Ina Drew Blames Flawed Risk Model, Trader Misconduct For London Whale Losses (Update 1)

(Updated with comments from the Senate hearing.)

NEW YORK ( TheStreet) -- The former head of the "London Whale" trading unit at JPMorgan Chase ( JPM) blamed a "flawed" risk model and "deceptive conduct" by traders at the London office for the massive $6 billion loss at the bank in 2012.

"Since my departure I have learned of the deceptive conduct by members of the London team, and I was, and remain, deeply disappointed and saddened to learn of such conduct and the extent to which the London team let me, and the Company, down," Ina Drew said, in prepared testimony before the Senate Permanent Subcommitee on Investigations.

Drew resigned from her position of Chief Investment Officer at JPMorgan Chase in May 2012, after the bank disclosed billions in losses at the firm's chief investment office, which it said stemmed from a failed hedging strategy.

The episode brought to an end the former executive's 30-year career at the bank. Drew served as bank's chief investment officer and head of the Chief Investment Office from February 2005, when it was spun off as a stand-alone office. Prior to that, Drew headed the bank's global treasury office.

In her testimony, Drew said that she did not believe that she was responsible for the losses and had reasonably relied on the CIO's traders to vet the trading strategy and on the firm's formal risk metrics to alert her to excessive risks.

"Ultimately, it appears that my oversight of the synthetic credit book during 2012 was undermined by two critical facts of which I was not aware at the time but have come to learn based on the Company's Task Force Report and other public statements: (i) the new VaR model was flawed and significantly understated the real risks in the book; and (ii) some members of the London team failed to value positions properly and in good faith, minimized reported and projected losses, and hid from me important information regarding the true risks of the book. I believe it goes without saying that it is extremely difficult, if not impossible, to oversee a portfolio under such circumstances," she said.

While Drew did not believe she was responsible for the losses, she said she stepped down "to make it easier for the company to move beyond these issues." She also gave up about $21 million in compensation in recognition of her unit's losses, she said.

Drew was replaced initially by Matthew Zames, from May to September 2012, and then by Craig Delaney.

The Senate Committee report released on Thursday found traders had misrepresented the size of the losses by using more favorable valuations. A spreadsheet maintained by a junior trader Julien Grout showed that by March 16, 2012, "the Synthetic Credit Portfolio had reported year-to-date losses of $161 million, but if midpoint prices had been used, those losses would have swelled by another $432 million to a total of $593 million," the report said. "CIO head Ina Drew told the Subcommittee that it was not until July 2012, after she had left the bank, that she became aware of this spreadsheet and said she had never before seen that type of 'shadow P&L document'."

The report did, however, fault Drew for misleading the Office of Comptroller Currency about the synthetic credit portfolio's size and pushing back on requests from the regulator. "Routine bank reports that might have drawn attention to the SCP were delayed, detailed data was omitted, blanket assurances were offered when they should not have been, and requested information was late or not provided at all. Dodging OCC oversight went to the head of the CIO, Ina Drew, a member of the bank's Operating Committee, who criticized the OCC for being overly intrusive," it stated.

In the hearing Friday, Senator Levin questioned Drew extensively on what disclosures were made to the Office of the Comptroller of the Currency(OCC) and whether the bank underplayed the losses. Drew said that she had been informed by her CFO John Wilmot that the OCC was given daily mark-to-market reports of the CIO's activities. Senator Levin seemed taken aback by that assertion.

Drew was also questioned on an email exchange between Drew and Javier Martin-Artajo who supervised the trades, where Drew suggested that he "tweak" the marks.

According to the report, on April 17, in a recorded phone conversation, Drew told Martin-Artajo" S tart getting a little bit of that mark back ... so, you know, an extra basis point you can tweak at whatever it is I'm trying to show."

Levin suggested that Drew was asking him to change the marks. Drew clarified that Martin-Artajo had been telling her that the marks were too conservative and she was asking him to correct it, using the word tweak.

But overall, Drew appeared to get through the hearing relatively unscathed. The same could not be said for former CFO and current Vice Chairman Doug Braunstein who had a prolonged, tense exchange with Senator Levin over statements he made to investors and analysts during the first-quarter conference call on April 13.

Levin said Braunstein made misleading statements, a "one-sided" presentation of the facts that were intended to quell press reports about the loss-making trades. Braunstein mostly maintained that his statements were made in good faith, based on information he had at that time.

-- Written by Shanthi Bharatwaj in New York.

>To contact the writer of this article, click here: Shanthi Bharatwaj.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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