Dimon Hearing Reveals Lingering Questions About the Health of the Financial System

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J. Scott Applewhite / AP

JPMorgan Chase CEO Jamie Dimon, head of the largest bank in the United States, arrives on Capitol Hill in Washington, on Wednesday, June 13, 2012, to testify before the Senate Banking Committee.

JPMorgan Chase CEO Jamie Dimon withstood a barrage of verbal flak yesterday in the Senate Banking Committee hearing which sought to investigate the over $2 billion trading loss that his bank suffered this spring. But the criticism was, for the most part, not coming from the august Senators who were questioning him. Citizen spectators in the Dirkson Office Building in Washington clamored at the JPMorgan CEO, calling him a “criminal,” and a “crook.” Others chanted, “Stop foreclosures now!” before Tim Johnson, chairman of the committee, brought the hearing to order, and Capitol Police escorted the emphatic spectators from the premises.

The Senators, however, handled Dimon with kid gloves. Given the nation’s hatred of the too-big-to-fail banks and a federal election that is not six months away, this comes as something of a surprise. But just because the Senators failed to dish out the conspicuous excoriation that some thought they might, it doesn’t mean the hearing was without merit. The huge trading loss JPMorgan suffered this spring has a lot to tell us about the state of our financial system and the efficacy of the nation’s newly overhauled regulatory structure — and the Senators’ discussions with Dimon revealed their thinking about what’s yet to be done to fix them.

(MORE: How Much Does The Big Boss Really Matter? (A Partial Defense of Jamie Dimon))

The hearing focused on three main issues: Dimon’s transparency about the loss, whether America’s large banks are too big to manage, and the implications of the yet-to-be implimented “Volcker Rule,” which would bar banks with federally-insured deposits from speculating in risky securities. The proceedure also revealed Dimon’s support of “clawback” provisions on Wall Street — or the practice of taking back compensation from traders and executives whose decisions cause banks to loose money.

Disclosure: Was Jamie Dimon misleading investors when he dismissed concerns about the bank’s operations as a “tempest in a teapot” during a call with analysts in April?  During the hearing, Dimon more or less laid the blame for that characterization at the feet of his former Chief Investment Officer Ina Drew and other subordinate executives at the firm. He told the Senators, “I was assured by them, and I have a right to rely on them, that they thought this was an isolated small issue and that it wasn’t a big problem.” But many are skeptical that Dimon was really in the dark about such a huge position in the firm’s most important investment portfolio. As William Cohan wrote yesterday in Bloomberg,

“How could Dimon not have closely monitored what Drew and her traders were doing in this $350 billion proprietary portfolio that was managing the firm’s excess cash on a daily basis? Did he really have such blind faith in Drew — or did he actually know much more than he is admitting, especially since Drew and two of her London traders have taken the fall for the bad bets?”

(MORE: The Public Whipping of Jamie Dimon)

Too-Big-to-Manage: As I wrote yesterday, there is a growing chorus of voices that are arguing that the mega banks we were left with post-crisis are simply too big to manage, let alone regulate. Republican Senator Bob Corker and Democratic Senator Sherrod Brown both raised this issue, with Brown saying that JPMorgan has “quadrupled in size” over the past thirteen years, and that “this case demonstrates as a practical matter that neither you nor the OCC could monitor what was happening in a $370 billion Chief Investment Office that would, if it were standing alone, be the 8th largest bank in the United States.”

Volcker Rule: Does this incident demonstrate the need for a strict Volcker Rule? Dimon has been a frequent and forceful critic of the proposed rule and tried to argue yesterday that it wouldn’t have had much effect on the offending trade, saying “I think it’s going to be very hard to make a bright line distinction between proprietary trading and hedging because you could look at almost anything we do and call it one or the other.” CNBC’s Steve Liesman disagrees, writing that Dimon “whiffed” on the Volcker Rule question. “The proposed rule requires a series of compliance steps that would appear to have had a profound effect on the errant trades.”

(MORE: JPMorgan’s Other Loss: A Voice for Regulatory Restraint)

Clawbacks: One of the most interesting (and heartening) disclosures at the hearing  was that Mr. Dimon believes that due to the trading fiasco “there will likely be clawbacks” of some executives’ pay. Dimon said JPMorgan’s clawback policy allows the bank to take back cash bonuses and uninvested stock if actions taken by traders turn out, in the long run, to be overly-risky. He justified these provisions by saying:

“I think that one of the legitimate complaints was that after the crisis people walked away from companies that went bankrupt with a lot of money. Some of that was inappropriate. In this particular case the board will review, at the end of this, every single person involved what they did what they didn’t and what’s appropriate.”

Of course, the devil will be in the details. This could be a bunch of hot air, but there are reasons to believe that banks will get more serious about implementing this sort of policy. Holding employees accountable for not only short term profits – but also for what comes after those profits are booked is good for shareholders and banks long-term. If this sort of policy has teeth and becomes standard operating procedure on Wall St., it will go a long way to preventing the kind of risky behavior that, in part, led to the financial crisis.