Dimon blames JPMorgan's $2 billion loss on 'complacency'

WASHINGTON -- JPMorgan CEO Jamie Dimon told Congress Wednesday that complacency kept bank executives from properly overseeing a unit that lost more than $2 billion and conceded that tough new banking rules he has opposed might have prevented part of the loss.

The bank's chief investment office "did so well for so long, a little complacency was taking place, maybe a little overconfidence," Dimon told the Senate Banking Committee. "We made a mistake. The buck stops with me."

Dimon said JPMorgan has appointed new executives to lead the chief investment office, taken steps to reduce risk and launched a review of the bungled trades. He also said the bank likely will "claw back," or retrieve, some of the pay of executives responsible for the loss.

Under bank policy, Dimon said, stock and bonuses can be recovered from executives, even for exercising bad judgment, although the policy has never been invoked.

The trading snafu has not hurt the profitability of the nation's largest bank. But it's providing ammunition to critics advocating rigorous constraints on banks just as regulators are debating details of legislation passed after the financial crisis three years ago.

The loss has heightened concerns that the biggest banks still pose risks to the U.S. financial system.

Sen. Robert Menendez, D-N.J., suggested a hypothetical $50 billion loss that causes a run on a bank "ultimately becomes the collective responsibility of each and every American."

JPMorgan's problem occurred in a portfolio of credit default swaps, which are designed to hedge against the risks of events such as the European debt crisis, Dimon said. In other words, when the economy goes into a tailspin and loans and other traditional investments incur big losses, the swaps typically generate a profit to offset some of the damage.

To meet new, higher bank capital requirements, JPMorgan's chief investment office was told to reduce risk in the portfolio. But instead of unloading holdings, executives added offsetting investments, enlarging the holdings.

"It morphed into something I just cannot justify," Dimon said. "Something too risky for our company." Rather than protect the firm, he said, it "created new and potentially larger risks. As a result, we have let a lot of people down, and we are sorry for it."

Dimon said the strategy was not carefully analyzed or reviewed outside the chief investment office and traders mistakenly believed the losses would be temporary. He said limits on risks the unit could take should have been lower and more specific.

Regulators, including the Securities and Exchange Commission are investigating whether the bank disclosed the loss to the public and financial regulators in a timely manner.

The so-called Volcker rule, slated to take effect in July, would prevent banks from making big risky trades with their own funds, but it would permit such trades to hedge risks or establish market prices.

Dimon said the Volcker rule "may very well have stopped part of what the portfolio morphed into."

At the same time, he said he still opposed the rule, adding, "I think it's going to be very hard to make a bright line distinction" between hedging and proprietary trading.

The swaps are "intended to earn a lot of revenue in the event of a crisis. I consider that hedging."

Dimon said it would be more effective to require banks to hold more capital to cover possible losses — a view held by several Republicans n the committee.

But committee chairman Tim Johnson, D-S.D., said, "We should not rely only on capital." He said, "How can a bank take on 'far too much risk' if the point of the trades was to reduce risk in the first place? Or was the goal really to make money?"

The start of the hearing was delayed slightly by demonstrators in the room who shouted about stopping foreclosures. Another demonstrator shouted, "Jamie Dimon's a crook." At least a dozen people were escorted from the hearing room.

Dimon skated a fine line in talking about his specific role in relation to the bank's trading operation. Asked whether he personally approved the investment office's trading strategy, Dimon said, "I was aware of it, but I didn't approve it."

The Wall Street Journal reported Tuesday that some senior JPMorgan executives, including the chief financial officer and chief risk officer, were told about risky trading in London two years before the losses came to light.

Dimon himself knew of some of the trades and sometimes spoke with the traders involved, the Journal reported, citing unnamed people familiar with the matter.

The Securities and Exchange Commission is reviewing what JPMorgan told investors about its finances and the risks it took before the loss.

In April, in a conference call with analysts, Dimon dismissed concerns about the bank's trading as a "tempest in a teapot." Later, adopting a more conciliatory stance, he conceded that he'd been "dead wrong" to minimize those concerns.

Since the 2008 crisis, Dimon has been an outspoken voice against stricter financial regulation. He has complained that lawmakers and regulators have gone too far in an overhaul of the financial system and might be slowing the economic recovery.

Contributing: Associated Press