Fed let Whale get away: watchdog
N.Y. regulator’s fumbling allowed US$6B in losses
WASHINGTON • The Federal Reserve Bank of New York botched oversight of the JPMorgan Chase & Co. office that suffered US$6.2-billion in trading losses attributed to the so-called London Whale, a watchdog report released Tuesday showed.
The report from the Fed board’s Office of Inspector General said the New York Fed spotted risks in JPMorgan’s chief investment office and planned examinations in 2008, 2009 and 2010, while mishandling execution of those reviews and inter-agency co- ordination. It calls the failure a “missed opportunity.”
The New York Fed “did not conduct the planned or recommended examinations because the Reserve Bank reassessed the prioritization of the initially planned activities related to the CIO due to many supervisory demands,” the report said, without being more specific as to what those demands were.
The findings may renew a debate over whether regulators can grasp the complexity and risks inside the largest banks. New York Fed president William Dudley warned bankers this week that they need to fix a corporate culture that encourages misdeeds or face being broken up.
“The report is disturbing in that it reveals that the Fed, the nation’s most powerful regulator, failed to follow up on identified risks that later cost JPMorgan and its shareholders over US$6-billion,” said Mark Williams, former Fed bank examiner who is now a lecturer at Boston University’s School of Management.
“Risk identification without follow-up is the equivalent of a fireman seeing a fire but not acting on it.”
Yesterday Mr. Dudley told industry leaders that if bad behaviour persists, “the inevitable conclusion will be reached that your firms are too big and complex to manage effectively.”
“In that case, financial stability concerns would dictate that your firms need to be dramatically downsized and simplified so they can be managed effectively,” he said.
Regulators are “questioning whether diversified banks with a large transactions staff can ever have something in common with an insured depository,” said Karen Shaw Petrou, managing partner at Federal Financial Analytics Inc., a Washington D.C. research firm.
Mr. Dudley succeeded Timothy Geithner as New York Fed president in January 2009. Mr. Geithner served in that role from November 2003 and became U.S. treasury secretary in 2009.
The Fed OIG’s report said there was “a lack of supervisory resources” while “weaknesses existed in controls surrounding the supervisory planning process.” The New York Fed also failed to co-ordinate with the Office of the Comptroller of the Currency, which regulated JPMorgan’s banking unit.
A reorganization of the Fed’s supervisory team in 2011 also resulted in “significant loss of institutional knowledge regarding” JPMorgan’s chief investment office, the report said.
JPMorgan, the largest U.S. financial holding company with US$2.5-trillion in total assets, lost at least US$6.2billion in 2012 on a large bet on synthetic credit derivatives. Two former traders face criminal charges, a U.S. Senate subcommittee wrote a scathing report, and the bank admitted violating securities laws and agreed to pay fines of more than US$1-billion.
The OIG listed 10 recommendations for Fed regulators, such as issuing “guidance that reinforces the importance of effective collaboration.”
A JPMorgan spokesman declined to comment on the report.