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Former London Whale boss: I was misled

March 15, 2013: 11:45 AM ET

Former JPMorgan official Ina Drew say she didn't engage in any misconduct.

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Former JPMorgan London Whale boss Ina Drew

FORTUNE -- On Friday, Ina Drew, the former head of JPMorgan Chase's chief investment office and ultimate boss of the London Whale, told a Senate subcommittee that she was misled. What's more, despite the $6.2 billion loss -- one of the biggest in Wall Street history -- Drew believes she did a "reasonable and diligent" job even as the losses were piling up.

Drew, who was based in New York, threw much of the blame for the losses onto the firm's former London traders. She said, without her knowledge, the traders who reported to her "inflated" the values of their positions and were not calculating their losses in "good faith."

A Senate report found that JPMorgan traders shifted the way they were marking the portfolio in either late 2011 or early 2012. In one instance, according to the report, the portfolio's daily loss was recorded as $12 million. It was in fact $600 million.

"I did not, and do not, believe that I engaged in any misconduct," Drew told senators.

MORE: JPMorgan ex-execs testify about London Whale

The hearing came a day after the Senate released a 300-page report on JPMorgan's 2012 trading loss. Drew, in he first public appearance since the losses were revealed last May, was among a number of current and former JPMorgan executives who were questioned on Friday. For more than three hours, Democratic Senator Carl Levin, head of the subcommittee investigating JPMorgan's trading blunder, grilled the executives on why the trades were miss-marked and why JPMorgan's risk controls weren't enough to limit the losses, among other issues. Rather than come clean, Levin said JPMorgan mislead the public and regulators in its initial response to reports about the potential London Whale losses.

"JPMorgan piled on risk, hid losses, disregarded risk limits,manipulated models, dodged oversight, and misinformed the public," said Levin.

Former CFO Doug Braunstein, who is now a vice chairman of the bank, said JPMorgan CEO Jamie Dimon in 2011 ordered bank employees to hold back information about the bank's trades from regulators. Braunstein said Dimon did it because the bank was worried that information being related to regulators was not being kept confidential. The bank resumed reporting trading results to regulators after two weeks.

One of Levin's key points of inquiry was about a risk model that was changed at the bank that effectively let the London Whale trading position continue to grow, even as officials inside the bank stated they wanted to lower the riskiness of their positions to comply with new regulations.

Michael Cavanagh, who is the head of JPMorgan's investment bank, said the bank does rely on models to tell it how much risk the bank has. He said at times, changes in models have resulted in the bank reducing its stated risk exposure. But he said it was not the policy of the bank to change its risk models just to show that the bank's risk had dropped.

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Peter Weiland, the chief risk officer of JPMorgan's chief investment office, said he regretted calling a report that warned the bank could lose $6.3 billion in January 2012 in its credit portfolio "garbage." Weiland said it was probably less than a coincidence that the actual loss ended up being within $100 million of that original estimate.

"We got some new numbers, and they looked like garbage from what I could tell," said Weiland.

For her part, Drew said she only learned of the problems in the portfolio in late March, just a week or so before media reports began to emerge about the surprisingly large bets the bank had made on credit derivatives. Even after she found out about potential problems, Drew said traders in London continued to hide information from her about the credit trades.

She seems to have had little contact with Bruno Iksil, the chief trader of the portfolio who has been nicknamed the London Whale. Instead, she appears to have relied on the trader's bosses, Achilles Macris and Javier Martin-Artajo, and risk models that now appear to have been flawed. In early April, Drew said Macris and Martin-Artajo told her the most the bank's credit portfolio could lose in the second quarter of 2012 was $250 million. They also said there was a possibility it could produce a $350 million profit. Instead, the portfolio lost more than $4 billion.

Drew said she played no role in revising the risk model that, in part, led to JPMorgan's (JPM) huge loss. Nonetheless, she admitting knowing the portfolio was regularly in "breach" of the firm's risk limits - on 71 straight days according to the Senate's report's findings - in early 2012. She also said that "senior management" at JPMorgan signed off on delaying a move that would have stopped the portfolio from growing significantly in early 2012.

MORE: Senate on London Whale: Worse than we thought

Levin seized on that fact to say the real problems were with JPMorgan's management and not its risk models. "It wasn't that the risk limits were wrong," said Levin. "It was that risk managers didn't manage the risks they knew they had."

Drew's testimony also shed light on how large and profitable the bank's chief investment office had become. From 2007 to 2011, Drew said her division contributed $23 billion to the bank's bottom line, or nearly a third of JPMorgan's total profit during the period. At the time of the credit losses, Drew said her division was responsible for hedging $700 billion in potential lending losses.

Some have called the Senate investigation of JPMorgan a witch hunt, considering the bank was more than able to swallow the losses without any help from the government. JPMorgan's stock is now higher than it was before the announcement of the London Whale losses. But Levin said the investigation was key to uncovering the riskiness of the nation's banks and how JPMorgan and others use deposit money that is insured by the government.

"Apparently, JPMorgan was too busy betting on derivatives to make loans that would have sped the U.S. recovery," he said.

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About This Author
Stephen Gandel
Stephen Gandel

Stephen Gandel has covered Wall Street and investing for over 15 years. He joins Fortune from sister publication TIME, where he was a senior business writer and lead blogger for The Curious Capitalist. He has also held positions at Money and Crain's New York Business. Stephen is a four-time winner of the Henry R. Luce Award. His work has also been recognized by the National Association of Real Estate Editors, the New York State Society of CPA and the Association of Area Business Publications. He is a graduate of Washington University, and lives in Brooklyn with his wife and two children.

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