Washington dealt a double blow Thursday to JPMorgan Chase as a Senate report accused its iconic chief executive of hiding information about a massive loss from regulators while the Federal Reserve unexpectedly said it had found a “weakness” in the bank’s capital plans.
The twin announcements, both unveiled in the late afternoon, escalates the problems for JPMorgan, the nation’s largest bank and arguably its most prestigious. Once viewed as the strongest bank to emerge from the 2008 financial crisis, the firm on Thursday watched its weaker rivals, Bank of America and Citigroup, sail through the Fed’s examination.
Perhaps more pressing is a report from the Senate’s Permanent Subcommittee on Investigations, which plans to hold a hearing Friday to probe the behavior of current and former senior bank executives as they tried to contain the fallout from a series of damaging trades, initiated by a trader known as the “London Whale.” The bets ultimately cost the bank about $6.2 billion.
The Senate report is the first to suggest that JPMorgan’s chief executive Jamie Dimon was less than forthright with regulators as he learned of the mounting losses. To date, Dimon has acknowledged that the bank failed to manage its risks, which allowed the bad trades to persist.
The report takes the bank to task for hiding losses for three months last year, overstating the value of its trading positions and ignoring red flags. When regulators grew concerned, JPMorgan withheld information about the nature of the portfolio, Senate investigators say.
At one point, the bank was providing regulators daily profit and loss statements from its investment division so they could see what was going on. But Dimon put a stop to it. When one of his subordinates resumed the updates, “Dimon reportedly raised his voice in anger,” the Senate report said.
Days after losses on the portfolio jumped to more than a billion dollars, Dimon dismissed concerns about the trades as a “tempest in a teapot.”
A senior banks examiner told the subcommittee that it was “very common” for JPMorgan to push back on findings and recommendations by regulators. He recalled one instance in which bank executives even yelled at the examiners and called them “stupid.”
JPMorgan did not immediately respond to a request for comment.
Meanwhile, on Thursday, the Federal Reserve said it had found “weaknesses” in JPMorgan’s capital plans, derailing the company’s plans to use its cash reserves to reward shareholders. It uncovered a similar issue at another prestigious Wall Street firm, Goldman Sachs.
The companies last week passed the Fed’s so-called “stress test,” which examines whether big banks can survive a downturn. But regulators said they had found issues in its capital plans that were “significant enough to require immediate attention.”
The two banks were ordered to resubmit their plans to the Fed by September, though they can continue to issue dividends and buy back stock in the interim.
Fourteen other big banks received a thumbs up on their capital plans. But the Fed outright rejected BB&T and Ally Financial, which is still largely owned by the federal government. Ally was the only bank to fail the Fed’s stress test last week.
After those results, the company called the central bank’s analysis “fundamentally flawed.”
Whereas analysts suspected Ally, which still owes the government $11.4 billion in bailout funds, would meet resistance from regulators, few anticipated JPMorgan or Goldman would have trouble.
“We are pleased to continue to have the flexibility to return capital to shareholders,” Goldman chief executive Lloyd Blankfein said in a statement. Dimon said the firm is “fully committed to meeting all of the Fed’s requirements.” In a statement, the chairman went on announce that the board intends to increase the company’s dividend in the second quarter from 30 cents to 39 cents per share.
BB&T sailed through last week’s test with one of the highest capital scores of the 18 banks. But in the latest round of testing, the Fed said its capital plan was rejected “based on a qualitative assessment.”