JPMorgan's (JPM) Dimon Girds Loins Ahead of Fierce Banking Panel

June 13, 2012 8:45 AM EDT
J.P. Morgan's (NYSE: JPM) "fortress" balance sheet is having some financial "trebuchets" being aimed at it, but CEO Jamie Dimon already has his sword and shield at the ready.

And shields, as we all know, are great at deflecting things.

In a written testimony to be given before the U.S. Senate Committee on Banking, Housing and Urban Affairs Washington, D.C. on Wednesday, Dimon said the $2 billion trading loss incident reported earlier in May was an "isolated incident" and the traders were poorly managed, taking on risks they "didn't fully understand."

Federal panels are like Carthaginians: they simply will not stop while delivering on the offensive (unless their time runs out, of course).

But, in battle, you need weapons as well. Dimon will brandish his spatha while noting the size of J.P. Morgan and all the lending it does to help spur economic growth. From the testimony: "J.P. Morgan Chase's six lines of business provide a broad array of financial products and services to individuals, small and large businesses, governments and non-profits. These include deposit accounts, loans, credit cards, mortgages, capital markets advice, mutual funds and other investments." Boom.

He'll note how the $350 billion CIO portfolio's primary purpose is to hedge against systemic risks like "the financial crisis or Eurozone situation." Dimon continued that the CIO portfolio is designed to delivery modest gains in a stagnant credit environment and substantial gains in a stressed environment.

Incoming! Here's a problem: Dimon said the unit was told to ease its positions in December 2011, but the unit instead embarked on more complex trades in January 2012. Biff! The portfolio now became the enemy, Dimon will note, entailing "more complex and hard-to-manage risks."

How'd that happen? Bad CIO strategy, traders unfamiliar with risks undertaken, no explicit set of risk limits for the portfolio, and basically a set of management in the unit which were "ineffective" at "challenging the CIO's trading personnel."

With J.P. Morgan's fortress walls now alit, its time for a little spiked flail! Dimon will fire back in saying there is new management in the CIO unit with a new leader in Matt Zames, as well as new Chief Risk Officer, Chief Financial Officer, Global Controller and head of Europe. There's a new risk structure in the unit as well as its corporate sector.

Bring out the water buckets to extinguish the fire, Dimon said J.P. Morgan will be its own toughest critic. He said there will be an investigation into the incident and, while some investor money was lost, "no client, customer or taxpayer money was impacted by this incident."

Some analysts see losses in the unit reaching $5 billion, but remember this: J.P. Morgan spent $3.2 billion in 2011 on litigation alone and reported $19 billion in profits. Here's another kicker: J.P. Morgan's market cap is down about $26 billion since the incident was revealed in May.

Though he may have fended off the first wave of attacks late Tuesday, the ships are still in the harbor, and Congress is still licking its chops. (Don't forget about a potential surprise attack by the SEC.)

Shares of J.P. Morgan are indicated for a lower open Wednesday.

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