JPMorgan Chase & Co. risk managers tried so hard in 2012 to get around international capital rules that they viewed their own discussions as too sensitive for email, according to a Senate report released on Thursday.
The report on the JPMorgan “London Whale” scandal includes the story of a quantitative engineer for the bank who made waves internally by sending an email suggesting how the bank could rearrange its risk modeling procedures to better accommodate the ballooning risk metrics inside the chief investment office.
“I think, the, the email that you sent out, I think there is a, just FYI, there is a bit of sensitivity around this topic,” a member of the bank’s central risk modeling group warned the engineer afterward in a phone call.
“While we have repeatedly acknowledged mistakes, our senior management acted in good faith and never had any intent to mislead anyone,” a spokeswoman for the bank said in response to the report.
The engineer, Patrick Hagan, a math expert who had previously worked at Exxon designing chemical reactors, had written to the risk modeling group suggesting a way to “optimize the firm-wide capital charge,” explaining how he could rearrange the calculations required to determine how much capital JPMorgan needed to hold to adhere to international regulatory requirements. Hagan wanted to make it so the bank needed to hold less capital.
“The bank may be leaving $6.3 billion on the table, much of which may be recoverable,” he wrote.
“What I would do is not put these things in email,” the risk group employee told Hagan on the phone.
Hagan’s email appears in a report by the Senate Permanent Committee on Investigations, which capped a nine-month investigation into JPMorgan’s $6.2 billion trading losses with the report and a hearing scheduled for Friday.
The report’s findings are expected to provide new political fodder for proponents of the Volcker Rule, which bans proprietary trading by depository institutions.
The report includes an account of JPMorgan’s internal wrangling with its methods for calculating risk and assessing how much capital it needed to hold as new rules from the Basel Committee, an international group of regulators, took effect.
An internal report the bank released in January also discussed some of the attempts the bank’s chief investment office made to find creative ways to adhere to the new Basel requirements. However, it did not disclose Hagan’s email or the other bank employees’ responses to it.
In the end, the bank did not take Hagan’s advice in its original form, according to the Senate report.
“Ultimately, the bank reached a compromise with Mr. Hagan,” the report said. It agreed to implement some of his ideas for categorizing the various assets inside a portfolio of credit derivatives while rejecting others.
But the Senate report makes clear that the attempts to change the bank’s risk modeling to help it hold on to as many risky assets as possible were deliberate, not simply an issue of theoretical differences over mathematical theory.
“Emails, telephone conversations, and internal presentations offer evidence that efforts to manipulate risk-weighted assets results to artificially lower the bank’s capital requirements were both discussed and pursued by the bank’s quantitative experts,” the report said.