Banking regulators in the United States are under pressure to explain their role in the $2 billion blowout of trading losses by a London-based trader at JPMorgan Chase.
The losses have become a political football in Washington as Democrats and Republicans debate the need for tougher bank regulation.
Democrats believe that the costly trading positions taken by Bruno Iksil, the trader known as the “London Whale”, prove that banks should not be allowed to trade their own assets and that oversight should be tougher. Sherrod Brown, a member of the Senate Banking Committee, wrote to the regulator this weekend to ask about its processes for reviewing bank trading positions.
The Ohio senator also asked the Comptroller of the Currency, a division of the US Treasury that has oversight of the banking system, whether it knew that JPMorgan Chase had changed the way it monitored trading risks.
It is likely that the answer will be that very little was known about what was going on.
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The timing of Mr Brown’s letter is pertinent as it comes only days before the Senate committee debates the JPMorgan Chase’s losses and amid a growing political debate in the US over the need for greater bank regulation.
The trading losses, which the bank’s chief executive Jamie Dimon has called “sloppy and stupid”, have been blamed in part blamed on a new mathematical equation for calculating risk. So-called “value-at-risk” models allow banks to determine what their worst-case exposure to trading losses might be each day.
JPMorgan Chase introduced a revised equation last year that underestimated the amount of risk the bank’s investment office was carrying. When the positions were evaluated again using the old model, the bank started to unwind the trades at a loss.
Meanwhile, it has emerged that one of JP Morgan’s shareholders questioned the oversight of risk within the bank more than a year ago. CtW Investment Group, which represents trade union pension funds, spoke to bank executives about its processes for assessing risk amid concern about the experience of the directors appointed to oversee this area. The three-member risk committee on JP Morgan’s board includes Ellen Futter, the president of the American Museum of Natural History, and James Crown, who manages a family investment company.
JP Morgan is expected to bolster its board risk committee, possibly adding directors such as Timothy Flynn, the former chairman of KPMG.