Sunday, May 20, 2012

Congress gets into the JPMorgan Chaseaffair Tuesday with the first in a series of hearings into how a federally insured bank incurred humongous losses on the kind of risky bets some, mistakenly, thought were a thing of the past.

We have learned more since the story broke last week.

The losses, as suspected, look to be far higher than the $2 billion initially estimated. As of Friday, the number was $5 billion.

What did CEO Jamie Dimon know, and when did he know it?

"Dimon personally approved the concept behind the disastrous trades ... but didn't monitor how they were executed," according to the Wall Street Journal.

He knew on April 6 that serious concerns were being raised about the trades. Yet one week later he called the concerns a "complete tempest in a teapot," even as hundreds of millions of dollars of losses were mounting.

Were the trades in question a one-off, or as Phil Angelides, the former chair of theFinancial Crisis Inquiry Commission, wondered in this column, more "endemic" at JPMorgan? The latter, it seems. Reportedly, similar trades, involving credit derivatives, date to 2006, ramping up with ever bigger bets as risk controls were eased in 2011.

Portfolio heavy on risk

Over the past three years, according to Friday's Financial Times, the bank's chief investment office, the unit running the trades, has built up "positions totaling more than $100 billion in ... the complex, risky bonds at the center of the financial crisis in 2008."

Add in other kinds of risky securities, and the unit's "non-vanilla" holdings currently amount to $150 billion, says the British paper. That's close to 50 percent of the $360 billion portfolio the unit is responsible for.

They had been delivering the kind of returns vanilla products, like U.S. Treasury bonds, couldn't come close to. In 2011, the unit's "London whale," the trader most directly responsible for the major recent losses, had made $450 million for the bank on a bet against a group of U.S. companies, including American Airlines. Overall, the unit recorded $5.1 billion in profits for the past three years - the same amount JPMorgan is now looking to lose.

"It almost seems like a fact of life - go back to the housing boom - there's no oversight so long as people are making money," said John Silvia, chief economist at Wells Fargo Securities. "We always tend to look the other way, even when we don't understand what the hell we're doing."

Silvia would not comment on the situation at JPMorgan but said, "while you can't have reward without some risk, any organization that's been making large profits for a good period of time - whether it's Florida real estate or financial securities - has to take a closer look at the risks involved."

Clearly, JPMorgan, from its CEO on down, did not do that. Neither, seemingly, did it consider the money it was making - $48 billion over the same three-year period - enough. Nor wonder whether it could be put to better use than investing in whatWarren Buffett famously called "financial weapons of mass destruction."

"It's their money and they can do with it what they want, but I think at this point, JPMorgan would agree with you," Silvia quipped.

Better uses for money

Still, one can't help but be struck by a growing disconnect. On the one hand, JPMorgan and other U.S. corporations are banking record profits and ever-growing piles of cash - $2 trillion at last count. On the other, U.S. unemployment remains unacceptably high, people are still losing their homes, small businesses are screaming for credit, local governments are cutting services left and right, and the nation's infrastructure is crumbling.

"It's a running source of discussion among economists," Silvia said. "There's an awful lot of money sitting around, and people expect it to be put to use."

One explanation: the 2012 version of the "liquidity trap," in this case, tons of money sloshing around, courtesy of the Federal Reserve, but banks and corporations, faced with a plethora of uncertainties - the U.S. economy, Europe, the future of tax reform, health care reform and the Dodd-Frank financial regulations, to name a few - are hoarding it.

"No one is sure what is going on," Silvia said.

Just like JPMorgan, "one of the best-managed banks there is," according to PresidentObama, didn't know what was going on. Not an edifying prospect.

Andrew S. Ross is a San Francisco Chronicle columnist. Blogging atwww.sfgate.com/columns/bottomline. Facebook page: sfg.ly/doACKM. Tweeting:@andrewsross. bottomline@sfchronicle.com

This article appeared on page F - 1 of the San Francisco Chronicle