we are doing with this hedging—and you 

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57 

cally gambling. You are just betting that you might have been 

wrong. It doesn’t help anything succeed anymore. It doesn’t encourage anything anymore. It creates the possibility that people are 

saying, do these guys really know what they are doing if they are 

now betting against their initial bet? 

And then if you go and hedge against your hedge, which means 

you are betting against your bet against your first bet, it seems to 

me that you are throwing darts at a dartboard and putting a lot 

of money at risk just in case you were wrong the first time. 

I don’t see how that creates one job in America. I don’t see how 

it helps the American economy. I don’t see how it helps the housing 

market or the building market or the let’s-make-steel-or-widgets 

market. One-tenth of a zillionth of a percent. What it helps is, if 

you were right a majority of the time, then it makes a bunch of 

money for the guys who did it, and doesn’t help the company, the 

industry, the economy, or the country at all. And if you were 

wrong, it puts systemically everything at risk. And when I say everything, I mean the confidence that the American people, the public, the investing community, and everybody else has in the system. 

And that is a loss you can’t hedge against, because the more you 

hedge, the more questions you raise in the confidence of what you 

are doing with your initial investment. 

And the fact that you have chosen to do this overseas raises a 

lot of fuzziness. Maybe the businesses there—da-da-da-da-da-da-dada-da. And it is not illegal to do it over there, it is just as good to 

do it over there. And, when you come back from an overseas trip, 

at customs there is always the question on the form, did you have 

any exposure to farm animals? And I am sure the nice people over 

in Europe and Africa and Asia, they have safety codes and enforce 

them, but they still ask the question because they are worried 

about the infiltration of the problem into the American system and 

putting us at risk. They ask that question. 

How is this hedging and wedging thing any different than protecting yourself by taking the odds to Las Vegas? 

Mr. DIMON. We don’t gamble. We do make mistakes. The main 

mission of this company is to serve clients around the world. 

Mr. ACKERMAN. But isn’t it— 

Mr. DIMON. Last quarter, we did $40 billion in mortgages. I assume you want us to do that. We are the biggest, or one of the biggest small-business lenders in the United States. We have raised 

$400 billion, $500 billion for the biggest American corporations. We 

bank some of those corporations in 20 countries around the world. 

Our main mission is serving those clients, investors, capital 

issuers, small businesses, and consumers. That is what we do. 

Mr. ACKERMAN. Granted, but when you— 

Mr. DIMON. And we lost $2 billion on Chrysler. I assume you 

want us to continue lending to Chrysler. 

Mr. ACKERMAN. I want all good things to happen. But wouldn’t 

you be serving those clients better—and you have done a pretty 

adequate job, from what I can see—wouldn’t you be serving them 

better if you spent more time and energy or that billion dollars in 

figuring out all these mathematical formulas, wouldn’t you do a 

better job if you evaluated the investment a lot clearer with another billion dollars into that? 

58 

Mr. DIMON. In this case, yes. 

Mr. ACKERMAN. Why shouldn’t we apply that to the whole program? What I am doing is I am raising a question on what is the 

purpose of hedging. If you are right, you win; if you are wrong, the 

system loses. We all lose in that context. Because there is nothing 

more important than that confidence. 

Chairman BACHUS. Thank you. 

Mr. Fitzpatrick? 

Mr. FITZPATRICK. Thank you, Mr. Chairman. 

Much of the discussion regarding JPMorgan’s trading loss is focused on whether the activity in question would have been prohibited if the so-called Volcker Rule had been in effect. What is your 

view on that? 

Mr. DIMON. I have already said I don’t know. The Volcker Rule 

isn’t fully vetted yet, it is not fully written, and I just don’t know. 

The Volcker Rule specifically allows portfolio hedging, properly 

done, if properly vetted. What this became wasn’t really that. So 

if it does or didn’t prohibit it, it wouldn’t bother me. 

Mr. FITZPATRICK. Putting aside the question of whether it would 

have been prohibited under the Volcker Rule, since the regulators 

who wrote it can’t seem to answer that question either, what is 

your view on whether it should be prohibited? 

Mr. DIMON. I believe that portfolio hedging, properly done, 

should be allowed. It protects the companies, particularly in times 

of dramatic credit crisis or Eurozone crisis. I do believe it should 

be allowed, portfolio hedging. 

Mr. FITZPATRICK. Mr. Dimon, some have suggested that your position as a board member on the New York Federal Reserve Board 

is a significant conflict of interest and have suggested that you and 

other bankers who sit on the board should resign your positions. 

How do you respond to that? 

Mr. DIMON. The Federal Reserve rules are written by you all, 

and so—but I should tell you that I don’t vote for the president, 

I don’t get involved in supervisory, I can’t serve on the Audit Committee. The board basically sits around and talks about the economy, what is going on. There are 12 Federal Reserve Boards. That 

information, I think, is put together and sent to Washington. It is 

more of an informational advisory group. And whatever the lawmakers write would be fine with me. 

I, personally, if I was head of the board, I would want to hear 

from a lot of different types of people. It would be funny to be talking about global markets and not have someone involved in the 

global markets at the table. It surely does not have to be me. 

Mr. FITZPATRICK. Nothing further. 

Chairman BACHUS. Thank you. 

Mr. Sherman for 5 minutes. 

Mr. SHERMAN. Thank you. 

Mr. Lynch wanted to swear you in. You have already said something that is false, that we all know is false— 

Chairman BACHUS. Let me— 

Mr. SHERMAN. Excuse me. Let me finish my statement. 

Chairman BACHUS. No, I— 

Mr. SHERMAN. Sir, I— 

59 

Chairman BACHUS. —want to clarify something about swearing 

people in. 

Mr. SHERMAN. That is— 

Chairman BACHUS. We had a hearing in September of 2009, 

when Mr. Frank was chairman. And Mr. Frank made a decision 

not to swear in any of the CEOs of the banks about what had gone 

on in September of 2009. I am following the protocol of the committee. 

Mr. SHERMAN. Mr. Chairman— 

Chairman BACHUS. If you want to continue to say he ought to be 

sworn in, that is fine. 

Mr. SHERMAN. I wasn’t saying that, Mr. Chairman. I was not 

criticizing you. But if I can’t get to the end of the sentence— 

Chairman BACHUS. I am saying the ranking member has said I 

am doing something unusual here. What I am doing is following 

the standard policy— 

Mr. FRANK. Excuse me, Mr. Chairman. I didn’t say you were 

doing anything unusual. 

Chairman BACHUS. Well, I took it as saying that. 

Mr. FRANK. What? I didn’t—I made no comment. 

Chairman BACHUS. I am sorry. I think it was Mr. Lynch. 

Mr. FRANK. Not everybody from Boston talks the same. 

Chairman BACHUS. That is right. 

Mr. FRANK. But let me just say— 

Chairman BACHUS. I am just saying this is normal, standard operating procedure. 

Mr. FRANK. Mr. Chairman, I do want to take exception. I have 

made no comment on the swearing in. Let me just—if I could, just 

another 30 seconds. I am gratified that you are following my precedent. And I will have by tomorrow another list of precedents that 

you can also follow, and we would all benefit. 

Chairman BACHUS. Don’t be in any rush to give it to me. 

Mr. SHERMAN. Mr. Dimon, had you been sworn in, you would 

face no legal liability for the comment that I think you have made 

that is erroneous, because we are here because we are in touch 

with Main Street in our districts. And you put forward the idea 

that there were $350 billion that you had given to your Chief Investment Office because there weren’t small and medium-sized 

businesses in the United States that were creditworthy that wanted the money. And I assure you, there isn’t a member of this panel 

who couldn’t bring you 100 small and medium-sized businesses, 

creditworthy, in need of loans from you. And, instead, you took the 

$350 million to London. 

That is why we are here. Because if you had made the small and 

medium-sized business loans, you wouldn’t be here. And some of 

that money in London went to the gambling tables in London. And 

whether it was $2 billion lost or some multiple of that, that is why 

we are here. 

I would hope that you would leave here dedicated to taking the 

money away from your London operations and lending it to small 

and medium-sized businesses. And if you can’t find 100 in each one 

of our districts, we will do it for you. 

60 

Now, I would like to, without objection, put in the record an editorial by the wild socialists over at Bloomberg. I assume there is 

no objection. 

Chairman BACHUS. Without objection, it is so ordered. 

Mr. SHERMAN. They point to a study just published by the IMF that says that your bank enjoys a $14 billion subsidy, that its cost 

of funds is some 0.8 percent lower because of the implicit Federal 

guarantee. 

What we saw in 2008 is a belief around the world that if a bank 

your size was going to go under, there would be a bailout not just 

of insured depositors but of all creditors. And that belief reduces 

your cost by 0.8 percent of your total funds, is responsible for $14 

billion. 

You are in a position where you are simply too-big-to-fail. And 

this raises—and I think the gentleman from Wisconsin made this 

point. You lost $2 billion or some multiple of that. You happen to 

be very well-financed. But you bet over $300 billion. You are lucky, 

and fortunate and wise that you didn’t lose more. Can you say on behalf of all the banks with over $100 billion in 

assets that all of them could have survived a mistake this size? I 

will ask you to answer that for the record. 

The question is, why should we allow you to be so big that if you 

go under, we are going to have to bail out your creditors? 

Mr. DIMON. Banks should take risks relative to their size and capability. So you can’t compare all the banks. And I would venture— 

and I am not going to change what you believe—but a lot of banks 

were a port in the storm. I know it is convenient to blame them 

all for everything, but JPMorgan’s size and capability and diversification in 2008, 2009, and 2010 allowed us to continue to do the 

things that you want us to do. We never stopped making loans. We 

bought Bear Stearns at the request of the United States Government. We helped the FDIC fund by buying WaMu. We lent money 

to California and New Jersey. It allowed us to do it. 

So we try to be a conservative company that does the right thing. 

Every now and then, we make mistakes. 

Mr. SHERMAN. And how can medium-sized banks compete 

against you when your cost of capital is reduced by 80 basis points, 

0.8 percent, because of a belief that if they go under, we will let 

them go under, but if you go under, we will bail out your creditors? 

Mr. DIMON. I don’t believe that is true. I am going to give you 

two facts, if you don’t mind. 

Fact number one is we borrow in the marketplace, unsecured, 

with the smartest people in the world. It costs us 200 basis points 

over Treasury. It costs the average single A industrial, like, 100 

basis points over Treasury. So we are—if everyone is so smart and 

knew that we are too-big-to-fail, we would be trading at 10 basis 

points over Treasury. 

Mr. SHERMAN. After you lost all that money in London, I would 

expect that creditors would be reluctant to lend you money at less 

than that rate. 

Mr. DIMON. Most of that $350 billion predominantly is in the 

United States. It is not in London. Most of it is here. 

The second is the FDIC report, which looks at average funding 

costs, because we have studied this report a way back and all alVerDate Nov 24 2008 15:49 Mar 13, 2013 Jkt 076107 PO 00000 Frm 00064 Fmt 6633 Sfmt 6633 K:\DOCS\76107.TXT TERRI
61 

most of it, if I remember correctly, was related to mix. We are a 

money center bank. We have a tremendous sum of money, which 

we keep very short term and overnight, which costs us very little 

right now because of the way the yield curve is. But we have to 

put out—we are the checking accounts for large corporations, including some nations, and so we invest that money very short and 

make almost no money on it. It shows up as a low funding cost, 

but our actual cost of funds for retail deposits, middle market deposits, and negotiated deposits is probably pretty much like everybody else. 

Mr. SHERMAN. There isn’t a small or medium-sized— 

Chairman BACHUS. Thank you, Mr. Sherman. 

Mr. SHERMAN. —banker who agrees with you. 

I yield back. 

Chairman BACHUS. Mr. Canseco for 5 minutes. 

Mr. CANSECO. Thank you, Mr. Chairman. 

I have spent a number of years in the banking sector, and I am 

approaching this hearing keeping in mind a primary truth about 

the banking industry, which is that the business of banking is inherently risky. Lending money is a risky proposition. 

This was evident back in February when your firm disclosed in 

an investor presentation that it had set aside $27 billion, more 

than 10 times the amount of its recent trading losses, in loss reserves against its loan portfolio, providing that lending and exposure to credit was and is the largest risk facing America’s banks 

today. 

So we must keep this in mind as today’s hearing has focused on 

whether it is appropriate or not, the Volcker Rule, and the attempt 

to keep banks from making so-called risky investments. Yet, in the 

years leading up to the financial crisis, there was hardly a riskier 

proposition than extending mortgage loans in the midst of an artificially inflated housing bubble. And if you want further proof of 

this, look no further than Fannie and Freddie, who didn’t need to 

make proprietary trades with depositors’ funds in order to lose 

$200 billion of taxpayer money. 

The irony is, of course, that had the Volcker Rule been in effect 

prior to the crisis, it is likely that banks would have had even more 

exposure to the housing bubble and the crisis would have been far 

deeper and far worse. 

Someone once said that, like energy, risk is not created or destroyed; it is simply transferred, passed on. And I feel the push for 

ever more regulation in your economy represents a continued misunderstanding of our banking system and the roots of the financial 

crisis and that this misunderstanding is, by itself, a great risk to 

our financial system and economy as we move forward. 

So, with that said, Mr. Dimon, during your testimony in the Senate last week, you stated that we don’t actually know who has jurisdiction over many issues we deal with anymore. Did Congress 

miss an opportunity with Dodd-Frank to simplify our regulatory 

structure and put an end to regulators passing the buck to one another? 

Mr. DIMON. It would have been my preference that we simplify 

it. And we made it a little more complicated, yes. 

Mr. CANSECO. Thank you. 

62 

So how do you respond to those who cite JPMorgan’s recent trading loss as evidence that JPMorgan and other banks are simply too 

large and complex to manage? 

Mr. DIMON. There are huge benefits to size, and you see them 

in the kinds of scale in aircraft and banking and diversification. I 

have already mentioned that we were a port in the storm because 

of our size and diversity. 

The benefit of size has to eventually accrue to clients, not to us. 

That is the capitalist system, that you do things better, faster, and 

the client benefits. There are some negatives to size—lack of attention to detail, et cetera. So some of those lack of benefits of size 

happen to small firms too, and you have to weigh and balance. 

So I think, on balance, the company has done a good job for its 

clients and its shareholders. And we continue to grow and expand 

and away from this problem. Our businesses are healthy and 

strong and serving more and more people, both in the United 

States and around the world. And we are helping a lot of American 

corporations travel around the world, helping them do a better job 

where they want to do business and do more exports. 

Mr. CANSECO. So, Mr. Dimon, if the activities of the Chief Investment Office at JPMorgan were severely restricted under the 

Volcker Rule, especially to the point where portfolio hedging was 

disallowed, what would that do to the risk profile of the CIO portfolio? 

Mr. DIMON. We would probably just modify the risk profile a little bit of the CIO portfolio and try to make sure we are not taking 

undue risks. 

As I mentioned before, the AFS portfolio has an $8 billion unrealized profit. It is double-A-plus average rating. And it has invested 

rather shorter term, not short, but shorter term to protect us from 

rapidly rising interest rates. So I would call it a fairly conservative 

portfolio, and maybe would have changed the nature of it a little 

bit. 

Mr. CANSECO. As I understand it, the CIO portfolio is around 

$400 billion of excess deposits that have not been lent out. Is that 

correct? 

Mr. DIMON. $350 billion, I think. 

Mr. CANSECO. It seems to me that if activities were restricted, 

JPMorgan would be left with the unappealing option of lowering 

underwriting standards or increasing risk somehow in a portfolio. 

Is that a fair assumption? 

Mr. DIMON. It is possible, yes. 

Mr. CANSECO. All right. So would you say that if the Volcker 

Rule were implemented, it is likely that overall risk in the financial 

system would actually be increased? 

Mr. DIMON. I would love to answer the question. I don’t know the 

answer to that. 

Chairman BACHUS. All right. Thank you. 

Mr. DIMON. Remember, it is one rule out of hundreds that are 

all being done together. So, I can’t tell you the cumulative effect 

of all of them. 

Mr. CANSECO. Thank you. 

Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you. 

63 

Mr. Meeks for 5 minutes. 

Mr. MEEKS. Thank you, Mr. Chairman. 

Mr. Dimon, I have been listening, and I think there is another 

reason why you are here. Some of it has to deal with the fact 

that—some of it has to deal with politics, to be quite honest with 

you. Some feel that Dodd-Frank has a role, and others feel that 

Dodd-Frank doesn’t have a role. Some think regulations, others 

think no regulations. I think that we were at a point where we 

were talking about a lot of deregulation at one point, when I first 

came to Congress anyway, and we got into the problem that we are 

in. I remember the Secretary of the Treasury coming and saying, 

disaster was about to happen. And so Dodd-Frank came into existence because we wanted to fix the problem so that we would not 

be where we were when we had this terrible catastrophe that was 

facing our country. 

And during that debate—and I want to pick up someplace 

around where I think Representative Maloney was talking about— 

there was concern about a lot of individuals doing business in London. That has been some of the questions that have been taking 

place. And I understand that you have to get the best deal for your 

investors, et cetera. 

But I kept hearing about this London loophole. And from what 

I heard you answering to Representative Maloney, that there is no 

London loophole, it wasn’t due to any regulations or lack of regulations in London. Yet when I talk to, not to you but a number of 

other financial institutions—I am from New York also, and I talk 

to them—and they tell me that if we put certain regulations in 

place, they will leave New York and they will go to London, because they will have less regulations in London. 

So I don’t understand if—isn’t there something, some kind of 

loophole in London that other institutions, maybe not JPMorgan 

Chase—but they say that if we put these regulations in place, they 

will leave New York and take those jobs with them—that is what 

they tell me—to London. Why is that if there is no London loophole? 

Mr. DIMON. Our problem has nothing to do with, as far as I 

know, any loopholes, going to London. It could happen in New 

York. So that is a separate issue. 

If a U.S. company calls up JPMorgan and says, make me a bid 

on interest rate swap, and we can’t give them the best deal and 

they are going to get the best deal out of Deutsche Bank in Europe, 

that is where they are going to go. The rules at the transaction 

level about margin, reporting, all those requirements may enable 

Deutsche Bank to make them a better deal. 

Two things will happen. Caterpillar or whoever the big company 

is will get less bids; it won’t be good for the American company. 

And the business will move to another bank overseas. You would 

see some—I don’t know the head count numbers—some firms, if 

they can, put some people overseas to do the business in foreign 

subsidiaries with the same company that they were doing it within 

the United States. 

If a U.S. bank can’t do the business at all, at all, because the 

rules are written so broadly, then we will lose a lot of business, you 

will lose a lot of jobs here. They will not move to London. But I 

64 

assure you, they will one day be in Singapore, China, and other 

parts of the world. 

Mr. MEEKS. Let me—time is so short. Last week, you referred to 

‘‘big, dumb banks.’’ In your opinion, could a big, dumb bank be successfully resolved under Title II of the Dodd-Frank Act without 

harming the American economy? 

Mr. DIMON. Yes, but we all have work to do to harmonize that 

globally and get the exact rules in place, things that you all call 

living wills and resolutions, et cetera. But, yes, I believe it can be 

done. More work needs to be done to make it real. And people have 

to believe it is real. It is not just sufficient for us to say it is real. 

We need the regulators and the people, the countries to say we believe it is doable. 

Remember, it was doable in the United States for years. The 

FDIC took down Continental Illinois, WaMu, American Savings 

Bank very successfully, all without damaging the American economy. So there are examples. It is just a bigger, more complex 

world. It is going to take a little more time. 

Mr. MEEKS. But it could be done under Dodd-Frank? 

Mr. DIMON. I think it could be done. But it is going to take foreign jurisdictions, particularly London, working out common sets of 

rules on how it would take place. 

Mr. MEEKS. And, we also are concerned with reference to the 

American taxpayers being stuck. Last, in 2009, we wanted an ex 

ante fund to resolve big banks. And I think that a number of individuals—I forget, I think maybe JPMorgan Chase was against an 

ex ante fund— 

Chairman BACHUS. The gentleman’s time is up. Thank you. 

Mr. Garrett for 5 minutes. 

Mr. GARRETT. I thank the chairman. 

Thanks, Mr. Dimon. 

So, before you came here, the previous panel, I don’t know if you 

were watching it in the back room. One of the cute little analogies 

that Mr. Gensler used was about, before he gives those keys to his 

daughter, he wanted to make sure that the rules and regulations 

were out there, and if not regulators, maybe a cop on the beat. 

The only problem with that, to try to compare that to this analogy, was that there were—sitting right where you are—one, two, 

three, four, five regulators or cops on the beat, and each one of 

them gave basically the same answer, that they got to the accident 

scene afterwards. And in each case, they were going to tell us what 

they are going to do next time. So the analogy just really doesn’t 

hold true, because we are trying to do, obviously, better than that. 

I know you gave testimony here and back at the Senate. Your 

exact quote I had was, with regard to the role of the regulators and 

what they could and couldn’t do, you said, ‘‘I think you have to give 

the regulators realistic objectives. I don’t think realistically they 

can stop something like this from happening. It was purely management’s mistake, and we were misinformed a little bit. We are 

not purposefully misinforming them too.’’ 

You had 100—there were 100 regulators, what, embedded, if you 

will, working full-time, getting up every day to go to your firm to 

work. So aren’t we in a case where there is a little bit of a charade 

here with the American public with regard to what it is that the 

65 

regulators, even after 2,300 pages of Dodd-Frank, are able to do in 

these circumstances, that they are really not able to get into the 

detail, into the granular nature of things with or without modifications to the rules? 

Mr. DIMON. I think I mentioned before— 

Mr. GARRETT. Yes. 

Mr. DIMON. —realistic assumptions help, realistic goals. I don’t 

think that stopping one thing—but they could disseminate good information. They could demand best practices. They do have constant audits. They can make the system better in total so that 

there are fewer mistakes and farther between. 

But I would never blame them for a mistake we made. Maybe 

what they learn from us will stop someone else from making a 

similar mistake. 

Mr. GARRETT. I know that the ranking member and the ranking 

member of the full committee were somewhat taken aback maybe 

by some of your responses to Dodd-Frank and the legislation and 

how it is being implemented, and that is fine. And I concur and I 

commend you, as for your part. Your part is to lobby for, if you will, 

what, the position for your firm on positions of these issues and 

also something more than that, as far as what is best in the interest of your investors, too, I would presume. Correct? 

Mr. DIMON. No. My highest, most important thing to me is the 

United States of America. 

Mr. GARRETT. Actually, I was— 

Mr. DIMON. I hope when I look back that anything I say was in 

the interest of the United States of America and not in the interest 

of JPMorgan Chase. And I feel that JPMorgan Chase will— 

Mr. GARRETT. Will improve. 

Mr. DIMON. —meet all the rules, meet all the regulations, we will 

continue to serve our clients. And that is what we are going to continue to try to do. 

Mr. GARRETT. And I was going to lead there, if your answer to 

the first question was yes. So part of the reform of the reform that 

we may need in this area is, what, the extraterritorial effect of 

some of the rules that we have had so far. And we have done that 

in a bipartisan manner, right? So we had a Member, he is not here 

right now, but Mr. Himes from Connecticut has legislation with us 

to try to reform it, to limit it. 

But you see at the same time, what, the previous panel, you had 

the CFTC Chair coming out with their proposed regulations—actually, not regulations, rules, but guidance in certain of these areas, 

in the areas of coming up with various standards, coming up with 

two separate standards for swap and security-based swap dealers. 

Is that the appropriate manner that we should have, purely guidance rules coming out, where you don’t do a cost-benefit analysis 

beforehand? Or should there actually be more of a close working 

relationship between the CFTC and the SEC when issuing and promulgating rules in this area? 

Mr. DIMON. The CFTC and the SEC is a primary example where 

we should have one set of rules around derivatives and swaps. We 

have competing sets of rules. They haven’t been defined yet. And, 

yes, of course, I think thinking through what makes sense and 

66 

cost-benefit always is the right way to do it. It is hard for me to 

imagine it is better to do something better than that. 

Mr. GARRETT. You would agree that we haven’t seen that, 

though, since Dodd-Frank has been passed into law. 

Mr. DIMON. There may have been places where it was done, but 

I am unaware of it, yes. 

Mr. GARRETT. Okay. 

And just to close, then, I thought your answer was going to be 

slightly different with regard to the Volcker Rule when you said 

that things may not have been different had the Volcker Rule been 

fully implemented here. I thought the answer would be, had the 

Volcker Rule been law at the time, there simply would not have 

been trades going on because of the uncertainty, not only by the 

regulators, but the uncertainty by institutions such as yours as to 

how is it actually going to be implemented and what trade is permissible and what trade is not permissible. 

I will close on that. 

Mr. DIMON. Yes, no, I think the most important—we are really 

focusing on portfolio hedging, which I think is the minor part of 

Volcker. 

Mr. GARRETT. Yes. 

Mr. DIMON. I think it is the market making that allows these 

great capital markets in America to remain healthy, to finance 

companies at a very cheap cost to investors and issuers. That, to 

me, is the more important part. 

And there are, if I remember correctly, like, 170 things written 

around that. And we are concerned that will stifle the capital markets here if they are not done right. They may very well end up 

being done right. The regulators, I think a lot of them want to get 

them to the right place. It is just very hard to do. 

Mr. GARRETT. Very hard to do. 

Thank you. I yield back. 

Chairman BACHUS. Thank you. 

Mr. Capuano for 5 minutes. 

Mr. CAPUANO. Thank you, Mr. Chairman. 

Thank you, Mr. Dimon, for being here. 

First of all, I want to tell you that I have agreed with a lot of 

the statements that you have made. I know that may surprise 

some people, but it shouldn’t. Because but I think, first of all, I 

welcome your voice in the discussion about what is appropriate regulation. There is no golden answer that any of us—at least, I don’t 

come to the table thinking I know the answers. You think, you try, 

you talk to people like you. Does this work? Does that not work? 

So I welcome your voice, whether we agree or not in the final analysis. 

I particularly welcome your comments on Title II of Dodd-Frank. 

You have clearly stated that you are not too-big-to-fail. Is that a 

misinterpretation? 

Mr. DIMON. Nope. 

Mr. CAPUANO. I agree with you, but I wish that some of my colleagues on the other side would finally hear that, because I think 

we handle that in Dodd-Frank. You have stated it. I agree with 

you. 

67 

I also fully agree with you on the simplification of regulators. I 

think we have too many regulators, as well. And I wish that some 

of the large institutions—I don’t remember whether you personally, 

your institution was, but, in general, the larger institutions and the 

organizations were nowhere to be found when we were having this 

debate during Dodd-Frank. I was on the side of trying to simplify 

the number of regulators, not because of what they were going to 

regulate, because it is too many people doing the same thing. I totally agree. I would work with you or anyone else to try to reduce 

the number of voices at the table to make your job easier. That 

doesn’t mean that I would reduce the regulation, just simplify it. 

I do want to talk a little more about the extraterritoriality because, again, I don’t think you have said anything here that I disagree with relative to competitiveness. We want to keep our financial institutions competitive. But I want to be clear, I want to make 

it clear that I am understanding you correctly. 

You are not arguing that all financial institutions, U.S. or any 

others, should always seek the least regulated regime. That is not 

your argument, is it? 

Mr. DIMON. That is not my argument, no. 

Mr. CAPUANO. I didn’t think so, but I wanted to be clear about 

that. 

I would suggest very clearly that you are not wrong about competitiveness. It is nobody’s goal, I hope, not my goal, to try to regulate you into a competitive disadvantage. And I think that is what 

the world is trying to accomplish now. Basel III is a classic example. It is not the answer, but it is a step in the direction of trying 

to get all the major different countries around to have similar approaches toward financial institutions. 

There are still loopholes. Whether you take advantage of them or 

not, there are loopholes. They exist in London and elsewhere, 

which is why people are there. You may not be there for that reason. I don’t know, and I don’t really mind whether you are, because 

you are one institution. The institution of JPMorgan, in and of 

itself, is of little interest to me. What I am interested in is the entire system and the U.S. competitive advantages we might have. 

And when you have a loophole in London or anyplace else that people take advantage of through regulatory schemes, we need to talk 

about it openly to try to find out whether their regulation is better 

than ours, whether their regulations are worse than ours, and, regardless, how we can work them together so the loophole is not just 

for you but also for your competitors, don’t give them an advantage. 

And I would argue that, very clearly, when you say that you are 

looking at who offers the best deal, you are 100 percent right. You 

should. But the truth is, if it is only about the bottom-line best 

deal, you would be loaning your money on the corner of some street 

someplace because they get a better deal than you do. They loan 

out their money at much better rates than you get. The difference 

is, it is a little less secure. 

So when you talk about best deal, it is not just bottom line, is 

it? It is also the ability to get those loans paid back and to make 

a profit. Is that an unfair—you are not just looking at the bottom 

line? 

68 

Mr. DIMON. I was referring to the best deal for the client. We are 

not going to win their business if we don’t give them the best deal. 

Mr. CAPUANO. Exactly right. But the best deal is more than just 

the lowest common denominator. 

Mr. DIMON. Yes. 

Mr. CAPUANO. It is also security, it is stability, it is operations 

under the rule of law, to know what those rules are so that you 

know the deal you are making is the deal you are going to be able 

to enforce. Is that a fair way to say it? 

Mr. DIMON. That is true. Yes. 

Mr. CAPUANO. Thank you. See, I told you, Mr. Dimon. We are not 

that far off from what we—we may have differences of opinion 

where we go. 

But I do want to talk about one thing that is happening today. 

As we speak, there is another committee meeting that is about, at 

least the last I read, at least the news reports are reporting they 

are going to cut out $25 million from the CFTC’s ability to pay 

their staff. Do you think that is a smart thing for us to be doing, 

to be cutting the ability of regulators to do their job? 

Mr. DIMON. I have never looked at the CFTC budget. We have 

already said, by the way, that we have a CFTC and an SEC in duplication. I would prefer we fix the duplication before we throw 

more money at it, but that is what I do at my company. I can create a lot more staff tomorrow too, but it is not necessarily the right 

thing to do. 

Mr. CAPUANO. And I agree with you on the analysis, but in the 

meantime, until we get there, do you really think it is a smart 

idea? With the regulatory regime that we have today—we both 

agree that it is not what we want, but it is what we have—do you 

really think it is a smart idea to be cutting the legs out of one of 

those major regulators? Do you think that is good for America? 

Mr. DIMON. I have enough problems. I am going to leave that to 

you. 

Mr. CAPUANO. Mr. Dimon, the only reason I ask is because you 

have had no hesitancy whatsoever in expressing opinions on other 

matters. I thought you might want to take an opportunity to express one today. 

Mr. DIMON. I know nothing about their budget. I don’t know how 

many employees they have. I really don’t know. So it would be— 

I try not to have a comment if I know nothing. 

Mr. CAPUANO. I would like you to learn it and maybe get back 

to us on the answer. Because the truth is, I would like to hear your 

answer before we actually vote on the Floor. 

Thank you, Mr. Dimon. 

Chairman BACHUS. Now, you do know that we are in serious 

trouble down here on our budget. I guess you would rather have 

your budget than ours, I am sure. 

Mr. DIMON. No comment. 

Chairman BACHUS. Ms. Hayworth? 

Dr. HAYWORTH. Thank you, Mr. Chairman. 

Mr. Dimon, I realize that the activity that we have talked about 

in terms of the loss for JPMorgan in April was bank hedging that 

was within the institution. But I have introduced legislation, in 

fact it passed unanimously through our subcommittee and comVerDate Nov 24 2008 15:49 Mar 13, 2013 Jkt 076107 PO 00000 Frm 00072 Fmt 6633 Sfmt 6633 K:\DOCS\76107.TXT TERRI
69 

mittee, to repeal most of the swaps push-out, Section 716 of DoddFrank. 

It strikes me that this example of the potential risk undertaken—and there is always risk involved, and there is going to be 

loss from time to time—but the potential risk undertaken in these 

sorts of activities does, it would seem, perhaps highlight the need 

for us to keep those activities within institutions where they are 

more regulated, if you will. 

I would just appreciate your comments on that. 

Mr. DIMON. I would agree with that. And the push-out, I never 

understood it. I thought it could make things riskier, not safer. 

Dr. HAYWORTH. Right. 

Mr. DIMON. I never understood why it was put in there at all. 

Dr. HAYWORTH. Right. And, in fact, we have broad support for 

that, so I am hopeful that we will be able to move that through expeditiously. 

With regard to the fact that derivatives activity seems to be concentrated in London, I get the sense that—I am a physician—I get 

the sense that it is because they are the specialist, so to speak. 

They do that kind of thing all the time. But Chairman Gensler implies that the rules are inadequate governing those activities. And 

yet, through the G-20, all regulators and extraterritorial regulators 

have coordinated fairly closely. 

Do you feel that there is a need for us? The SEC is about to come 

out with its ruling on extraterritorial activity. Do you feel that we 

need to have some sort of regulation that we apply to our subsidiaries extraterritorially? 

Mr. DIMON. No. I have been clear, I think the foreign laws should 

apply over there so we can compete fairly over there. And it is 

not—they were always regulated, the OCC and the Fed, so it is not 

true that there is no regulation. There is prudential regulation at 

the top. And the trades that I mentioned were collateralized, 60 

percent cleared. So I think some of those rules wouldn’t have 

mattered at all. 

Dr. HAYWORTH. Right. 

Mr. DIMON. And AIG, which I know keeps on coming up as an 

example, AIG was insured only. They weren’t trying to hedge anything. AIG was an insurance company. AIG didn’t have regulators 

who understood credit derivatives. And AIG, they accounted for 

them as insurance contracts. 

Dr. HAYWORTH. Right. 

Mr. DIMON. They were not mark-to-market and, for the most 

part, not collateralized. So a completely different example in a different industry. 

Dr. HAYWORTH. Right. And yet an enormous level of risk, obviously, that had great implications. But you cannot map that situation onto the JPMorgan situation. 

Now, clearly, sir, there have been questions about the activities 

of risk committees. Obviously, there are lessons that you have referred to that JPMorgan has learned. Are there lessons that we can 

apply to what our regulators use, the criteria they use when they 

look at how our institutions undertake risk? 

Mr. DIMON. Yes. Risk committees—and, obviously, we have failed 

in this regard, but we have very strong risk committees. You need 

70 

properly staffed, properly reported, that everyone gets it, independent-minded. Their job is to challenge management, all the way 

to the CEO. Why are we doing that? Why don’t we have more limits? What can go wrong? Let’s stress test it. And that is what those 

committees are supposed to do. Proper reports, granular limits, 

constantly testing, and protecting the management from themselves sometimes. 

And our risk committees do report independently. In this particular case, the risk committee made the same lack of oversight 

that I probably made a little bit down the line about this one activity. They had some pretty good disciplines in the other activities. 

It was in this synthetic credit activity that it should have been 

much tougher. 

Dr. HAYWORTH. Yes, sir. And in terms of—obviously, JPMorgan 

has regulators inhouse who closely monitor your activities. Is there 

an element of human nature that makes us, to a certain extent, 

comfortable with each other and how we do things that may lend 

a certain amount of hazard to these relationships over time? 

Mr. DIMON. No, they are not. They can be pretty tough on us. 

But I think what happens sometimes is—and it is just human nature—I say it is okay, the next person doesn’t spend that much 

time on it, the next person doesn’t spend that much time on it. You 

go around the table, everyone says it is okay. 

Dr. HAYWORTH. Because you have a track record. 

Mr. DIMON. Yes, all of us. So you can’t be complacent about risk. 

It has to go through a rigor. It is not whether you trust the person, 

because I trust a lot of people. It is that it has to be independently 

verified. 

Dr. HAYWORTH. Right. Trust but verify. Thank you, sir. 

And thank you, Mr. Chairman. I yield back. 

Chairman BACHUS. Thank you. 

Mr. Hinojosa for 5 minutes. 

Mr. HINOJOSA. Mr. Dimon, thank you for your testimony. 

The recent JPMorgan loss comes at a time when we have many 

in your industry complaining about the new regulations that were 

put in place with the Dodd-Frank Wall Street Reform Act. For good 

reason, the $2-billion-plus loss has pressed the pause button on the 

constant stream of attempted rollbacks to Dodd-Frank. It seems to 

me that with the recent conviction of a prominent Wall Street corporate director, Wall Street firms do not seem to be going out of 

their way to restore trust with the American people. 

I understand that JPMorgan will still turn a profit this year, but 

the size of the loss and the complexity of the trades and macro 

hedging that caused the loss still gives cause for concern. There 

needs to be an evaluation of not only prudent regulations but also 

the broken culture on Wall Street, a culture that some believe provides perverse incentives to play fast and loose with other people’s 

money. After the crisis, there should have been major self-reflection 

and reevaluation of Wall Street. 

Mr. Dimon, looking back at this loss, do you feel that the compensation structure at JPMorgan might have created incentives for 

excessive risk? 

Mr. DIMON. I don’t agree with what you said about Wall Street, 

so I will be direct about it. I think there are a lot of people you 

71 

can trust on Wall Street. And there are a lot of people you can 

trust anywhere, and I think when anyone blankets a whole industry with the same thing, I think we are making a mistake. It is 

like when people blanket all of Congress the same way. I just think 

it is not fair. 

We try to have a culture at the company where people have longterm careers. They aren’t paid just because of profits. They are 

paid because they are good managers. They are paid because they 

recruit, they retain, they are open-minded, they are independent on 

risk committees, they participate in the company, they mentor our 

younger people. That is what we do. It is not just financial results 

that drive people’s compensation at JPMorgan. And no one in this 

area had formulas. 

Now, is it possible that someone here says, yes, I was driven a 

lot by money? Yes, people—it shouldn’t be a great surprise to you 

or anybody else that some people are driven a lot by money. Some 

are not. 

Mr. HINOJOSA. Next question: Do you feel there is a problem 

with Wall Street culture? 

Mr. DIMON. I think there might be a problem with some people 

on Wall Street. And, Wall Street for the most part are honest, decent, hardworking people. Their clients trust them. And to the extent we lose it, we should earn it back. I think if you talk to most 

of our clients, they think that JPMorgan tries to do a very good job 

for them, including when we make a mistake, we admit it. We try 

to rectify it. 

And all firms are different, so I can’t speak for every firm while 

I am standing here. 

Mr. HINOJOSA. Mr. Dimon, what would you personally recommend be done by Congress to strengthen the Dodd-Frank Act so 

that we can prevent actions with the complexity of trades and risky 

derivatives and macro hedging that caused the loss of at least $2 

billion at JPMorgan which brought us to this congressional hearing? We want to ensure similar losses do not occur in other banks, 

and I would like to hear your recommendations. 

Mr. DIMON. I have lost this argument publicly many times, but 

I will make it again. Regulation is not binary. It is not left or right. 

It is not Democrat or Republican. These are complex things that 

should be done the right way, in my opinion in closed rooms—I 

don’t think you make a lot of progress in an open hearing like 

this—talking about what works, what doesn’t work, and collaborating with the business which has to conduct it. 

We want a safer system, too. We have as much a vested interest 

in having a safe and good financial system as anybody else. And 

we will do anything we can to be part of a process to make it 

healthy and safe. 

I should point out, it is a lot healthier and safer today. The market did a lot of things, like I mentioned—no off-balance-sheet vehicles, no subprime mortgages, exotic derivatives are going away. 

Regulation has created more capital, more liquidity, standardized 

derivatives go to clearing houses. It is a much stronger system 

today. A lot has been accomplished. 

Mr. HINOJOSA. My time has ended, and I yield back. 

Chairman BACHUS. Thank you. 

72 

Mr. McHenry for 5 minutes. 

Mr. MCHENRY. Thank you, Mr. Chairman. 

Mr. Dimon, there is this discussion today, the distinction between hedging and proprietary trading. Can you define to us the 

difference, in your view, of hedging versus proprietary trading? 

Mr. DIMON. I will tell you what I think. A hedge is meant to protect you if something goes wrong in a decision you make. Proprietary trading I think people mean is just making a bet that prices 

change and you can make money in a price change. 

The problem with that is, every time we make a loan, it is proprietary. The riskiest thing we do is loans. They are all proprietary. 

If we lose money on them—and one of the Congressmen mentioned 

how much money we can lose on loans—that is to the house account. We still make them. We try to do the right thing to riskmanage it. 

I understand and never disputed the intent of the Volcker Rule 

to make companies safer. I totally agree. I think we have made 

something very complex which is going to be very hard to legislate 

or put in regulatory terms that works. 

Mr. MCHENRY. Is there a bright-line distinction between hedging 

and proprietary trading? Because don’t they look similar unless 

there is a balanced trade on the other side that matches up? 

Mr. DIMON. I think in some cases there is a bright line, yes. 

Mr. MCHENRY. Okay. And how long have you been in finance, 

how many years? 

Mr. DIMON. A long time, 30 years or so. 

Mr. MCHENRY. Okay. We will just say a long time. And for a living, you are supposed to know the distinction between this. You are 

testifying before Congress. You have obviously spent a lot of time 

doing this. So is there a bright-line distinction between that? And 

if you can’t determine what that is, how can a regulator determine 

that? 

Mr. DIMON. Okay. I wouldn’t have set it up proprietary versus 

hedging. That is not how I would have had the conversation. If you 

wanted to make the system safer, I would have said for trading, 

proper capital, proper liquidity, make sure it is largely done with 

clients, look at age inventory, you have proper risk reporting. You 

do have the ability to portfolio hedge and hedge because you need 

that in trading. And you could track all these things to say if you 

are running a good customer business or not. It does not eliminate 

risk; it will mitigate the risk. 

Mr. MCHENRY. Okay. So did you support Dodd-Frank? 

Mr. DIMON. That is a hard one to say. There are parts—we had 

a major crisis. We— 

Mr. MCHENRY. Did you support Dodd-Frank in its conception? 

Mr. DIMON. We had a major crisis, and we never denied that. 

And the crisis unveiled lots of flaws in our system—not one flaw, 

lots of flaws. So we understood the need for reform. There are parts 

of Dodd-Frank we supported; there are parts of Dodd-Frank we 

didn’t. 

Mr. MCHENRY. Okay. Suffice— 

Mr. DIMON. If you do remember, there are lots of parts to DoddFrank, so it is not like we had the same vote— 

73 

Mr. MCHENRY. Suffice it to say, you have a little buyer’s remorse. That is kind of what I am hearing. So, I understand, you 

are basically saying, yes, you understand the need for changes, you 

just don’t like the results. 

Mr. DIMON. Some of the results. 

Mr. MCHENRY. Some. 

Mr. DIMON. It should be modified. 

Mr. MCHENRY. Okay. So with Volcker, as it is being written, the 

distinction between proprietary trading and hedging, that is a bit 

of the debate that is going on right now. 

So, look, my concern is, in the post-TARP era, when we said we 

are going to end bailouts, we have actually codified it and institutionalized it. Therefore, when a company like yours that received 

extraordinary support from the government has a trading loss, the 

government gets very involved. Why is the government very involved? Because we have institutionalized ‘‘too-big-to-fail’’ and bailouts with Dodd-Frank. 

Now, to that point, during your hearing last week with the Senate, you discussed the distinction between a resolution authority 

and bankruptcy. Would you touch on that? Would you explain your 

view on what is preferable, the resolution authority as written in 

Dodd-Frank or bankruptcy? 

Mr. DIMON. You are asking for a lot of semantics. I would use 

the word ‘‘bankruptcy.’’ A bankruptcy implies that the equity gets 

wiped out. The unsecured debt only recovers if there is some left 

over to recover. And a court manages the wind-down of the company. 

You do need an expert like the FDIC to manage the process, that 

has the right people, the right structures, the right capabilities to 

manage the wind-down. And that it should be wound down, and all 

clawbacks invoked, the board of directors fired. The company 

should eventually be dismantled in a way that does not damage the 

economy. The name should be buried in disgrace. That is what 

should happen. 

Mr. MCHENRY. Okay. So that is called bankruptcy, right? 

Mr. DIMON. You guys can call it whatever you want. I am not 

going to get involved in the debate between bankruptcy and resolution. 

Mr. MCHENRY. If you are involved in the debate, actually, sir, I 

don’t know if you have been here for as long as— 

Mr. DIMON. Yes. 

Mr. MCHENRY. Anyway. But the distinction between resolution 

authority, which is in essence codifying ‘‘too-big-to-fail,’’ in essence 

codifying the fact that the government will lift you up if you fail, 

therefore these trading risks can be as risky as possible—this is 

the crux of the debate and why you are here today. 

Mr. DIMON. They won’t lift you up. They will keep it going so 

that—but the equity is wiped out, management is wiped out, unsecured is wiped out. The company gets dismantled and eventually 

is not there, without damaging the economy. 

Mr. MCHENRY. So we will put you on record in support of that. 

Chairman BACHUS. Your time is up, Mr. McHenry. Thank you. 

Mr. Miller for 5 minutes. 

Mr. MILLER OF NORTH CAROLINA. Thank you, Mr. Chairman. 

74 

Mr. Dimon, you were very dismissive last week with the Senate 

about a Bloomberg article—I think you told the Senate committee 

not to believe everything they read—that said that the CIO had 

really changed in the last few years from being a fairly sleepy, cautious risk mitigation unit and had become much more aggressive, 

much more risk-tolerant and profitable, and it was your intention 

that it become a profit center. And, in fact, more than a quarter 

of JPMC’s profits for 2010 came from CIO’s trading. 

But there was a question that Senator Johnson asked you from 

that article about a—that there had been a limit, that traders had 

to liquidate, had to get out of any position that had lost $20 million. And you were very puzzled by that and said you knew nothing 

about it. Have you inquired since then if there was such a limit 

and it was changed? 

Mr. DIMON. No. 

Mr. MILLER OF NORTH CAROLINA. You have not asked within 

your organization? 

Mr. DIMON. I think it referred to something back in 2007 or 

2008, so I did not ask, no. 

Mr. MILLER OF NORTH CAROLINA. All right. You did say last 

week that the failure with these trades was not that it was rogue 

traders; they weren’t violating the risk controls. The risk controls 

were not sufficient. That is correct, right? 

Mr. DIMON. They were too low—they were too high. There should 

have been much more lower limits that they had, yes. 

Mr. MILLER OF NORTH CAROLINA. Did they have any limits? Last 

week, you seemed to indicate not. 

Mr. DIMON. No, the CIO as a total had limits, but this unit didn’t 

have its own. But they used the CIO’s limits, which they eventually 

hit and stopped it at this level of loss. 

Mr. MILLER OF NORTH CAROLINA. But a limit of $20 million in 

losses and then you close the position, that would be a fairly granular risk control, wouldn’t it? 

Mr. DIMON. If that were true, that would—it depends what the 

area is, but yes. 

Mr. MILLER OF NORTH CAROLINA. All right. You have been very 

critical of JPMC in this matter, and you said that it was a significant risk management failure. You said it is flawed, complex, poorly reviewed, poorly executed, poorly managed. But on February 

29th, you filed a certification required by law that you had adequate risk controls in place, that management’s assessment of the 

firms determined that there were no material weaknesses in its internal controls over financial reporting as of December 31, 2011. 

I know that you are entitled to rely upon your subordinates, and 

I am sure you have relied upon your subordinates in making that 

certification. But was that certification correct? 

Mr. DIMON. I believe it to be, yes. 

Mr. MILLER OF NORTH CAROLINA. It was correct? 

Mr. DIMON. It was to my knowledge at the time. And— 

Mr. MILLER OF NORTH CAROLINA. No, no. Not based upon your 

knowledge at the time, but based upon what you know now, was 

that certification correct? 

Mr. DIMON. That is why we are having the review, to make sure 

that we have all the right things in place. That is what companies 

75 

do when they have problems. They analyze them, they review 

them, and they make determinations like that. And the review is 

not done yet. 

Mr. MILLER OF NORTH CAROLINA. All right. Who is entitled to— 

it seems like that certification is intended for regulators, but it is 

also intended for investors, isn’t it? Aren’t they entitled to rely 

upon the representation that there are adequate risk controls? 

Mr. DIMON. I don’t know the thing you have in front of you, 

but— 

Mr. MILLER OF NORTH CAROLINA. What is that? 

Mr. DIMON. I don’t know what you are referring to, but we try 

to give proper disclosures to our investors. 

Mr. MILLER OF NORTH CAROLINA. I am referring, actually, to the 

certification about risk controls. That certification is required by 

law. And presumably it is for both regulators and also for investors, isn’t it? 

Mr. DIMON. Yes. We try to disclose what we are supposed to disclose. 

Mr. MILLER OF NORTH CAROLINA. All right. 

What inquiry did you make about risk controls at the CIO before 

you signed that certification? 

Mr. DIMON. I believed at that time that the risk controls in the 

CIO were being done properly. 

Mr. MILLER OF NORTH CAROLINA. You were surprised last week at the question about a $20 million limit. It appeared to be something you were hearing for the first time, and you haven’t inquired 

in the 6 days since then whether that was true. I know that you 

rely upon—you are entitled to rely upon your subordinates, you 

said that last week, but there seems like there must be a limitation 

on that entitlement if you have noticed that there may be something wrong. One of the ways you might get other information 

would be from the financial press. Did you read the Bloomberg article? 

Mr. DIMON. I don’t remember if I read the Bloomberg article. 

Mr. MILLER OF NORTH CAROLINA. It was an article that said 

there was a $100 billion limitation, that traders at the CIO had to 

close positions once they lost $20 million. That would seem like 

that would stick out as a pretty big deal. 

Mr. DIMON. It wouldn’t stick out to me. It happened many years 

ago. I would pay virtually no attention to it. I am sorry. 

Chairman BACHUS. Mr. Miller, your time has expired. 

Mr. Stivers for 5 minutes. 

Mr. STIVERS. Thank you, Mr. Chairman; and thanks for being 

here today, Mr. Dimon. 

Before you were seated, we had a first panel where we had five 

regulators; and the two things that really struck me out of that 

panel was something Mr. Alvarez from the Federal Reserve said 

about capital. Obviously, that is a theme we have had here today, 

about how capital—your strong capital position saved this from 

causing JPMorgan from having a big problem and ensures that it 

won’t cause the rest of the system a problem. 

The other thing was Mr. Gruenberg from the FDIC talked about 

risk management. Your questions you got from Mr. Grimm and Ms. 

Hayworth centered around risk management. Is there anything in 

76 

your internal review other than capital and risk management that 

have come out that are lessons learned that other institutions 

should know? 

Mr. DIMON. I agree. You all brought up some things a little bit 

about models and implementation of models, making sure the risk 

committee is independent minded and not just sitting around having a cup of coffee, all those kind of things. So there will be more 

than just that, but— 

Mr. STIVERS. Mr. Frank talked a little bit about smart regulation 

that you had referred to earlier. We had those five regulators sitting in the seats before you. Not one of them really is in charge 

of the others. They don’t really coordinate with a lot of questions 

about how they share communication. In fact, no questions came 

up from any of the previous panel about harmonizing the regulations between Europe that they passed in March—on March 29th 

with the U.S. regulations. And there don’t appear to be any lessons 

learned that are shared with the other firms after what you go 

through to make sure that there is real shared knowledge. Do you 

want to comment any more about what smart regulation means to 

you? 

Mr. DIMON. So when Dodd-Frank was done, one of the things it 

had was the FSOC, like an oversight committee to make sure there 

are no gaps in the system and that learnings are shared, and we 

kind of supported that. It was set up with I say virtually with no 

teeth, and the legislators would have to change it. 

But someone should tell them who is responsible for mortgages, 

who is responsible for Volcker, as opposed to five people having jurisdiction. You see how complex it gets, how long it takes, how long 

it takes to work it out with foreign regulators. So I think simplifying it, clarifying it, adjudicating disputes, and giving authority 

and responsibility to the same people would be a good thing. 

Mr. STIVERS. Do you want to comment a little bit about how the 

impact on a multinational financial firm like yourself with regulations in Europe and regulations here that are not harmonized? 

Mr. DIMON. Yes, we talked about Dodd-Frank, which has 400 

rules. We have to accommodate Basel, which has hundreds of different things. We are not against them all, but liquidity, capital, 

et cetera. But the rules coming out of Brussels FSA, which is in 

the U.K., and several others and the CFTC, the SEC. So we have 

to deal with a lot, and we are going to. We are going to. I just wish 

it was a little bit more coordinated, and we did the important ones 

first and not just treat everyone like they are all the same. Like 

they are equally important. To a hammer, everything is a nail; and 

that is kind of what we are doing. 

Mr. STIVERS. Some questions have come up earlier today, and I 

am going make a statement instead of asking you this. There have 

been a lot of questions about too-big-to-fail, and I will just say as 

a policymaker, too-big-to-fail only happens when policymakers let 

it happen. So I am not asking you to comment on that, but that 

is a fact. 

I do want to talk to you about the Volcker Rule a little bit. You 

had some questions about it before. But, really, the key thing on 

the Volcker Rule would be getting it right. I don’t want financial 

institutions that can run to the Fed fund’s window borrowing 

77 

money and then putting it in a trading account and then essentially gambling— 

Mr. DIMON. And they don’t. 

Mr. STIVERS. But, at the same time, you have to be able to risk 

to hedge your positions. So I hope that we can work with the regulators as policymakers here and with the industry to craft something that makes sense. And if you have any ideas for us—I have 

a minute and 4 seconds—I will let you tell us if you have any ideas 

on how to make that happen. 

Mr. DIMON. The only idea I have is people should actually get in 

a room, talk about what they are going to accomplish, go through 

the specifics, and not pretend they are either for Volcker or against 

Volcker. For us, it is the process of the law of the land. You all may 

want to get rid of it, but we have to deal with it, and it is a very 

detailed thing. 

And I remind people we do have the best capital markets in the 

world. You should go home at night and say that we sit upon the 

best economy in the world, the best capital markets of the world, 

the best job creator of the world. We need to start doing jobs again, 

and we need to fix the mortgage market. We need to do a lot of 

things. If we do, I think it will help this economy recover quicker, 

not slower. 

Mr. STIVERS. One of the things Mr. Gensler said earlier today— 

there weren’t many things he said that I agreed with, but the one 

thing he did talk about is the advantage Europe has being in a 

time zone between Asia and the United States. There have been a 

lot of questions about why certain trades go to London, and I know 

you need to follow your customers who are global, too, but aren’t 

there some advantages to that time zone? 

Chairman BACHUS. Thank you. Mr. Stivers, your time is up. I 

think the answer was yes. 

Mr. DIMON. Yes, sir. 

Chairman BACHUS. Mr. Scott for 5 minutes. 

Mr. SCOTT. Thank you, Mr. Chairman. 

Welcome, Mr. Dimon. It is good to have you here. 

I want to start off by paying you and your operation down in 

Georgia a tremendous compliment. Georgia is number one in home 

foreclosures. We had a great foreclosure event down there, and I 

want you to say a good word for your folks down there in Georgia: 

Mr. David Balo and Todd Williams and Vanessa Williams— 

Vanessa Mims. Your Chase Home Ownership Center, good job. We 

saved over 1,785 homes, many of them yours. So good work. 

I think it is very important for us to set the stage here. I think 

that we in the United States of America and probably the world 

economy dodged a bullet, and we dodged a bullet basically because 

of your size, because of your largeness. You were able to handle 

and absorb this loss. But there is much we can learn from it. And 

I think, if I get my hands around this correctly, one was not 

enough attention was paid early on in the game; is that correct? 

Would you say that is one of the major reasons why the loss was 

substantial? 

Mr. DIMON. In hindsight, yes. 

Mr. SCOTT. And your reporting was diluted in the aggregate, 

which caused a problem as well. 

78 

The fundamental issue here, so we can learn from the future, is 

your risk management tool is referred to as Value at Risk. That 

was your model. And it is one of the reasons it was used to effectiveness, but it is basically predicated on large financial institutions. You are the largest financial institution in the world, certainly in the United States of America, and that is why we are still 

profitable, taxpayers didn’t lose anything on this, and it was effective. 

But here is the question: Would smaller firms have been able to 

have those same protections, using the same Value at Risk model 

as Chase? 

Mr. DIMON. We use lots of protections. VaR is one of many things 

we do to manage risk. 

I should point out there are reasons for big banks. There are reasons for small banks. Community banks do a great job. JPMorgan 

Chase in fact is one of the biggest banker to banks. The history of 

JPMorgan, as a money center bank, was to bank banks; and I 

think some of them can, yes. I can’t go through each one. They 

have different business models. But each one should do what they 

need for their own business, the ame business as we are in. 

Mr. SCOTT. Let me ask you this, Mr. Dimon. As a result of this, 

should one of the things we do now—should banking entities like 

JPMorgan be allowed by our regulators to hedge only on positions 

specific basis, as opposed to on an aggregate or portfolio basis? 

Mr. DIMON. If I were the regulator, I would allow portfolio aggregate. I will give you one example, because several people have mentioned Europe today. JPMorgan has been doing banking in Europe 

for 75 years. JPMorgan himself used to love Italy and would go 

there. We have exposures to Italian companies that you can’t get 

out of tomorrow. So if you were on my board of directors and you 

said, I don’t want Italian exposure, there is only one way to really 

do it, would be to go and do certain portfolio hedging, which would 

accomplish part or all of that. If you said do it by individual name, 

it would be impossible. 

Mr. SCOTT. And, Mr. Dimon, I think the American people would 

want to know, when this happened, when you first got wind of this 

$2 billion loss, what was your initial reaction? 

Mr. DIMON. When I fully realized it, I told our people that everything is going to happen, from coming down to Washington, to 

questioning Volcker, that I think we have hurt other bankers—it 

causes a lot of commotion inside the company, soul searching. But 

my attitude is let’s admit our mistakes, and fix them. Let’s put our 

jerseys on and fix it. That we would have to make changes. It 

would be a very tough time for us. 

However, it didn’t affect—it does affect it, but it shouldn’t detract 

us from our mission of serving clients. We have 82 Chase home offices, we have opened them all in the last 3 or 4 years, and we will 

do all the things we have to serve the clients right. I don’t want 

this detracting from what all of our 260,000 people do every day. 

Mr. SCOTT. And I can’t let you leave without this question. Because the fundamental question going forward is this whole issue 

of too-big-to-fail, how do you feel about that, especially since you 

are the biggest of the biggest? 

79 

Mr. DIMON. Our goal is not to be the biggest. It is to be the best. 

I think everyone kind of agrees we have to get rid of that in any 

incarnation. 

Mr. SCOTT. You said get rid of too-big-to-fail? 

Mr. DIMON. We cannot have too-big-to-fail. We have to eliminate 

too-big-to-fail, therefore allowing a big bank to fail in a way that 

doesn’t damage the American economy and the taxpayer never 

pays. And I think we are on our way to working through the things 

that would allow that to take place. 

Chairman BACHUS. Thank you. 

Mr. Neugebauer for 2 minutes, and that will then conclude our 

hearing. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Mr. Dimon, I want to kind of just go through a little calendar 

here. On April 6th, Bloomberg had an article. You are familiar with 

that article. 

Mr. DIMON. Yes. 

Mr. NEUGEBAUER. And I think the Wall Street Journal had an 

article that same day. Are you aware that the regulators had come 

into your shop on April 9th and had expressed concerns about this 

article in the trades? 

Mr. DIMON. I am aware that—I don’t know if they came or we 

called them. Like I said, we share everything with them. So I do 

believe some of the people spoke to the regulators and described 

what they thought about it, yes. 

Mr. NEUGEBAUER. It is reported on Tuesday, April the 10th, that particular position lost $300 million that day and I think subsequently on the next Tuesday and Wednesday with smaller losses. 

Were you familiar with those? 

Mr. DIMON. Yes. 

Mr. NEUGEBAUER. And so then on April 13th, you made a statement that it is no big deal; it is just a tempest in a teapot. Was 

that an accurate reflection of that transaction? 

Mr. DIMON. It is totally a positive, accurate reflection of what I 

believed at the time. Because folks had done work to look at the 

additional stress. That day it lost $300 million was the first trading 

day after the article. So part of that was expected, since we just 

showed the world our hand a little bit. The stress tests showed that 

it could be that dramatic. Several people believed that, reported 

that back to me. So on April 13th, I believed it was a tempest in 

a teapot. 

I obviously was dead wrong. It won’t be the first time I have ever 

been wrong. It won’t be the last. I obviously was dead wrong, and 

I deeply regret having said it. 

Mr. NEUGEBAUER. I understand. We all—I think the concern I 

had was that was a couple of days after that $300 million pop, and 

that is a pretty big pop even in your organization, isn’t it? 

Mr. DIMON. Our folks have looked to reports after that about how 

bad it can get. We stress-tested it. Some of the stress reports, I 

may have seen them, but there were reports to me that doesn’t 

show it could be that much worse. So, no, if that is what we believed, I would have considered that a small thing for JPMorgan. 

We had a very profitable quarter. You have to put things in relative size. 

80 

Mr. NEUGEBAUER. Thank you. 

Chairman BACHUS. Thank you. 

Mr. Green for 2 minutes. 

Mr. GREEN. Thank you, Mr. Chairman. I will be quick. 

Mr. Dimon, thank you for appearing today. 

Is it fair to say that you probably had more than 50 meetings 

concerning this issue that we are talking about today? 

Mr. DIMON. Fifty what? 

Mr. GREEN. Fifty meetings, meetings. Meeting with people, talking on the phone about this? 

Mr. DIMON. Yes. 

Mr. GREEN. Probably a hundred. More than a hundred. 

And is it fair to say that you are amenable to meeting with and 

talking to various people about these things and other things associated with your business and that probably you meet with Members of Congress and talk to them about these issues? 

Mr. DIMON. I talk to people if appropriate. We operate under a 

lot of rules and laws of what I can and can’t say to certain people. 

Mr. GREEN. If appropriate, do you meet with Members of Congress? 

Mr. DIMON. On occasion, yes. 

Mr. GREEN. I am asking this because I want to talk to you about 

a concept that is near and dear to my heart. We have been talking 

about too-big-to-fail. I want to talk to you about a concept that I 

have called ‘‘too-small-to-live-off.’’ That concerns something that is 

happening in this country. We have in Houston, Texas, some persons who are janitors; and they are paid $8.35 an hour. Now I 

know this is very small compared to what we have been talking 

about. I think you made about $19 million in 2011, or thereabouts; 

is that right? 

Mr. DIMON. Yes. 

Mr. GREEN. And I understand that your 4th highest paid person 

made about $14 million in 2011. I won’t mention the name, but 

there is a reason for picking the 4th highest. With persons making 

this kind of money— 

By the way, I salute you for it. I am a capitalist. I commend people for making the money that they make, within the rules, of 

course. 

But what I want to talk to you about is this: $47,000 is what it 

costs a family of 4 to live off in Houston. The poverty level is 

$23,000 a year. The average janitor working full time will make 

about $18,000 a year. That is working full time and living below 

the poverty line. 

I would like to meet with you and talk to you about ‘‘too-smallto-live-off.’’ And I will pay my way. I won’t use congressional funds. 

I will be willing to do it anyplace that you would like. Can you and 

I meet and talk about ‘‘too-small-to-live-off,’’ Mr. Dimon? 

Mr. DIMON. Yes, we can. 

Mr. GREEN. I will talk to you after the meeting. 

Chairman BACHUS. Actually, maybe tomorrow or the next day. 

Mr. GREEN. I am going to miss the vote. 

Chairman BACHUS. Thank you. 

This concludes the hearing. The Chair thanks our panelist for his 

testimony. 

81 

The Chair notes that some Members may have additional questions for this witness, which they may wish to submit in writing. 

Without objection, the hearing record will be open for 30 days for 

Members to submit written questions to this witness and to place 

his responses in the record. 

Mr. DIMON. Thank you very much, Mr. Chairman. 

Chairman BACHUS. This hearing is now adjourned. Thank you. 

[Whereupon, at 1:49 p.m., the hearing was adjourned.] 

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