WASHINGTON — Like many House Financial Services Committee hearings after the passage of Dodd-Frank, the panel's questioning of regulators Tuesday about JPMorgan Chase & Co.'s trading loss became a tug of war across the aisle about the reach of regulatory reforms.
While the five regulators were challenged on what they knew and when about the bank's derivatives loss, and shed some new light on JPMorgan Chase's risk management function, the lawmakers' continued discord over the regulatory reform law set the tone for the hearing.
"To me this is not a hearing about JPMorgan Chase. They are an example of the larger issue, which is the effort by my Republican colleagues, with help from some in the industry, to re-deregulate derivatives," said Rep. Barney Frank, D-Mass., the committee's ranking member.
The hearing marked another Capitol Hill appearance by newly-confirmed Comptroller of the Currency Thomas Curry, who under harsh questioning from senators June 6 revealed the agency's limited knowledge — in advance of the losses — of the trading activities run out of the bank's Chief Investment Office in London.
On Tuesday, he told the House committee that, while the Office of the Comptroller of the Currency is "continuing our review of the facts surrounding the trading loss at JPMC," the agency's findings point to concerns about the bank's risk management.
"We do believe, as a preliminary matter, that there are apparent serious risk management weaknesses or failures at the bank," Curry said. "We're attempting, as I mentioned, to continue to examine the root causes for those failures and to determine whether or not there are other weaknesses elsewhere in the bank besides the Chief Investment Office.
But he and other regulators — including Federal Deposit Insurance Corp. Acting Chairman Martin Gruenberg and Federal Reserve Board general counsel Scott Alvarez—said that the agencies only found out about the trading risks in JPMorgan's London affiliate after they were revealed in April press reports.
"That's when we became aware of the potential significance of the situation," Curry said.
The committee's questioning, however, was largely dominated by issues that lawmakers continue to debate two years after the law's passage — from funding of agencies implementing the law, to restrictions for offshore derivatives trades to whether the taxpayer is protected from bailouts.
"JPMorgan and its shareholders, not the bank's clients, not the taxpayers, not the depositors… are the ones paying for the bank's mistakes," said Financial Services Committee Chairman Spencer Bachus, R-Ala. "This is how the system is supposed to work, and it has."
Rep. Scott Garrett, R-N.J., chairman of the capital markets subcommittee, complained about Democrats responding negatively to a private company's loss — which did not threaten its solvency — while having had condoned taxpayer-funded aid for failing institutions during the crisis.
"I'm a little surprised thought about the hemming and hawing that we've heard by my colleagues on the other side of the aisle when a private business loses money, when the institution that we're all in right here is losing billions of dollars literally every day," Garrett said. "There was no shortage of outrage from my friends on the other side of the aisle when the private sector loses money. So it makes you wonder, where was the outrage when Bear Stearns was bailed out with billions of dollars?"
Many Republicans on the committee pointed to JPMorgan's high amounts of capital as a better defense against system failures than passing laws to restrict business activity.
"Capital is the ultimate buffer to protect against those unforeseen losses," said Rep. Ed Royce, R-Calif.
But Democrats countered that the JPMorgan episode undercuts GOP proposals to lower funding for agencies implementing Dodd-Frank — particularly the Commodity Futures Trading Commission — and to provide more flexibility in regulations for offshore derivatives transactions.
"As we sit here now … the Appropriations Committee will be voting in on a budget proposed" for CFTC "which incredibly will reduce the amount they have from this year to next year," said Frank.
Some lawmakers said trades like those executed by JPMorgan- to the extent they are allowed — pose concerns if losses are higher and at an institution with lower capital levels.
"This is not just about a $2 billion or $3 billion trading loss at JPMorgan Chase. It's about the" bigger loss "that could come next," said Rep. Maxine Waters, D-Calif., the ranking member of the capital markets subcommittee.
Echoing concerns about GOP efforts to limit regulators' extraterritorial powers, Rep. Carolyn Maloney, D-Calif., noted a "disturbing pattern" of institutions reporting losses from London subsidiaries, including both JPMorgan Chase and American International Group.
"It seems that every big trading disaster is happening in London," she said.
Frank asked Gary Gensler, the CTFC's chairman, about the impact of recently proposed legislation to limit extraterritorial powers.
"It would be a major retreat from reform," Gensler said. "And as I understand, these trades were executed in London in a branch and they would not be covered."
Responding to similar questioning from Waters, Gensler said it would be near impossible to differentiate the theoretical failure of a large U.S. firm like JPMorgan with that of its overseas affiliates.
"Often it comes right back here crashing on our shores," he said. "If taxpayers bail out JPMorgan, they would be bailing out the London entity as well.
"It's almost impossible to sever off a limb … even if it's overseas."
Lawmakers remained concern, however, that regulators were not even aware of the risks from the trading activities in JPMorgan Chase's London subsidiary until news articles publicized the issue.
"Nobody's really in charge. Nobody is really supervising. We're finding out after the fact through press releases or whatever. It gets very frustrating from our point of view," said Rep. Steve Pearce, R-N.M.
Curry responded: "I understand that, congressman. It's part of our review process to do a postmortem to see what went wrong in this particular case and how the OCC can better perform these duties."