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Ineffective risk control mechanism leads to JPMorgan's trade loss: Dimon


The recent trading loss of more than 2 billion U.S. dollars suffered by JPMorgan Chase' Chief Investment Office (CIO) resulted from the company's ineffective risk control system, said Jamie Dimon, JPMorgan's chairman and CEO on Wednesday.

Appearing at a hearing organized by the Senate Banking Committee, Dimon admitted a series of factors led to the loss in the company's synthetic credit portfolio, saying that CIO's strategy for reducing the synthetic credit portfolio was poorly conceived and vetted.

The strategy was not carefully analyzed or subjected to rigorous stress testing within CIO and was not reviewed outside CIO, Dimon said, adding that CIO's traders did not have requisite understanding of the risks they took.

When the positions began to experience losses in March and early April, the company's traders incorrectly concluded that those losses were the result of anomalous and temporary market movements, and therefore were likely to reverse themselves, he added.

"Personnel in key control roles in CIO were in transition and risk control functions were generally ineffective in challenging the judgment of CIO's trading personnel. Risk committee structures and processes in CIO were not as formal or robust as they should have been."

He also noted that the company's synthetic credit portfolio should have gotten more scrutiny from both senior management and the firmwide risk control function.

To stop the loss from happening again, the company has taken remedial actions including naming a new leader for the investment operation that was responsible for the losses and establishing a risk committee to investigate what went wrong, said Dimon.

In addition, he asserted that the giant bank's second quarter should still be "solidly profitable" despite the reported huge loss on derivatives trading.

The huge trade loss of JPMorgan has increased concerns that the biggest banks still pose risks to the U.S. financial system, even after the financial crisis has evolved for more than three years.


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