The Justice Department has initiated a criminal probe into the $2 billion trading loss at JPMorgan Chase, a law enforcement representative familiar with the situation said Tuesday.
The inquiry is at a very early stage, said the person, who spoke on the condition of anonymity because the matter is private.
Many details about the loss at JPMorgan are murky, so it is unclear what laws, if any, may have been violated. But the attention from federal officials indicates that regulatory pressure is rising on JPMorgan, and its chief executive Jamie Dimon, to explain what exactly led to the bank’s multi-billion dollar misstep. That, in turn, has rekindled questions about whether government regulators are equipped to monitor banks making risky, complex trades.
At JPMorgan’s annual shareholder meeting Tuesday, Dimon responded to shareholders asking about the company’s trading loss, its lobbying on financial regulations and Dimon’s post on the board of the Federal Reserve Bank of New York.
Dimon opened the Tampa meeting, which lasted for less than an hour, by speaking rapidly about the bank’s surprising trading loss, calling the mistakes “self-inflicted.”
“This should never have happened,” he said.
Meanwhile on Tuesday, Treasury Secretary Timothy F. Geithner said at an event in Washington that the JPMorgan loss strengthens the case for financial reform. Geithner said regulators are “going to take a very careful look at this incident.”
“The test of reform is not whether you can prevent banks from making mistakes,” Geithner said. “That’s going to happen; it’s inevitable. But tests of reform should be, do those mistakes put at risk the broader economy, financial system or . . . the taxpayer?”
A central question in JPMorgan’s case is whether the bank’s losses were the result of a badly executed hedge, meaning the bank invested in the losing assets to reduce overall risk in its portfolio, or if the bank was betting purely for its own profits.
If the losses were simply the result of a bad hedge, accounting standards allow companies to exclude from reported earnings changes in the value of financial instruments known as derivatives. If not, the company must tell shareholders.
Regulators can potentially look at whether JPMorgan violated securities laws by not appropriately writing down losses associated with the trades.
“Hedging accounting abuses are very common. This is not something weird,” said Bill Black, a federal bank regulator during the savings-and-loan crisis. He added that Fannie Mae and Freddie Mac were both reprimanded by the Securities and Exchange Commission for these violations in the mid-2000s, before the financial crisis.
Dean Boyd, a Justice spokesman, declined to comment.
At JPMorgan’s meeting, shareholders voted on various proposals, including one that would split the roles of chief executive and chairman of the board. Both titles are held by Dimon. The proposal, often recommended by corporate governance experts, did not pass.
During a question-and-answer period, a shareholder pressed Dimon on reports that the bank was lobbying to water down regulations, including a rule that would force banks to spin off trading operations that exist primarily to pad their profits.
Dimon said JPMorgan supports “the intent” of the rule, named after former Federal Reserve chairman Paul Volcker.
“We believe in strong, simple, good regulation,” said Dimon, adding that it’s “not simply a question of more or less” oversight.
Dimon has also come under criticism for his post on the board of the New York Fed, which regulates JPMorgan. Critics charge that his seat threatens the regulators’ independence. Dimon said Tuesday that he is “not involved at all in the supervisory side” of the New York Fed. “It’s not like a board,” he said. “It’s more like an advisory group, in my opinion.”