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Abuse of Structured Financial Products: Misusing Basket Options to Avoid Taxes and Leverage Limits (hearing and report)

July 24, 2014 Comments off

Abuse of Structured Financial Products: Misusing Basket Options to Avoid Taxes and Leverage Limits
Source: Senate Permanent Subcommittee on Investigations

The Permanent Subcommittee on Investigations has scheduled a hearing, “Abuse of Structured Financial Products: Misusing Basket Options to Avoid Taxes and Leverage Limits,” on Tuesday, July 22, 2014, at 9:30 a.m., in Room 216 of the Hart Senate Office Building.

The Subcommittee hearing will examine a set of transactions that utilize financial engineering and structured financial products to attempt to avoid paying U.S. taxes on short-term capital gains. Witnesses will include representatives of major financial institutions, as well as tax experts from a nonprofit institution and the U.S. Government Accountability Office.

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McCaskill: Campus Sexual Assault Survey Results a ‘wakeup call’ for Schools

July 11, 2014 Comments off

McCaskill: Campus Sexual Assault Survey Results a ‘wakeup call’ for Schools
Source: Senator Claire McCaskill (D-MO)

U.S. Senator and former sex crimes prosecutor Claire McCaskill today released the results of a first-of-its-kind national survey on campus sexual assaults—results McCaskill said must serve as a “wakeup call” to the nation’s institutions of higher learning.

The massive survey of schools demonstrates a disturbing failure by many institutions to comply with the law and with best practices in how they handle sexual violence against students—failures which affect nearly every stage of the institutions’ responses to sexual violence.

Among the findings in McCaskill’s survey:

  • Investigations: Federal law requires every institution that knows or reasonably should have known about an alleged sexual assault to conduct an investigation. But 41 percent of schools surveyed have not conducted a single investigation in the past five years. More than 21 percent of the nation’s largest private institutions conducted fewer investigations than the number of incidents they reported to the Department of Education, with some institutions reporting as many as seven times more incidents of sexual violence than they have investigated.
  • Training: 21 percent of institutions surveyed provide no sexual assault response training at all for members of their faculty and staff. 31 percent of schools do not provide any sexual assault training for students.
  • Title IX coordinator: Colleges and universities are required to assign a staff or faculty member as a Title IX coordinator, with responsibility for coordinating the institution’s compliance efforts, including investigations of sexual harassment and sexual violence, but more than 10 percent of institutions surveyed do not have a Title IX coordinator.
  • Adjudication: Federal law requires institutions that receive claims of sexual assault to conduct an adjudication process to determine whether an assault occurred and, if it did, to reach a determination. But:
  • 33 percent of schools failed to provide basic training to the people adjudicating claims.
  • 43 percent of the nation’s largest public schools let students help adjudicate cases.
  • 22 percent of institutions give athletic departments oversight of cases involving athletes.
  • Climate surveys: Confidential climate surveys of students are one of the best ways to get an accurate portrait of assaults on a campus, but only 16 percent of schools conduct climate surveys.
  • Coordination with law enforcement: Law enforcement officials at 30 percent of institutions receive no training on how to respond to reports of sexual violence, and 73 percent of institutions have no protocols on how the institution & law enforcement work together to respond to such violence.

Beyond the Waiting Lists, New Senate Report Reveals a Culture of Crime, Cover-Up and Coercion within the VA

June 24, 2014 Comments off

Beyond the Waiting Lists, New Senate Report Reveals a Culture of Crime, Cover-Up and Coercion within the VA
Source: U.S. Senator Tom Coburn (R-OK)

U.S. Senator and doctor Tom Coburn, M.D. (R-OK), today released his new oversight report “Friendly Fire: Death, Delay, and Dismay at the VA.” The report is based on a year-long investigation of VA hospitals around the nation that chronicled the inappropriate conduct and incompetence within the VA that led to well-documented deaths and delays. The report also exposes the inept congressional and agency oversight that allowed rampant misconduct to grow unchecked.

“This report shows the problems at the VA are worse than anyone imagined. The scope of the VA’s incompetence – and Congress’ indifferent oversight – is breathtaking and disturbing. This investigation found the problems at the VA are far deeper than just scheduling. Over the past decade, more than 1,000 veterans may have died as a result of the VA’s misconduct and the VA has paid out nearly $1 billion to veterans and their families for its medical malpractice. As is typical with any bureaucracy, the excuse for not being able to meet goals is a lack of resources. But this is not the case at the VA where spending has increased rapidly in recent years,” Dr. Coburn said.

Reduction in Face – to – Face Services at the Social Security Administration

June 20, 2014 Comments off

Reduction in Face-to-Face Services at the Social Security Administration
Source: U.S. Senate Committee on Aging

From a customer service perspective, the Social Security Administration (SSA) has set a standard for superior customer service among governmental agencies. It has historically received high marks from beneficiaries, and most Americans do not have to travel far to reach a SSA field office, where they can apply for benefits, become a representative payee for someone incapable of managing his or her finances, or apply for a name change after marriage.

Yet continuing budget constraints, which began at the start of the decade, have forced SSA to make difficult decisions to reduce service to the public. At a time when Baby Boomers are retiring and filing disability and retirement claims at record numbers, SSA has shed 11,000 workers agency – wide over three years. Hiring freezes resulted in disproportionate staffing across the nation’s 1,245 field offices, with some offices losing a quarter of their staff. These past five years have also served witness to the largest five-year decline in the number of field offices in the agency’s 79-year history as 64 field offices have been shuttered, in addition to the closure of 533 temporary mobile offices known as contact stations. SSA has also reduced or eliminated a variety of in – person services as it attempts to keep up with rising workloads and shift seniors and others online to conduct their business.

Committee staff has spent seven months examining the impact and rationale behind these service cuts, examining all documented and available written justifications for field office closures since 2010. SSA reported to Congress last month that it examines six major factors before determining whether to close a field office. Our conclusion: on four of these six metrics, the data the agency has compiled to justify its closures are incomplete or insufficient, and ultimately SSA has no clear way to compare offices against each other and determine which offices are most needed by the American public.

Hat tip: PW

Subcommittee exposes Caterpillar offshore profit shifting

April 2, 2014 Comments off

Subcommittee exposes Caterpillar offshore profit shifting
Source: U.S. Senate Permanent Subcommittee on Investigations

Caterpillar Inc., an American manufacturing icon, used a wholly owned Swiss affiliate to shift $8 billion in profits from the United States to Switzerland to take advantage of a special 4 to 6 percent corporate tax rate it negotiated with the Swiss government and defer or avoid paying $2.4 billion in U.S. taxes to date, a new report from Sen. Carl Levin, the chairman of the U.S. Senate Permanent Subcommittee on Investigations shows.

“Caterpillar is an American success story that produces phenomenal industrial machines, but it is also a member of the corporate profit-shifting club that has shifted billions of dollars in profits offshore to avoid paying U.S. taxes,” Levin said. “Caterpillar paid over $55 million for a Swiss tax strategy that has so far enabled it to avoid paying $2.4 billion in U.S. taxes. That tax strategy depends on the company making the case that its parts business is run out of Switzerland instead of the U.S. so it can justify sending 85 percent or more of the parts profits to Geneva. Well, I’m not buying that story.”

Senate Commerce Committee — Staff Report Details Target’s Missed Opportunities to Stop Massive Data Breach

March 28, 2014 Comments off

Staff Report Details Target’s Missed Opportunities to Stop Massive Data Breach
Source: U.S. Senate Committee on Commerce, Science, and Transportation

Chairman John D. (Jay) Rockefeller IV today released a staff report titled, “A ‘Kill Chain’ Analysis of the 2013 Target Data Breach.” The report details how Target possibly failed to take advantage of several opportunities to prevent the massive data breach in 2013 when cyber criminals stole the financial and personal information of as many as 110 million consumers.

Rockefeller will formally introduce the report tomorrow when he chairs his third full Committee hearing on data security. The hearing, titled, “Protecting Personal Consumer Information from Cyber Attacks and Data Breaches”, will explore the dangers to consumers posed by recent data breaches. The Chairman will also highlight legislation he recently introduced, the Data Security and Breach Notification Act, that would – for the first time – establish strong, federal consumer data security and breach notification standards. The hearing will begin at 2:30pm in Russell 253. The hearing will also be webcast live via the Senate Commerce Committee website.

Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts

February 26, 2014 Comments off

Offshore Tax Evasion: The Effort to Collect Unpaid Taxes on Billions in Hidden Offshore Accounts (PDF)
Source: U.S. Senate Committee on Homeland Security & Government Affairs

This investigation arises from the Permanent Subcommittee on Investigations’ longstanding focus on offshore tax abuse, including U.S. taxpayers using hidden offshore accounts. In 2008 and 2009, the Subcommittee held three days of hearings and released a bipartisan report examining how some tax haven banks were deliberately helping U.S. customers hide their assets offshore to evade U.S. taxes. The hearings focused on two tax haven banks, UBS AG, the largest bank in Switzerland, and LGT, a private bank owned by the royal family of Liechtenstein.1 On the first day of the hearings, UBS acknowledged its role in facilitating U.S. tax evasion, apologized for its wrongdoing, and promised to end it. It later entered into a Deferred Prosecution Agreement with the U.S. Department of Justice, paid a $780 million fine, and turned over about 4,700 accounts with U.S. client names that had not been disclosed to the Internal Revenue Service (IRS). It also committed to disclosing to the IRS all future accounts opened for U.S. persons.

Since then, significant progress has been made in the effort to combat offshore tax abuses. World leaders have declared their commitment to reduce cross border tax evasion. Tax havens around the world have declared they will no longer use secrecy laws to facilitate tax dodging. In the United States, over 43,000 taxpayers joined a voluntary IRS disclosure program, came clean about their hidden offshore accounts, and paid over $6 billion in back taxes, interest, and penalties. In addition, Congress enacted the Foreign Account Tax Compliance Act (FATCA), which requires foreign banks to either disclose their U.S. customer accounts on an automatic, annual basis or pay a 30% tax on their U.S. investment income. Just this month, at the request of G8 and G20 leaders, the Organisation for Economic Co-operation and Development (OECD) issued a model agreement that, like FATCA, will enable countries to automatically exchange account information to fight cross border tax evasion.

On the negative side of the ledger, despite evidence of widespread misconduct by Swiss banks in facilitating U.S. tax evasion, Switzerland has continued to severely restrict the ability of Swiss banks to disclose the names of U.S. customers with undeclared Swiss accounts. As a result, the United States has obtained few U.S. names and little account information. In addition, despite the passage of five years, the U.S. Justice Department has failed to hold accountable the vast majority of the 4,700 UBS accountholders whose names were given to the United States. Aside from UBS, it has prosecuted only one of the Swiss banks suspected of misconduct, while setting up a program for hundreds of Swiss banks to obtain non-prosecution agreements without disclosing the names of a single U.S. customer with a hidden account. The promise of FATCA to disclose hidden offshore accounts has also dimmed due to regulations that opened disclosure loopholes which may enable many offshore accountholders to continue to conceal their accounts from U.S. authorities.

In this Report, the Subcommittee’s investigation chronicles these developments and provides an assessment of U.S. efforts to combat offshore tax evasion through hidden foreign accounts. It examines, in particular, ongoing roadblocks erected by the Swiss Government to block bank disclosure of the names of former U.S. customers with undeclared Swiss accounts. It uses as a case study a major Swiss bank, Credit Suisse, that was deeply involved in facilitating U.S. tax evasion and whose unnamed U.S. customers continue to owe unpaid U.S. taxes on billions of dollars in hidden assets.

CRS — Senate Committees: Categories and Rules for Committee Assignments

February 25, 2014 Comments off

Senate Committees: Categories and Rules for Committee Assignments (PDF)
Source: Congressional Research Service (via U.S. Senate)

Senate Rule XXV and party conference rules address committee assignments. Senate Rule XXV, paragraphs 2 and 3 establish categories of committees, popularly referred to as “A,” “B,” and “C,” that condition assignment rules.

New Report Outlines Treatment and Regulation of Bitcoin Around the World

February 5, 2014 Comments off

New Report Outlines Treatment and Regulation of Bitcoin Around the World
Source: U.S. Senate Committee on Homeland Security and Governmental Affairs

The report…surveyed the central banks or government offices of individual nations on how those entities handle and address Bitcoin and if there is any evidence of significant use of Bitcoin in business transactions. According to the report, of the nations reviewed, only a few had specific policies in place that affects Bitcoin use, most notably China and Brazil. The report concludes that the debate and regulation of Bitcoin is still in its infancy.

The Federal Government’s Track Record on Cybersecurity and Critical Infrastructure

February 5, 2014 Comments off

The Federal Government’s Track Record on Cybersecurity and Critical Infrastructure (PDF)
Source: U.S. Senate Homeland Security and Governmental Affairs Committee (Minority Staff)
From press release (Senator Tom Coburn, R-OK):

The report details serious vulnerabilities in the government’s efforts to protect its own civilian computers and networks, and the critical, sensitive information they contain.

The report compiles problems identified in over 40 audits, investigations and reviews by agency Inspectors General, the Government Accountability Office and others. In many cases, simple fixes like using stronger passwords, and applying patches and updates in a timely manner, would fix critical vulnerabilities.

Harkin Unveils HELP Committee Investigation Revealing Widespread Labor Law Violations Among Major Government Contractors

February 4, 2014 Comments off

Harkin Unveils HELP Committee Investigation Revealing Widespread Labor Law Violations Among Major Government Contractors
Source: Senator Tom Harkin (D-IA)

An investigation into the federal contracting process unveiled today by U.S. Senator Tom Harkin (D-IA), Chairman of the Senate Health, Education, Labor, and Pensions (HELP) Committee, revealed widespread labor law violations among major government contractors. The investigation found that almost 30 percent of companies receiving the highest penalties for violations of federal labor law are also federal contractors. Specifically, the 49 federal contractors accountable for large-scale labor law violations were responsible for almost 1,800 separate enforcement actions taken by the Department of Labor and paid $196 million in back wages and initial penalties over a recent six-year period.

The report shows that these 49 contractors received more than $81 billion in taxpayer dollars in 2012 alone, and demonstrates that the current federal contracting process fails to hold contractors accountable for major or repeated labor law violations. Harkin unveiled the report today during an address at the Center for American Progress Action Fund titled “How the Federal Contracting System Harms Workers and Taxpayers.”

The report, titled “Acting Responsibly? Federal Contractors Frequently Put Workers Lives and Livelihoods at Risk” is the result of a year-long investigation by HELP Committee majority staff. It identifies the shortcomings of the current federal contracting process and offers a list of solutions to remedy these problems to ensure that taxpayer dollars are spent in a way that promotes compliance with federal law and improves the quality of life for working Americans. These recommendations include administrative actions by the Department of Labor (DOL) and the Government Services Administration (GSA), coupled with a White House Executive Order.

Just Released — Review of the Terrorist Attacks on U.S. Facilities in Benghazi, Libya, September 11-12, 2012, together with Additional Views

January 15, 2014 Comments off

Review of the Terrorist Attacks on U.S. Facilities in Benghazi, Libya, September 11-12, 2012, together with Additional Views (PDF)
Source: U.S. Senate Select Committee on Intelligence

The purpose of this report is to review the September 11-12, 2012, terrorist attacks against two U.S. facilities in Benghazi, Libya. This review by the Senate Select Committee on Intelligence (hereinafter “SSCI” or “the Committee”) focuses primarily on the analysis by and actions of the Intelligence Community (IC) leading up to, during, and immediately following the attacks. The report also addresses, as appropriate, other issues about the attacks as they relate to the Department of Defense (DoD) and Department of State (State or State Department). It is important to acknowledge at the outset that diplomacy and intelligence
collection are inherently risky, and that all risk cannot be eliminated. Diplomatic and intelligence personnel work in high-risk locations all over the world to collect information necessary to prevent future attacks against the United States and our allies. Between 1998 (the year of the terrorist attacks against the U.S. Embassies in Kenya and Tanzania) and 2012, 273 significant attacks were carried out against U.S. diplomatic facilities and personnel. 1 The need to place personnel in high-risk locations carries significant vulnerabilities for the United States. The Committee intends for this report to help increase security and reduce the risks to our personnel serving overseas and to better explain what happened before, during, and after the attacks.

CRS — Flow of Business: Typical Day on the Senate Floor

December 27, 2013 Comments off

Flow of Business: Typical Day on the Senate Floor (PDF)
Source: Congressional Research Service (via U.S. Senate)

Several authorities govern the daily work in the Senate chamber: its standing rules, standing orders, unanimous consent agreements, precedent, and tradition. Because these authorities have different influence at certain times, no Senate session day is truly “typical.” This report discusses procedures that usually occur every session day, and notes certain business items that occur less frequently. This report will be revised as events warrant.

Harkin Unveils HELP Committee Investigation Revealing Widespread Labor Law Violations Among Major Government Contractors

December 18, 2013 Comments off

Harkin Unveils HELP Committee Investigation Revealing Widespread Labor Law Violations Among Major Government Contractors
Source: Senator Tom Harkin (D-IA)

An investigation into the federal contracting process unveiled today by U.S. Senator Tom Harkin (D-IA), Chairman of the Senate Health, Education, Labor, and Pensions (HELP) Committee, revealed widespread labor law violations among major government contractors. The investigation found that almost 30 percent of companies receiving the highest penalties for violations of federal labor law are also federal contractors. Specifically, the 49 federal contractors accountable for large-scale labor law violations were responsible for almost 1,800 separate enforcement actions taken by the Department of Labor and paid $196 million in back wages and initial penalties over a recent six-year period.

The report shows that these 49 contractors received more than $81 billion in taxpayer dollars in 2012 alone, and demonstrates that the current federal contracting process fails to hold contractors accountable for major or repeated labor law violations. Harkin unveiled the report today during an address at the Center for American Progress Action Fund titled “How the Federal Contracting System Harms Workers and Taxpayers.”

The report, titled “Acting Responsibly? Federal Contractors Frequently Put Workers Lives and Livelihoods at Risk” is the result of a year-long investigation by HELP Committee majority staff. It identifies the shortcomings of the current federal contracting process and offers a list of solutions to remedy these problems to ensure that taxpayer dollars are spent in a way that promotes compliance with federal law and improves the quality of life for working Americans. These recommendations include administrative actions by the Department of Labor (DOL) and the Government Services Administration (GSA), coupled with a White House Executive Order.

For Second Year in a Row, Markey Investigation Reveals More Than One Million Requests By Law Enforcement for Americans’ Mobile Phone Data

December 13, 2013 Comments off

For Second Year in a Row, Markey Investigation Reveals More Than One Million Requests By Law Enforcement for Americans’ Mobile Phone Data
Source: Senator Edward J. Markey (D-Mass.)

As part of his ongoing investigation into wireless surveillance of Americans by law enforcement, Senator Edward J. Markey (D-Mass.) today released responses from eight major wireless carriers that reveals expanded use of wireless surveillance of Americans, including more than one million requests for the personal mobile phone data of Americans in 2012 by law enforcement. This total may well represent tens or hundreds of thousands more actual individuals due to the law enforcement practice of requesting so-called “cell phone tower dumps” in which carriers provide all the phone numbers of mobile phone users that connect with a tower during a specific period of time. Senator Markey began his investigation last year, revealing 1.3 million requests in 2011 for wireless data by federal, state, and local law enforcement. In this year’s request for information, Senator Markey expanded his inquiry to include information about emergency requests for information, data retention policies, what legal standard –whether a warrant or a lower standard — is used for each type of information request, and the costs for fulfilling requests. The responses received by Senator Markey reveal surveillance startling in both volume and scope.

Rockefeller Releases Cruise Crime Report that Shows Gaps in Accessibility of Safety Data

July 26, 2013 Comments off

Rockefeller Releases Cruise Crime Report that Shows Gaps in Accessibility of Safety Data
Source: U.S. Senate Committee on Commerce, Science, & Transportation

Chairman John D. (Jay) Rockefeller IV today released a report that exposes critical barriers to public access of important cruise ship crime and safety data. The reality is, according to the report, the number of alleged crimes cruise lines have reported to the FBI since 2011 is 30 times higher than the number of crimes the FBI is required to report publicly.

And crimes committed against minors are not publicly reported at all. Cruise lines sell their “dream vacations” as simple and fun trips that are family friendly. When parents do not have access to any data about crimes and sexual assaults against minors, how can they be sure their children will be safe aboard a cruise ship.

Rockefeller introduced legislation yesterday, the Cruise Passenger Protection Act, that would close the gap between crime reporting requirements so passengers can access the total number of alleged crimes committed on cruise ships. Currently, per existing law, the FBI is only required to disclose crimes that have been solved, not alleged crimes. Rockefeller’s staff reviewed those alleged crimes and discovered that since 2011, cruise lines have reported 130 of such alleged crimes to the FBI, while only 31 alleged crimes were reported publicly.

Rockefeller released the report at today’s hearing where he focused on the challenges the cruise industry continues to face. Consumers need and deserve to know about the true number of alleged crimes that occur on cruise ships, the limited consumer protections that exist, and safety issues that continue to plague the industry before they book their next vacation.

Senate Armed Services Committee Hearing — Pending Legislation Regarding Sexual Assaults in the Military

June 4, 2013 Comments off

Oversight Hearing: Pending Legislation Regarding Sexual Assaults in the Military
Source: U.S. Senate Armed Services Committee

Webcast plus testimonies in PDF.

Memo: Offshore Profit Shifting and the U.S. Tax Code – Part 2 (Apple Inc.)

May 21, 2013 Comments off

Memo: Offshore Profit Shifting and the U.S. Tax Code – Part 2 (Apple Inc.) (PDF)

Source: U.S. Senate Permanent Subcommittee on Investigations

From press release (Sen. Carl Levin (D-MI):

Apple Inc. has used a complex web of offshore entities – including three foreign subsidiaries the company claims are not tax resident in any nation – to avoid paying billions of dollars in U.S. income taxes, a bipartisan investigation by the Senate Permanent Subcommittee on Investigations has found.

The subcommittee will spotlight Apple’s extensive tax-avoidance strategies at a Tuesday hearing. Witnesses will include Apple CEO Tim Cook, other Apple executives, Treasury Department officials and outside experts. Sen. Carl Levin, D-Mich., and Sen. John McCain, R-Ariz., subcommittee chairman and ranking member, respectively, will also issue a 40-page memorandum with findings and recommendations.

The subcommittee, which previously explored tax avoidance by other multinational corporations using offshore subsidiaries, found similar practices at Apple. In addition, the subcommittee review discovered an unusual tax scheme: Apple’s claim that two key offshore companies are not tax residents of Ireland, where they are incorporated, or of the United States, where Apple executives manage and control the companies. One of those Irish subsidiaries has paid no income taxes to any national tax authority for the past five years.

See also: Offshore Profit Shifting and the U.S. Tax Code – Part 1 (Microsoft & Hewlett-Packard)

Markey Report: Compounding Pharmacies Going Untracked, Unregulated, Under-inspected from Coast to Coast

April 16, 2013 Comments off

Markey Report: Compounding Pharmacies Going Untracked, Unregulated, Under-inspected from Coast to Coast
Source: U.S. Senator Ed Markey (D-MA)

Compounding pharmacies are going largely untracked, unregulated and under-inspected by states across America, according to a new report released today by Rep. Ed Markey (D-Mass). Following the meningitis outbreak originating in a Massachusetts compounder that killed dozens and sickened hundreds, Rep. Markey, along with Reps. Henry A. Waxman (D-Calif.), John Dingell (D-Mich.), Frank Pallone (D-N.J.) and Diana DeGette (D-Colo.), quizzed all states on their oversight of compounding pharmacies, which mix specialty drugs.

The report, “State of Disarray”, is a shocking compendium of the responses from the states queried in the investigation, showing that they are largely leaving compounding pharmacies to their own devices, without the ability to effectively inspect, track or police activities within states and across state lines when the drugs are shipped.

JPMorgan Chase Whale Trades: A Case History Of Derivatives Risks And Abuses

March 22, 2013 Comments off

JPMorgan Chase Whale Trades: A Case History Of Derivatives Risks And Abuses (PDF)

Source: United States Senate Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs

JPMorgan Chase & Company is the largest financial holding company in the United States, with $2.4 trillion in assets. It is also the largest derivatives dealer in the world and the largest single participant in world credit derivatives markets. Its principal bank subsidiary, JPMorgan Chase Bank, is the largest U.S. bank. JPMorgan Chase has consistently portrayed itself as an expert in risk management with a “fortress balance sheet” that ensures taxpayers have nothing to fear from its banking activities, including its extensive dealing in derivatives. But in early 2012, the bank’s Chief Investment Office (CIO), which is charged with managing $350 billion in excess deposits, placed a massive bet on a complex set of synthetic credit derivatives that, in 2012, lost at least $6.2 billion.

The CIO’s losses were the result of the so-called “London Whale” trades executed by traders in its London office – trades so large in size that they roiled world credit markets. Initially dismissed by the bank’s chief executive as a “tempest in a teapot,” the trading losses quickly doubled and then tripled despite a relatively benign credit environment. The magnitude of the losses shocked the investing public and drew attention to the CIO which was found, in addition to its conservative investments, to be bankrolling high stakes, high risk credit derivative trades that were unknown to its regulators.

The JPMorgan Chase whale trades provide a startling and instructive case history of how synthetic credit derivatives have become a multi-billion dollar source of risk within the U.S. banking system. They also demonstrate how inadequate derivative valuation practices enabled traders to hide substantial losses for months at a time; lax hedging practices obscured whether derivatives were being used to offset risk or take risk; risk limit breaches were routinely disregarded; risk evaluation models were manipulated to downplay risk; inadequate regulatory oversight was too easily dodged or stonewalled; and derivative trading and financial results were misrepresented to investors, regulators, policymakers, and the taxpaying public who, when banks lose big, may be required to finance multi-billion-dollar bailouts.

The JPMorgan Chase whale trades provide another warning signal about the ongoing need to tighten oversight of banks’ derivative trading activities, including through better valuation techniques, more effective hedging documentation, stronger enforcement of risk limits, more accurate risk models, and improved regulatory oversight. The derivatives overhaul required by the Dodd-Frank Wall Street Reform and Consumer Protection Act is intended to provide the regulatory tools needed to tackle those problems and reduce derivatives-related risk, including through the Merkley-Levin provisions that seek to implement the Volcker Rule’s prohibition on high risk proprietary trading by federally insured banks, even if portrayed by banks as hedging activity designed to lower risk.

See also: Exhibits (PDF)

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