JPMorgan Chase & Co. Chief Executive Officer Jamie Dimonsaid traders in a London unit responsible for a $2 billion lossdidn't understand the risks they were taking and weren't properlymonitored.

“This portfolio morphed into something that, rather than protectthe firm, created new and potentially larger risks,” Dimon said inprepared remarks ahead of his appearance tomorrow before theSenate Banking Committee. “We have let a lot of people down, and weare sorry for it.”

Lawmakers plan to question Dimon at hearings this week and nextabout the bank's blunders on credit derivatives in its chiefinvestment office after he initially called April news reportsabout the trades “a complete tempest in a teapot.” Shares of thebank, the biggest in the U.S., have dropped 17 percent since Dimondisclosed the mounting losses May 10, lopping about $26.5 billionfrom the firm's market value.

“CIO's traders did not have the requisite understanding of therisks they took” on bets that were supposed to hedge credit risk,Dimon said. “When the positions began to experience losses in Marchand early April, they incorrectly concluded that those losses werethe result of anomalous and temporary market movements.”

Dimon, who's also set to face the House Financial ServicesCommittee on June 19, finds himself in the middle of a reneweddebate about whether the so-called Volcker rule, which would curbtrading by deposit-taking banks, should be tightened. While Dimondidn't comment on the size of the loss from the trades, he said thesecond quarter would be “solidly profitable.”

“The lessons learned from the recent failures in riskmanagement at JPMorgan Chase will be an important input intoefforts to design the Dodd-Frank Act reforms including a strongVolcker rule,” U.S. Treasury Department Deputy Secretary Neal Wolintold the Senate panel last week.

The bank instructed the CIO in December to reduce its risk-weighted assets to prepare for new international capital rules.Instead, the office in mid-January “embarked on a complex strategythat entailed adding positions that it believed would offset theexisting ones,” Dimon said. The portfolio instead got larger andthe problem got worse, he said.

Dimon said that the risk committee structures and processes werenot as robust in the CIO as they should have been. The division'sLondon team built up a book of credit derivatives that became solarge that employees couldn't unwind it without roiling markets orincurring large losses, current and former executives havesaid.

'Poorly Conceived'

The strategy for reducing the portfolio was “poorly conceivedand vetted,” Dimon said. “The strategy was not carefully analyzedor subjected to rigorous stress testing within CIO and was notreviewed outside” the division.

Risk oversight personnel were “in transition” and thederivatives credit portfolio responsible for the loss should have“gotten more scrutiny from both senior management and the firmwiderisk control function,” he said.

The position of chief risk officer inside the CIO was arevolving door, with at least five executives holding the job insix years, people familiar with the matter said. Irvin Goldman,appointed in February and replaced in May, had been fired in 2007by brokerage Cantor Fitzgerald LP for money-losing bets that led toa regulatory sanction of the firm, said three people with knowledgeof the matter. Goldman wasn't directly accused of wrongdoing.

Chief Investment Officer Ina Drew retired after the loss wasdisclosed and was replaced by Matt Zames, who was co-head offixed-income trading in the investment bank. Zames told staff thattop London-based trading executive Achilles Macris would hand offduties.

“When we make mistakes, we take them seriously and often are ourown toughest critic,” Dimon said. “While we can never say we won'tmake mistakes — in fact, we know we will — we do believe this to bean isolated event.”

JPMorgan's biggest competitors, including Bank of America Corp.,Citigroup Inc. and Wells Fargo & Co., have said their corporateinvestment offices avoid using the kind of derivatives that led tothe trading losses and buy fewer bonds exposed to credit risk. Therivals said their offices don't trade credit- default swaps onindexes linked to the health of companies.

Government Probes

Government investigators are scrutinizing how long seniorexecutives knew about the CIO's swelling bets before the lossesapproached $2 billion. One focal point is why the CIO's so- calledvalue-at-risk formula used to calculate potential losses wasaltered in this year's first quarter, cutting the reported risk byhalf.

When the bank reported first-quarter earnings, the new modelshowed an average daily VaR within the CIO of $67 million, aboutwhere it stood in the previous period. Dimon said May 10 that thebank then reviewed the effectiveness of the new model, deemed it“inadequate” and decided to return to the previous version. On thatbasis, VaR doubled to $129 million.

Government investigations of JPMorgan include the FederalReserve's study of internal oversight, the Office of theComptroller of the Currency's look into trading, and the Securitiesand Exchange Commission's examination of why the bank changedinternal risk gauges this year. The Department of Justice and theCommodity Futures Trading Commission also are conductinginquiries.

Investors and bankers, including Dimon, have speculated that theloss may hurt efforts to soften restrictions imposed by the 2010Dodd-Frank Act, including the law's so-called Volcker rule, whichlimits lenders from making bets with their own money and wasdesigned to head off a repeat of the financial crisis.

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