Dimon, who's also set to face the House Financial Services Committee on June 19, finds himself in the middle of a renewed debate about whether the so-called Volcker rule, which would curb trading by deposit-taking banks, should be tightened. While Dimon didn't comment on the size of the loss from the trades, he said the second quarter would be “solidly profitable.”

“The lessons learned from the recent failures in risk management at JPMorgan Chase will be an important input into efforts to design the Dodd-Frank Act reforms including a strong Volcker rule,” U.S. Treasury Department Deputy Secretary Neal Wolin told the Senate panel last week.

The bank instructed the CIO in December to reduce its risk- weighted assets to prepare for new international capital rules. Instead, the office in mid-January “embarked on a complex strategy that entailed adding positions that it believed would offset the existing ones,” Dimon said. The portfolio instead got larger and the problem got worse, he said.

Dimon said that the risk committee structures and processes were not as robust in the CIO as they should have been. The division's London team built up a book of credit derivatives that became so large that employees couldn't unwind it without roiling markets or incurring large losses, current and former executives have said.

'Poorly Conceived'

The strategy for reducing the portfolio was “poorly conceived and vetted,” Dimon said. “The strategy was not carefully analyzed or subjected to rigorous stress testing within CIO and was not reviewed outside” the division.

Risk oversight personnel were “in transition” and the derivatives credit portfolio responsible for the loss should have “gotten more scrutiny from both senior management and the firmwide risk control function,” he said.

The position of chief risk officer inside the CIO was a revolving door, with at least five executives holding the job in six years, people familiar with the matter said. Irvin Goldman, appointed in February and replaced in May, had been fired in 2007 by brokerage Cantor Fitzgerald LP for money-losing bets that led to a regulatory sanction of the firm, said three people with knowledge of the matter. Goldman wasn't directly accused of wrongdoing.

Chief Investment Officer Ina Drew retired after the loss was disclosed and was replaced by Matt Zames, who was co-head of fixed-income trading in the investment bank. Zames told staff that top London-based trading executive Achilles Macris would hand off duties.

“When we make mistakes, we take them seriously and often are our own toughest critic,” Dimon said. “While we can never say we won't make mistakes — in fact, we know we will — we do believe this to be an isolated event.”

JPMorgan's biggest competitors, including Bank of America Corp., Citigroup Inc. and Wells Fargo & Co., have said their corporate investment offices avoid using the kind of derivatives that led to the trading losses and buy fewer bonds exposed to credit risk. The rivals said their offices don't trade credit- default swaps on indexes linked to the health of companies.

Government Probes

Government investigators are scrutinizing how long senior executives knew about the CIO's swelling bets before the losses approached $2 billion. One focal point is why the CIO's so- called value-at-risk formula used to calculate potential losses was altered in this year's first quarter, cutting the reported risk by half.

When the bank reported first-quarter earnings, the new model showed an average daily VaR within the CIO of $67 million, about where it stood in the previous period. Dimon said May 10 that the bank then reviewed the effectiveness of the new model, deemed it “inadequate” and decided to return to the previous version. On that basis, VaR doubled to $129 million.

Government investigations of JPMorgan include the Federal Reserve's study of internal oversight, the Office of the Comptroller of the Currency's look into trading, and the Securities and Exchange Commission's examination of why the bank changed internal risk gauges this year. The Department of Justice and the Commodity Futures Trading Commission also are conducting inquiries.

Investors and bankers, including Dimon, have speculated that the loss may hurt efforts to soften restrictions imposed by the 2010 Dodd-Frank Act, including the law's so-called Volcker rule, which limits lenders from making bets with their own money and was designed to head off a repeat of the financial crisis.

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