JPMorgan Silent Partner Revealed in Whale Fiasco

By Jonathan Weil

One of the best parts about last week’s Senate hearing on JPMorgan Chase & Co. (JPM)’s London Whale trades is that we finally got a clear picture of whose side the regulators were on during the early days while the bank’s executives tried to contain the unfolding debacle.

Even when officials at the U.S. Office of the Comptroller of the Currency knew that JPMorgan had misled the public, they did nothing to make the company set the record straight. Theregulators didn’t merely keep quiet while JPMorgan spread falsehoods. Their silence made them complicit. Last April, when Douglas Braunstein was still JPMorgan’s chief financial officer, he said the bank’s regulators were fully aware of what the credit-derivatives traders at its chief investment office had been doing. His assurances came a week after the first stories about the London Whale scandal broke in the press. This was before JPMorgan’s acknowledgement in May that it had a serious problem, which eventually added up to more than $6 billion in trading losses.

“We are very comfortable with our positions as they are held today, and I would add that all of those positions are fully transparent to the regulators,” Braunstein said on JPMorgan’s April 13 quarterly earnings conference call. “They review them, have access to them at any point in time” and “get the information on those positions on a regular and recurring basis as part of our normalized reporting.”

Knowing Better

The world knows better now. At last week’s hearing by the Permanent Subcommittee on Investigations, Senator Carl Levin asked Scott Waterhouse, the OCC examiner-in-charge for JPMorgan, if Braunstein’s statement was true. “That is not true,” Waterhouse said. Levin, the Michigan Democrat who is the panel’s chairman, next asked if it was true that regulators got “the information on those positions on a regular basis.” Waterhouse answered: “No, we didn’t.”

This was the first time anyone from the OCC had said publicly that Braunstein’s statement was false. Why did it take almost a year? The agency doesn’t have any good answers.

Waterhouse and others at the agency were in a unique position to know the truth when Braunstein told his whopper. They knew what was transparent to them and what wasn’t. They knew what information JPMorgan had given the OCC and what it hadn’t. But they didn’t alert the public or make JPMorgan issue a correction.

They didn’t see it as their job to care if the public was misled. Behind the scenes, in conversations among themselves, OCC officials said the information JPMorgan initially provided the agency about its credit derivatives was useless, according to the Senate panel’sreport.

There’s no law or regulation that prevented the OCC from telling the public that Braunstein’s comments weren’t true. The head of the OCC, Thomas Curry, could have approved a news release in rebuttal. An OCC spokesman, Robert Garsson, confirmed this much. Garsson said it wasn’t the agency’s responsibility to tell the public. He declined to say if the OCC gave a heads-up to other regulators, such as the Securities and Exchange Commission. There has been no indication it did.

“Our mission is safety and soundness, and we don’t divulge confidential exam information,” Garsson said. Never mind that Braunstein had been speaking on a public conference call. There wasn’t anything confidential about it. Plus, information can’t be confidential if it isn’t true -- because it’s made-up and doesn’t exist.

Here we had JPMorgan’s CFO using OCC employees as human shields in an effort to calm the public, and the agency didn’t even seem to care. His message was clear: Don’t worry, because our government minders know everything -- and if you are going to come after us, well, they’re fine with what we’re doing.

Wasn’t True

Braunstein, now a JPMorgan vice chairman, acknowledged to Levin that his April statement wasn’t true. “On the 13th, I believed it to be accurate based on the information that I had received,” Braunstein said. It’s still far from obvious what basis he had for believing what he said. JPMorgan didn’t address the subject in the internal investigative report it released in January.

Levin told him: “I have a lot of trouble -- a lot of trouble, I gotta tell you, Mr. Braunstein -- believing that those statements were anything other than an effort to calm the seas. Because they all were exaggerations or inaccurate.”

It’s true that OCC officials had no legal duty to make JPMorgan come clean. The question is whether they had a moral obligation, especially given the stakes. This is the U.S.’s largest bank by assets, and one that has taken taxpayer bailout money before and would take it again in a pinch.

Here’s what the OCC should have done back in April: Send a letter, signed by Curry, to Braunstein, JPMorgan Chief Executive Officer Jamie Dimon and the bank’s board, telling them that JPMorgan had 24 hours to publicly correct the record about what it had told the OCC. Then, if JPMorgan failed to do so, the agency should have released the letter.

That way Curry at least could have said the OCC didn’t participate in this conspiracy of silence. He can’t say that now.

(Jonathan Weil is a Bloomberg View columnist. The opinions expressed are his own.)

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