(Bloomberg News) JPMorgan Chase & Co.'s switch to a new risk model may have helped fuel a $2 billion trading loss at the chief investment office, Chief Executive Officer Jamie Dimon told a U.S. Senate panel today.

Amid chants from protesters, Dimon arrived shortly before 10 a.m. and began answering questions about the causes of the loss, which he described as part of a hedging strategy.

The new measurement of value-at-risk was "implemented in January and did effectively increase the amount of risk this unit was able to take," Dimon told the Senate Banking Committee. On April 13, when he downplayed the risks of trades on a call with analysts, "we were still unaware that the model might have contributed to the problem," Dimon said. "So when we found out later on, we went back to the old model."

The switch -- and the timing of the firm's disclosures -- are the focus of an inquiry by the Securities and Exchange Commission as the government examines how long senior executives knew about the CIO's swelling bets and losses. Dimon said May 10 that the bank had reviewed the effectiveness of a new VaR model, deemed it "inadequate" and decided to return to the previous version. On that basis, the unit's VaR doubled.

Clawbacks Expected

"When the board finishes its review, which is the appropriate time to make those decisions, you can expect that we will take proper corrective action and it is likely there will be clawbacks," Dimon said.

As Dimon, 56, took his seat in the Senate hearing room, Tighe Barry, 50, a prop man from Los Angeles and protester with activist group CodePink, yelled, "This man is a crook and he needs to go to jail." A few minutes later, several people rose out of the audience and started yelling, "Stop foreclosures now." Senators delayed the hearing for a few minutes as Capitol police removed the protesters from the room.

Dimon received support from other quarters. Lloyd C. Blankfein, chairman and chief executive officer of Goldman Sachs Group Inc., said this morning that mistakes in risk judgment shouldn't be penalized "too much."

Blankfein Comments

"If you put too much penalty on risk judgment, what kind of world are you going to have?" Blankfein, 57, said at the Chicago Club. "If you're getting pounded and being made to ask questions, what kind of economic system do we have?"

Senators said they intend to press Dimon to explain what led to the losses and will be looking closely at whether they need to tighten exemptions in the so-called Volcker rule that bans proprietary trading by banks.

"It has been two months since he first publicly acknowledged the trades, so I expect Mr. Dimon to be able to answer tough, but fair questions today," Senator Tim Johnson, the panel's chairman, a South Dakota Democrat, said in his opening comments. "A full accounting of these events will help this committee better understand the policy implications for a safer and stronger financial system going forward."

Dimon told the committee that the bank let traders take risks they didn't understand.

[To read Dimon's prepared testimony, click here.]

Expresses Regret

He expressed regret over losses in the bank's chief investment office, saying that its trading strategy was "poorly conceived and vetted" by senior managers who were "in transition" and not paying adequate attention.

"This portfolio morphed into something that, rather than protect the firm, created new and potentially larger risks," Dimon said. "We have let a lot of people down, and we are sorry for it."

Dimon is making his first of two appearances on Capitol Hill to face lawmakers probing how the largest and most profitable U.S. bank, often praised for its "fortress" balance sheet, could have taken such risks after coming through the 2008 financial crisis largely unscathed.

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.

"I don't want to see consumer lenders in Columbus losing their jobs because cowboys in London make too many risky bets," said Senator Sherrod Brown, an Ohio Democrat, referring to 19,000 JPMorgan in his state.

Feels 'Terrible'

Dimon said he feels "terrible" that the firm will lose shareholder money, yet defended the bank by saying lawmakers needed to put the losses "into perspective," noting that no client, customer or taxpayer money was impacted. He said the second quarter would be "solidly profitable."

Dimon explained that 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 grew and the problem got worse.

Shares of JPMorgan advanced 2.3 percent to $34.55 at 11 a.m. in New York, the most in the 24-company KBW Bank Index, which climbed 0.7 percent. Shares of the bank have dropped 17 percent from May 10, when Dimon disclosed the losses, through yesterday, lopping about $26.5 billion from the firm's market value.

Portfolio Hedging

U.S. Senator Jeff Merkley, the Oregon Democrat pushing for stronger restrictions on banks' bets with their own money through proprietary trading, said this morning that JPMorgan's hedges were too risky.

"Portfolio hedging is just a name for saying anything goes, and we'll continue proprietary trading," Merkley said in an interview on Bloomberg Television.

Merkley, who co-wrote the Volcker provision in the Dodd- Frank Act along with Senator Carl Levin of Michigan, has said that the draft rule released by regulators in 2011 had loopholes that would allow banks to maintain much of their proprietary trading operations.

"I want to know whether or not he is determined to continue pressing for loopholes in the Volcker rule so he can continue proprietary trading or whether he recognizes that really is a role for hedge funds that shouldn't be subsidized by American taxpayers," Merkley said.

Five U.S. agencies are working to complete the Volcker rule, which is named for former Fed Chairman Paul Volcker and is intended to reduce risky trading by banks with federally insured deposits and access to the central bank's discount window.

Christopher Whalen, senior managing director at Tangent Capital Partners LLC, said he didn't expect Congress to do more than scold Dimon.

"This is precisely why we have to break up these odious monopolies," he said in an interview on Bloomberg Radio with Tom Keene and Ken Prewitt. "All these members are going to scold Jamie Dimon and then they are going to ask him for an autograph."