The Scariest Thing Jamie Dimon Told the Senate Panel

by 15 Jun 2012

(CNBC) -- Much of the discussion about Jamie Dimon’s testimony has largely missed the point.

It’s true that the senators on the Banking Committee were humiliatingly deferential to the JPMorgan Chase chief executive. It’s true that Senators from both sides of the aisle seem to be attempting to score political points about Dodd-Frank, using Dimon as a prop for the usual D.C. partisan claptrap. It’s true there seem to have been prearranged ground rules that barred questions about the details of the trades that lost JPMorgan billions.

And, yes, it’s true that Dimon wore cufflinks with the presidential seal on them. (I’ve been investigating this one.)

But the most important thing Dimon said has been almost entirely ignored. 

Dimon told the Senators that the multi-billion dollar losses at the bank stemmed from an attempt to adjust JPMorgan’s  holdings because of changes in the way capital requirements work. Specifically, he said that the risk weighted assets of the CIO office were due to increase three hundred percent under Basel III.

"Under Basel I, the risk-weighted assets of these positions in the fourth quarter of 2011 were around $20 billion. Under Basel III, those [risk-weighted assets] were estimated to be around $60 billion. We thought this was an ineffective use of risk-weighted assets and our intent was to bring that down over time," Dimon said.

This echoed what he said in his prepared remarks:

“In December 2011, as part of a firmwide effort in anticipation of new Basel capital requirements, we instructed CIO to reduce risk-weighted assets and associated risk. To achieve this in the synthetic credit portfolio, the CIO could have simply reduced its existing positions; instead, starting in mid-January, it embarked on a complex strategy that entailed adding positions that it believed would offset the existing ones. This strategy, however, ended up creating a portfolio that was larger and ultimately resulted in even more complex and hard-to-manage risks.

This might need some translating for those of you who haven’t been keeping up with your required international capital accords reading.

Basel is the town in Switzerland where banking regulators and bankers from around the globe meet to decide on international standards for bank regulation. Basel I was the first body of rules decided on; Basel III is the latest. The U.S. is in the process of creating and implementing the Basel III rules.

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