Regulator: JPMorgan appeared to have 'inadequate' risk controls in investment operation

WASHINGTON – A top federal regulator says JPMorgan Chase had weak controls in place to contain risk in its investment division that suffered a $2 billion-plus trading loss.

U.S. Comptroller of the Currency Thomas Curry told a Senate panel on Wednesday that the nation’s largest bank began reducing the amount of hedging it was doing to minimize potential losses at the end of 2011. Curry’s agency is examining JPMorgan’s risk-containment policies in the weeks before it suffered the trading loss this spring.

Curry told the Senate Banking Committee that “inadequate risk management” was the problem. He said his agency is conducting an extensive review that “will focus on where breakdowns or failures occurred.”

Senators pressed Curry to explain why regulators weren’t able to detect the risks that led to the loss earlier.

Did the Comptroller’s Office, which had 65 examiners onsite at JPMorgan’s offices, “screw up” in monitoring the bank, asked Sen. Bob Menendez.

“We’re going to critically look at that question,” Curry responded. “It will be a critical self-review.”

The Office of the Comptroller of the Currency, which is part of the Treasury Department, oversees about 2,000 banks.

JPMorgan’s $2 billion-plus trading loss has renewed calls from lawmakers and Obama administration officials for tougher regulation.

JPMorgan spokesmen declined to comment on Curry’s remarks. The bank’s CEO Jamie Dimon acknowledged the loss May 10, weeks after dismissing concerns about the bank’s trading as a “tempest in a teapot.” He more recently called the loss “a black mark” for the bank.

Dimon has said the loss came from trading in credit derivatives that was designed to hedge against financial risk, not to make a profit for the bank. He is scheduled to testify before the panel next Wednesday.

The Federal Reserve also is conducting a review of the JPMorgan loss.

Another federal agency, the Commodity Futures Trading Commission, is also investigating JPMorgan’s ill-timed bet on complex financial instruments that led to the trading loss. And the Securities and Exchange Commission is reviewing what the bank told investors about its finances and the risks it took weeks before suffering the loss.

Regulators say the loss underscores the need to tighten rules mandated under the 2010 financial overhaul law.

The misstep at JPMorgan has revived debate over the so-called Volcker Rule, which would prevent banks from trading for their own profit. The idea is to protect depositors’ money, which is insured by the government. Regulators are completing work on the rule, which is scheduled to take effect in July. But banks will have until July 2014 to meet its requirements.

Dimon has been among the most vocal critics of the Volcker Rule. The big Wall Street banks won an exemption in the rule: It would let them make such trades to hedge not only the risks of individual investments but also the risks of a broader investment portfolio.