JPMorgan Faces Tough Senate Hearing, but So What? (Update 1)

JPMorgan story updated with comments from FBR Capital Markets analyst Paul Miller

NEW YORK ( TheStreet) -- JPMorgan Chase ( JPM) looks set to take a bruising in a Senate hearing on Friday, though it is hard to see anything tangible coming out of it.

Senate investigators "have got to find really a big time smoking gun where somebody got shot and the gun's in CEO Jamie Dimon's hand," to cause a meaningful decline in JPMorgan shares, according to FBR Capital Markets analyst Paul Miller. Dimon is not scheduled to testify at the hearing, though other current and former high-level JPMorgan executives will testify.

The subject of the hearing will be the "London Whale" credit derivatives trades that resulted in several billion dollars in losses for the bank. The Senate Permanent Subcommittee on Investigations, which is holding the hearing, will also release a report summarizing its findings and making recommendations.

A separate report by Graham Fisher analyst Joshua Rosner was grabbing some attention on Wednesday. Titled "JPMorgan Chase: Out of Control," it compares JPMorgan to Fannie Mae ( FNMA) ahead of the crisis, arguing the bank has worked hard to ingratiate itself with Washington in order to forestall serious inquiry into what Rosner argues are faulty risk controls.

One of many targets of Rosner's report was an internal audit conducted by Michael Cavanaugh, a top JPMorgan executive viewed as a potential successor to Dimon. Rosner argues the report was a whitewash, and should have been conducted by an outside party.

Rosner's report could offer the Senate subcommittee members a road map, suggesting questions they can ask of the current and former JPMorgan executives called to testify. They may not need it, however, given that the subcommittee has already conducted its own investigation.

Friday's hearing promises to be tougher on JPMorgan than a previous hearing in June that looked at the trading losses. That hearing, called by the Senate Banking Committee, virtually turned into a commercial for the bank and CEO Jamie Dimon, who danced a celebratory jig after it was over.

This hearing, however, will be led by Carl Levin (D., Mich.) who has been one of Wall Street's toughest critics in the wake of the 2008 subprime housing crisis.

"They've gone through thousands and thousands and thousands of emails," says FBR's Miller of the Senate investigators. "If they can prove that Jamie's testimony and Cavanaugh's internal audit was garbage, that starts to layer on a negative perception of Jamie which could shake up the company. But I'd put that as a very low probability. These guys aren't dumb."

Senator Levin previously took Goldman Sachs ( GS) to task over securities called "Abacus" it sold with little or no disclosure that they were created in part by hedge fund investor John Paulson, who was betting against them.

Still, while Levin's hearing on Goldman arguably contributed to that bank's paying a record $550 million fine from the Securities and Exchange Commission, even a fine of that size changes little for these giant global banks.

Rosner's report argues JPMorgan and other big banks are simply too big to supervise, and that is surely an area of inquiry Levin's committee can be expected to pursue. Still, as the crisis recedes into history and the economy begins to find its footing, it is hard to see how Washington can muster the sustained energy and focus necessary to break up the largest U.S. banks.

Friday's show will be overlong, with some entertaining moments, but the final act is sure to put us all to sleep.

-- Written by Dan Freed in New York.

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