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State pension funds sticking with JPMorgan despite $2B loss

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The agencies that manage retirement benefits for California teachers and governmental employees are standing by JPMorgan Chase for now despite a recent $2 billion trading loss that has sparked two federal investigations and reignited calls for tougher bank oversight.

Representatives of the California State Teachers Retirement System (CalSTRS) and the California Public Employees' Retirement System (CalPERS) told California Watch that they are monitoring the controversy at JPMorgan but had no immediate plans to stop investing with the bank over its recent trading woes. That controversy swirled in Washington on Wednesday, with the Senate Banking Committee grilling JPMorgan Chase CEO Jamie Dimon.

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JPMorgan is an international banking conglomerate and one of the four biggest banks in the United States. It was formed in 2000 with the merger of J.P Morgan & Co. and Chase Manhattan banks. JPMorgan has been reeling since disclosures in April that its London-based investment office lost at least $2 billion over risky trades of exotic financial instruments.

Last month, the SEC confirmed that it is probing whether the bank withheld critical information about the trades from investors. The FBI and Commodity's Future Trading Commission are also investigating the transactions, according to The New York Times.

Brad Pacheco, spokesman for the state employee retirement system, said no pension fund money was directly impacted by the JPMorgan trades now under investigation.

"We don’t have any exposure to the type of synthetic credit securities (JPMorgan) was trading," Pacheco wrote in an email. "We are monitoring the issues related to the company but I have nothing further at the moment."

Ricardo Duran, spokesman for the teachers retirement system, said CalSTRS routinely monitors such situations.

"But as a long-term investor, we focus on the longer-range performance of the company, which has been excellent," Duran said. "This will likely be a quarterly loss for the company but is not expected to significantly impact our long-term returns."

Prior to the trading loss, Dimon was one of the leading bank critics of strict government regulation and downplayed early reports about JPMorgan's risky trades, calling them a "tempest in a teapot."

But in the wake of the federal investigations and a Wall Street Journal report that bank executives were warned as early as 2010 about problems with their trading strategies, Dimon has been more contrite. This week, Dimon told the Senate Banking Committee that complacency and lack of understanding were to blame for the recent losses. He still expressed reluctance about tighter government oversight, however.

"It would have been very hard for regulators to catch this," Dimon said.

The commitment from the California pension funds is significant as the two represent the bank's biggest bloc of pension fund stockholders. In late April, CalSTRs, which has invested in JPMorgan since 1973, owned about 12.2 million shares in JPMorgan stock, worth $522 million. CalPERS owned more than 12.4 million shares, with a total value of $565 million, officials said.

Brad Barber, finance professor at UC Davis, said the pension fund stance is not surprising given the lack of full details about the trades.

"Was this a breakdown in risk controls at JPMorgan? We really don’t know the answer to that question yet," Barber said. "I think it makes sense to try to answer to that question, before proceeding."

But the banks aren't getting a total pass from the state's pension funds.

CalPERS led a stockholders push to strip Dimon of his position as chairman of the board, saying an independent chairman would “be able to exercise stronger oversight of management."

The proposal failed to garner enough votes at the May 15 board meeting, but Barber said the move still sent a "powerful signal" about accountability.

Duran said CalSTRS' corporate governance section is conducting a review of the bank. He said no details were available from the examination, however, nor could he give an estimate of when it would be completed.

"The CalSTRS policy is not to comment on any future moves we may or may not pursue for any individual manager or holding," Duran said.

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