June 12, 2012 at 12:38 PM ET
Updated at 7:30 a.m. ET: When JPMorgan Chase’s Chairman and Chief Executive Jamie Dimon appears on Capitol Hill later Wednesday he will reportedly talk down the risky trading practices that have led to massive derivatives trading losses at the bank.
Dimon will apologize for the bank’s mistakes, and he will say JPMorgan’s recent multibillion-dollar trading loss happened because poorly managed traders in January started an unwise hedging strategy they did not fully understand, according to reports of his prepared testimony for a Senate hearing into the trading disaster. He will also argue that risk is inevitable in the banking business.
“We will not make light of these losses, but they should be put into perspective,” Dimon is expected to tell lawmakers, according to a copy of his testimony published by The Wall Street Journal. “We will lose some of our shareholders’ money -- and for that, we feel terrible -- but no client, customer or taxpayer money was impacted by this incident.”
“We have let a lot of people down, and we are sorry for it,” Dimon is also expected to say.
In early May, Dimon revealed that a London-based section of the bank had lost $2 billion in a trading portfolio designed to hedge against risks the company takes with its own money.
That figure has since grown to $3 billion -- a massive loss for a single bank that has shocked Washington, Main Street and even Wall Street, and represents a big embarrassment for the bank, which unlike many of its rival institutions managed to come through the 2008 financial crisis relatively intact.
The losses are especially embarrassing for Dimon, who is known for his skills in the field of risk management, and also because he has been an outspoken opponent of the so-called Volcker Rule, which is supposed to prohibit banks from making speculative bets with their own money on a scale that could endanger both the institution and the financial system.
Dimon has insisted the bank’s botched trades were designed to hedge its overall risk, rather than simply to make profits. Lawmakers are likely to question that view when Dimon appears before them on Wednesday. They also could ask if the nation’s other big banks are still engaged in the risky trading activities that can lead to catastrophic losses.
They are also likely to mention the findings of a story in The Wall Street Journal Tuesday that showed some JPMorgan executives and directors were warned about risky practices by a team of London-based traders two years before botched trading cost the bank billions.
“The question is will Jamie Dimon tell us the whole truth [tomorrow], because he hasn’t done so yet,” said Christopher Whalen, a senior managing director of Tangent Capital Partners in New York.
Whalen told CNBC lawmakers are likely to want to know when Dimon first became aware of the risks taken by Bruno Iksil, the man at the center of the trading disaster, who was nicknamed the “London Whale” for his risky trades.
When Iskil’s trading initially came to light, Dimon dismissed the press coverage as a “tempest in a teapot,” but now lawmakers are likely to want to drill down into the details of the trading activities at JPMorgan, and in particular those of the London-based team at the center of the controversy, and to understand the risks they took, Whalen said.
The big trading loss has sparked investigations from the FBI and the Securities and Exchange Commission, and it has also prompted shareholder lawsuits. Dimon has apologized for the losses, and he even warned that they are likely to grow, but he has also told shareholders that the bank is not in danger because the size of the losses are relatively small compared to JPMorgan’s operations.
In April, JPMorgan reported first-quarter 2012 net income of $5.4 billion, down from a net income of $5.6 billion in the first quarter one year before.
Whalen said another issue for lawmakers will be why regulators didn’t detect the extreme risks that JPMorgan traders apparently were taking.
Several representatives of the Office of Comptroller of the Currency, which is charged with supervising the international activities of U.S. banks, were detailed to JPMorgan in London.
“The examiners are supposed to follow the audit trail, in part; they have to go and check all of the significant operations of the bank,” Whalen said. “This as a very significant part of the bank, and it was growing. The exposures were growing.”
“What’s the point in regulation if they’re not going to be diligent?” Whalen continued. “That’s what we pay them for.”
For Dimon himself, there’s the matter of his position on the board of the New York Federal Reserve, which lawmakers say is a conflict of interest.
The New York Times has reported that, even though scores of federal regulators are stationed inside JPMorgan’s Manhattan headquarters, the Federal Reserve did not assign any regulators to the London office that generated the big trading loss.
Below, CNBC's Sue Herera reviews Dimon's prepared remarks for today's event.