Two key financial regulators told senators Tuesday that they learned of the multibillion-dollar trading loss at JPMorgan Chase & Co. through media reports and that the public wouldn't be protected from the fallout from future incidents until new rules are finalized to allow better monitoring of such trades.
In the first of several congressional hearings to look at the loss, the heads of the Securities and Exchange Commission and the Commodity Futures Trading Commission gave some details about their investigations into the incident.
The SEC is focused on the "appropriateness and completeness" of JPMorgan's financial disclosures, including whether its recent earnings statements and first-quarter financial reports were "accurate and truthful," agency Chairwoman Mary L. Schapiro told the Senate Banking Committee.
CFTC Chairman Gary S. Gensler said his agency's Enforcement Division is investigating the credit derivative products traded by JPMorgan's chief investment office that led to the loss.
Gensler and Schapiro said they could not comment further on their investigations. The FBI also has launched an inquiry into the trading loss.
Sen. Richard C. Shelby, R-Ala., said he was surprised that regulators did not know about JPMorgan's loss until it was reported in the media.
"So you really did not know what was going on or the problems with the trade until you read the press reports like all of us?" he asked.
Gensler said that was true and that until rules are in place limiting so-called proprietary trading by banks and imposing new oversight on complex financial derivatives, "the American public is not protected."
Democrats said the trading loss highlighted the need for implementation of tough reforms. Republicans, who almost unanimously opposed the law, warned of an overreaction.
The SEC and the CFTC are working on finishing the new rules, which were mandated in the 2010 Dodd-Frank financial reform law.
Schapiro and Gensler said the JPMorgan incident would be instructive as they finish new rules to monitor and limit the type of trading activity that led to the bank's loss.
Among the regulations still being drafted is the so-called Volcker Rule, which is intended to limit trading by depositary banks for their own accounts.
"I think it gives us real, live experience, like AIG and Lehman Brothers and Citigroup did in a more disastrous way," Gensler said of the JPMorgan loss.
But Sen. Bob Corker, R-Tenn., said he worried that regulators would try to broaden their rule-writing in reaction to the JPMorgan loss.
"What I fear is in a rush to make it look like the Dodd-Frank legislation addressed these kind of issues, what you're going to do is end up causing the Volcker Rule to be something it never was intended to be," he said.
But Sen. Mark R. Warner, D-Va., said regulators might be fortunate that the JPMorgan trading loss took place as regulators were writing the rules and provided a real-world example that did not damage the financial system.
"We were going to have an incident like this," Warner said. "It could be a blessing that it was happening with the strongest financial institution we have in the country."