At issue on Friday will be how the bank lost as much as $6 billion on derivative trades. JPMorgan faces daunting day

JPMorgan Chase and its CEO, Jamie Dimon, have worked tirelessly to put the billions of dollars in “London Whale” trading losses behind the Wall Street firm as it works to restore its once sterling reputation.

But this week, there is a land mine on its road to redemption.


On Friday, the Senate’s Permanent Subcommittee on Investigations will hold a hearing on a highly anticipated report on the bank’s mismanagement of these derivatives trades — putting the firm through Congress’s most strenuous Wall Street wringer.

“When you can drag somebody’s rear end in front of a congressional panel, that’s pretty daunting,” said former Sen. Norm Coleman (R-Minn.), who chaired PSI from 2003 to 2007. The subcommittee “is respected, maybe feared at times.”

The panel has earned a reputation for digging deep into complicated financial matters and exposing embarrassing information on big companies, whether it’s Goldman Sachs employees pushing deals to customers they disparaged in internal emails, HSBC not safeguarding against drug lords being able to use the bank, to launder money or big banks helping investors to avoid paying taxes on dividends.

At the center of the investigations is subcommittee Chairman Carl Levin (D-Mich.) — a “one-man wolf pack,” according to a financial industry lobbyist — who announced last week he will retire at the end of this Congress.

“It’s difficult to really influence,” said the lobbyist, who has represented clients under investigation by the panel. “If you hear that the Banking Committee is thinking of getting a hearing on something, you can kind of work with them and try to figure out a way to help guide it. But with Levin, there are fewer pressure points on him.”

At issue on Friday will be how the bank lost as much as $6 billion on derivative trades, first announced in May, that its management says were made to hedge against economic risk but that its critics say were too large not to be driven primarily by a profit motive. Also in the spotlight will be how its regulator — the Office of the Comptroller of the Currency — didn’t detect the extent of the risk.

Much of the work that will determine the report’s impact has been conducted in a suite of offices in the Russell Senate Office Building where witnesses are questioned, often accompanied by multiple lawyers, in a small, one-window meeting room.

The subcommittee has unilateral subpoena power and its seasoned team — including staff Director and Chief Counsel Elise Bean and chief investigator Bob Roach — has the leeway to spend months or even years on investigations.

Its reports often conclude with bipartisan agreement and recommendations, which have found their way into laws such as the 2010 Dodd-Frank financial regulatory overhaul and the Credit CARD Act of 2009.

“We don’t have a legislative authority directly, but our investigations are aimed at trying to produce the background and the material for legislation,” Levin said.

The reports are often read by regulators and the Justice Department, where it can be more difficult to determine the extent of the panel’s influence.

For instance, HSBC agreed in December to pay the United States $1.92 billion to settle money-laundering issues that the subcommittee highlighted about five months earlier. The Justice Department in August, however, took the rare step of saying publicly it would not pursue any cases against Goldman Sachs based on the panel’s investigation into the causes of the 2008 financial crisis, which highlighted the banking and securities firm.

The report will most likely be one of the last tests of how much longer the losses will dog JPMorgan. The bank’s bottom line easily survived the debacle, and it already has struck a deal with the OCC over what changes it needs to make.

The panel was well-prepared to dive into Whale trades, having strengthened its derivatives expertise after Levin commissioned in 2008 the investigation on the causes of the financial crisis, which looked at Washington Mutual, regulators, credit ratings agencies and investment banks. It resulted in a 639-page report.

Even if there is no smoking gun lurking in the JPMorgan emails and files subcommittee staff have combed through, being in such a thorough and aggressive spotlight can carry “headline risk” for a company’s stock price or ding its reputation.

The bigger debates

The report is coming out at an important time in the debate over Washington’s oversight of banking giants.

Regulators are currently finalizing a regulation — the “Volcker rule” — that will govern banks’ trading activities, like those that led to the Whale losses.

Levin, an author of the Volcker rule, and his allies want the trading curb to be as strict as possible, warning of dangerous speculation, while Wall Street has argued the tighter the leash, the less able it will be to help companies to grow and help the economy.

It also will be released amid the growing and persistent too-big-too-fail or too-big-to-manage debate about whether the largest U.S. banks need to be scaled down.

“The importance of the London Whale fiasco and the importance of going inside it in a report like this is it really gives you an inside perspective about exactly the kind of dysfunctions that are created by our current financial system,” said Marcus Stanley, the policy director for the watchdog group, Americans for Financial Reform.

Levin prepares to exit

Levin is the ninth chairman of the subcommittee, which has roots in the 1940s Truman Committee, having alternated as chairman and ranking member since 1999.

Bean, chief counsel, and Roach, chief investigator, lead Levin’s staff of seven lawyers and two administrative personnel, as well as interns, law clerks and fellows.

Subcommittee staff take pride in mastering a subject and pressing witnesses for information.

“We’re grinders,” a subcommittee staffer said. “We’ll be there, we’ll be there, we’ll be there. Nobody’s going to outlast the subcommittee.”

In line with one of PSI’s touted strengths, the JPMorgan report appears on track to receive bipartisan subcommittee support, even with a shift in Republican leadership in the waning days of the probe.

Sen. John McCain is now the panel’s top Republican after Sen. Tom Coburn, who had a good working relationship with Levin, became the top Republican of the full Senate Homeland Security and Governmental Affairs Committee.

“We respect the rights of the minority, who have rights under our rules,” Levin said.

McCain is bringing in a team led by staff director and chief counsel Henry Kerner, a former Los Angeles prosecutor who previously served as investigations senior counsel on the House Oversight and Government Reform Committee under Chairman Darrell Issa.

During his final two years, Levin has indicated he wants PSI to investigate secret money flowing into elections, a topic where campaign-finance reformer McCain may serve as a powerful ally.

“The advantage I have is Sen. Levin and I have worked together for so many years,” McCain said. The two have been senior members of the Armed Services Committee for years.

In his retirement statement, Levin pledged to keep the panel busy working on tax avoidance schemes as well.

“He wants to be a tiger for the next two years, which suits the PSI team perfectly,” a person close to the subcommittee said.

But it’s unclear what will happen to PSI after Levin exits.

Few members of Congress have the patience to let staff spend months or years on one investigation that culminates in a handful of hearings and a big report, said Michael Bopp, partner at the law firm Gibson, Dunn & Crutcher who represented Goldman Sachs before PSI and was formerly counsel on the subcommittee.

“If Levin retires, I don’t know what happens to that staff and to PSI because that staff wouldn’t be the type who would be inclined toward a more superficial style of investigating,” Bopp said. “I think they’d lose interest.”