The Federal Reserve Bank of New York three years ago replaced nearly all of its examiners at JPMorgan Chase in a bid to prevent regulators from getting too cozy with executives as part of a bid to boost bank supervision following the financial crisis, the New York Times reports, citing former and current officials.
The move left the New York Fed’s examiners without deep knowledge of JPMorgan’s operations for a period in mid-2011, just when the bank made its "whale’’ trades that led to as much as $5 billion in investment unit losses that began to be revealed last month.
The new group of roughly 40 examiners “couldn’t ask tough questions,” said a former official who was based at JPMorgan.
The transition from one team to another, while aimed at beefing up oversight, was not always seamless as it was carried out over several months, other people close to the Fed told the Times.
Regulators that oversee large banks like JPMorgan often rely on a bank’s own analysis of its risk, which can mask problems, as they cannot sift through every loan document or trade.
“They aren’t examiners as much as they are overseers, forced to peer over the banks’ shoulders,” said Bart Dzivi, who served as special counsel to the Federal Crisis Inquiry Commission.
The changes at the New York Fed exacerbated a conflict between JPMorgan executives and regulators from the Office of the Comptroller of the Currency, which supervises banks. With its own examiners at JPMorgan, the agency for years had fretted that the bank may have underestimated how much money it could lose in extreme situations, according to the current and former officials.
As the two groups butted heads, JPMorgan executives, at one point in early 2012, briefly stopped providing examiners with a key risk estimate for the chief investment office, the unit at the center of the recently reported trading losses, according to the officials, the Times reported.
JPMorgan and the New York Fed both declined to comment.
JPMorgan on Friday will report its quarterly results, and is expected to reveal trading losses of about $5 billion, according to people with knowledge of the matter, the Times said.
Meanwhile, securities regulators are running out of time to file civil charges for alleged wrongdoing during the financial crisis, the Wall Street Journal reports.
Securities and Exchange Commission regulators usually go after alleged fraud under federal laws that have a five-year statue of limitations.
That limit is prompting SEC officials to rush to file lawsuits or to ask lawyers representing their targets in some investigations to give them more time, the Journal said, citing people close to the inquiries.
Mizuho Financial Group is among companies that may face civil charges for its role in the creation of a $1.6 billion mortgage bond collateralized debt obligation that imploded months after it was launched in 2007, the Journal said.
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