What Jamie Dimon told Congress: four key points

Jamie Dimon came to Washington Wednesday and promptly went down the rabbit hole of congressional inquiry.

That is: Much was said, little was revealed.

Mr. Dimon, CEO of JP Morgan and hailed as one of the smartest and most prudent bankers on Wall Street, continued trying out "contrite" as a descriptor after a supposedly super-safe part of his business blew up last month to the tune of $2 billion and counting.

"We have let a lot of people down, and we are very sorry for it," Dimon said in testimony to the Senate Banking Committee.

Also from the department of tried and true, the hearing demonstrated how much Republicans generally hate regulation (and specifically loathe the Dodd-Frank financial reform bill passed in 2009) while simultaneously demonstrating that Democrats think banks need a stronger regulatory hand.

But there were a few nuggets that emerged from Dimon’s two-hour stint on the congressional roasting spit.

In his view:

1. Financial reform's next big step is going to be a bear to implement.

The Volcker Rule, named after its advocate and former Federal Reserve Chairman Paul Volcker, would prevent banks from trading exclusively for their own profit, or what's known as proprietary trading. Instead, they'd be limited to hedging transactions (taking positions to protect themselves from catastrophic downside) and what's called market-making, or ensuring that their customers can complete transactions quickly and easily.  Currently, regulators are trying to figure out how exactly to put the rule into place.

But Dimon's $2 billion embarrassment came from a unit that's supposed to be hedging ­– meaning that it should have only gone down if there was a corresponding gain somewhere else. But there has been no gain.

As Sen. Richard Shelby (R) of Alabama wondered, if the unit responsible for disastrous trade generated some 10 percent of the company's total profit last year, is what JP Morgan calls hedging really hedging at all? 

Dimon didn’t really answer the question, agreeing that the unit was supposed to make money but leaving the size of its contribution to JP Morgan's bottom line alone. More broadly, he later said that figuring out what's a proprietary trade and what's a hedge is a difficult task.

"I think it's going to be very hard to make a bright line distinction between proprietary trading and hedging, because you can look at almost anything we do and call it one or the other. Every loan we make is proprietary. If we lose money, the firm loses money. If we buy Treasury bonds and they lose money, we lose money. So I have a hard time distinguishing [between the two]," Dimon said.

"I do understand the intent of the Volcker rule, that the intent is to reduce activities that could jeopardize and threaten a big financial company. I completely understand that. I think the devil is going to be in the detail in how these rules are written that allow the good of our capital markets and not the bad."

But he later said the rule was "unnecessary" and "too confusing" as currently written.

2. Regulators are not the devil – but regulations are expensive.

Dimon had a few nice things to say about financial regulators.

Speaking of the Office of the Comptroller of the Currency, Dimon said: "I think it's important to recognize that I think there have been improvements in companies, including J.P. Morgan, because of their audit and criticism."

Moreover, he said, Republican criticisms of banking regulators for perhaps not spotting the trading loss before it morphed into such a large hit on the firm are misplaced.

"I think you have to give regulators realistic objectives," Dimon said. "I don't think realistically they can actually stop something like this from happening. It's purely a management mistake. And again, if we are misinformed a little bit, we're – not purposely, but misinforming them, too."

But he did put a price tag on the total cost of complying with global regulators: $1 billion.

"We're going to do all those things, meet all the requirements, but it will be a little costly," he said.

3. Bigger can be better.

Dimon offered up his case for why large institutions can be helpful.

First, massive American companies in other sectors need massive lines of credit – and JP Morgan can provide those in only a day or two. Second, a bigger, more diverse business can help banks weather a storm – whether financial or otherwise.

"Our diversification was a source of strength in the crisis. It was not a source of weakness," Dimon said. "It allows you to invest huge sums of money in data centers, cybersecurity, some of the things you all want us to do."

Of course, there is a downside to size, he allowed: "greed, arrogance, hubris, lack of attention to detail."

4. You can only anticipate so much.

The main thread running through Tuesday's hearing was this: How do we know that there aren't a whole bunch of JP Morgan-esque errors bubbling up through the banking system, growing large enough to bring the entire economy down on our heads?

Dimon's answer was that this was an isolated incident where "hubris" and "arrogance" beat out clear-headed evaluation.

Neither the question (How do we know this will never happen again?) and the answer (this won't happen again, I promise) are satisfying.

Congress and financial regulators are trying to figure out how they can prevent the past from being prologue to the next financial crisis. For now, at least, it looks like there's much more heat than light in the JP Morgan situation.