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Guest Post: JP Morgan Chase Caught Speculating with Customer Money

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Served by Jesse of Le Café Américain

“Flagrant evils cure themselves by being flagrant…” John Henry Newman

Why the surprise? This is what the Wall Street banks do, even under a ‘reform’ administration. They use their customer money and public funds, for which they pay a pittance, to speculate in markets, distorting prices and taking enormous risks, in order to pay themselves outrageous bonuses. They buy politicial influence to enable regulatory capture and support their financial schemes. And when their bets go wrong, the public absorbs the losses. This is the model of US gangster banking in the 21st century.

The Obama Administration cannot energize their health care reform because the public demands reform in the financial sector, and quite frankly Obama has lost the ‘high ground’ of the reformer by his inability to free his administration from the growing taint of scandal and conflicts of interest.

So it remains for the rest of the world to begin to rein in the outrageous behaviour of the US financial institutions that treat the world’s bourses as their private casinos.

For a party that spent eight years on the sidelines, the American Democrats have proven themselves to be particularly inept at doing anything to promote their agenda once presented with a solid majority by the voting public. One has to wonder if they ever intended to deliver on their promise of change at all.

The banks must be restrained, and the financial system reformed, before there can be any sustainable recovery.

Daily Mail
Blair bank targeted in £8.5bn FSA probe

By Ben Laurance
10th August 2009

The bank where Tony Blair is an adviser is the target of an unprecedented probe involving billions of pounds of customers’ funds, the Daily Mail can disclose.

JP Morgan Chase, whose chief executive Jamie Dimon last year recruited the former prime minister as an adviser, is being investigated by the City’s watchdog, the Financial Services Authority for allegedly failing to keep track of £8.5billion of clients’ money.

The FSA has called in a top firm of accountants to examine the bank’s London activities after evidence emerged that JP Morgan had mixed customers’ funds with its own.

Banks are meant to maintain a strict segregation of their own money from that which is held on behalf of clients.

But JP Morgan managers in London discovered last month that client and bank money used for trading futures and options – a way of speculating on movements in currencies, share prices and commodities – had apparently been put into a single pool.

They raised the alarm and notified the FSA. The scale of case is unprecedented, say City insiders. The FSA has penalised small firms in the past for mixing funds owned by clients and the banks themselves.

But this is thought to be the first case involving such a large household name.
JP Morgan Chase faces the threat of an unlimited fine if the watchdog decides enforcement action is necessary.

News of the FSA investigation will come as a huge embarrassment for the bank, which is valued on Wall Street at £100billion.

It is thought that the JP Morgan Chase problem dates back to late 2002. This followed the takeover of JP Morgan by Chase Manhattan two years earlier.

Assets were not segregated to protect clients as FSA rules demand, insiders believe.

When the issue first came to light last month and the FSA was told, the authority called in specialists from leading accountancy firm KPMG to investigate.

The cost of the probe – known as a section 166 review – will be met by the bank.

Sources say that KPMG’s team of investigators has been working at JP Morgan Chase’s offices on London Wall in the City, combing through records and e-mails and interviewing staff.

Bank employees who were involved in handling client funds in 2002 as well as those still responsible have been questioned. The KPMG team has been asked to find out what checks, if any, were made to ensure that clients’ money has been kept safe and segregated.

The accountants have also been asked to calculate if clients lost out because they were not paid any interest they might have been due.

Senior figures at the bank could be reprimanded or even barred from working in the City if the FSA concludes that they were slack in setting up systems for separating customers’ funds.

The accountants have been asked to deliver their preliminary findings to the FSA by the end of this month. A final report is due by the end of September. These reports will not be made public – unless the FSA subsequently decides that the bank should be punished.

JP Morgan Chase has been regarded as one of the more robust of the banks to emerge from last year’s meltdown in the global financial system. Among the six largest U.S. banks, it is the only one to have stayed consistently in the black since the recession began in 2007.

But it still took £15billion last year under the U.S. government’s programme to prop up the financial system. The money has since been repaid.

Last month, the bank reported quarterly earnings of £1.64billion, which was a major factor in spurring the recovery in its shares and in Wall Street prices as a whole.

A report last week showed that last year, the firm paid bonuses of £600,000 ($1m) or more to 1,626 employees. Of those, more than 200 received at least £1.8m. The top four earners received a total of nearly £45million between them

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30 comments

  1. Doc Holiday

    You hit the nail on this quote dude:

    "Obama has lost the 'high ground' of the reformer by his inability to free his administration from the growing taint of scandal and conflicts of interest.

    Is there any doubt that Team Obama is just as corrupt as the Bush Coup? I agree 1000% percent — Obama is trying to sell healthcare reform while all the crap with financial regulation is swept under the rug, as if a systemic collapse didn't occur and to ignore the fact that capitalism did fail — so let's ignore reality and pick up where Bush left off with more of the same……. total bullshit!

    Bring on Palin & The Retards!

  2. Edwardo

    I can imagine some good coming out of this such that the number of people left that have any regard for the two parties will be vanishingly small come 2012. I am hoping that once that occurs that maybe, just maybe,
    We The People will "make some (real) changes."

  3. Lavrenti Beria

    What is simply mind-numbing to me is that anyone past the age of 30 years hasn't woken up to the fact that the United States is a not functioning democracy any longer. We have an "in-party" whose congressional representatives are owned by the financial, arms, drug, and Middle Eastern foreign policy interests and whose President, as Mike Whitney so aptly states, "is a public relations invention who's used to cut ribbons, consoling the unemployed, and convincing Americans they live in a "post racial" society. And there is an "out-party" whose congressional representatives are owned by the financial, arms, drug, and Middle Eastern foreign policy interests and whose existence is given over solely to funnelling public outrage into a black hole. The franchise is a fiction and the Constitution an abstraction. And the usual public discourse regarding the significance of elections, candidates and the like has all the reality of a Willy Loman self-analysis. Nothing could be more clear than the fact that economic change requres political change and that, today, political change will not come about except through massive public demonstrations. The rest is simply insanity.

  4. Anonymous

    I think President Andrew Jackson said it best… Bankstas never change..

    "Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves."

  5. jest

    Levrenti-

    I hear what you are saying, but there is an expression about people getting the government they deserve.

    Our political system may be dysfunctional, but only because we allowed, condoned, and demanded this silliness.

    I shudder to think what our streets would look like if our citizens had the same constitution as those protesters in Tehran. The best we can come up with is a few racist, Palin worshipping, Birthers who still talk about socialism as if we were still fighting the cold war.

    RE: JPM

    The UK never had a Glass-Stegall law passed, and they did fine without it. I guess the imported criminality of American banks may someday change that.

  6. Jesse

    jest,

    "Banks are meant to maintain a strict segregation of their own money from that which is held on behalf of clients."

    It would be more correct to say that the UK has a form of Glass-Steagall law, which has not yet been repealed.

    Jesse

  7. Anonymous

    So when do we go from spewing textual white noise to doing something? The money folks are already creating the next war on us and brainwashing the ignorant as their soldiers

    psychohistorian

  8. Anonymous

    So how many of you have ever worked in a bank? More importantly, how many of you have ever represented a financial institution to regulators?

    It's really easy to armchair quarterback based on the very limited information that seeps out from regulatory action, but I think the fact that the FSA is investigating JPM (who self reported) and it is now public is an indication that the system works. The FSA is not to be messed with. It wasn't until the end of 2008 that the internal controls imposed by the FRB/OCC were lifted so that deposits from retail banking could be moved into the holding company to shore up the balance sheet. The money moved into the holding company is supposed to sit in reserve and not be used to gamble. I can promise you that the FRB/OCC are checking up on this monthly, for the banks given an exception (C, BAC, JPM, and WFC).

    Your cynicism is misplaced, and your editorial is amateur at best ideologically hackish at worst. Try posting about topics on which you've actually been paid to be a subject matter expert on.

  9. Anonymous

    "JP Morgan Chase faces the threat of an unlimited fine if the watchdog decides enforcement action is necessary."

    LOL–the FSA should fine them $100bn. It's just gonna come from the US taxpayer, anyway. Taxation without representation :)

  10. tom a taxpayer

    Thanks, Jesse. We need Shock-and-Awe prosecutions of the hundreds of criminals responsible for committing the greatest financial crimes in U.S. history. We need coast-to-coast arrests, from Countrywide to Goldman Sachs and every one in between. We need Racketeer Influenced and Corrupt Organizations Act (RICO) prosecutions and mass trials in style of the Maxiprocesso (Maxi Trial) of the Mafia in Sicily during the mid-1980s that resulted in hundreds of defendants convicted. We need RICO confiscations of the hundreds of billions in illegal "profits" from the criminal enterprises of the mortgage industry and Wall Street Mafia.

    It takes only one prosecutor to investigate just one crime, and follow the money and the connected crimes, and bring down the entire criminal enterprise using a Racketeer Influenced and Corrupt Organizations Act (RICO) prosecution. This is a target rich environment, and the criminal activities (fraud, Ponzi schemes, blackmail, looting of treasury, cover-ups, etc.) are continuing today. So the investigation and prosecution can begin anywhere, with Countrywide, the mortgage industry and the appraisers or Freddie and Fannie or Citi and the big banksters or with Goldman Sachs and other Wall Street investment banks and brokerages or the rating agencies or AIG or with the federal co-conspirators at U.S. Treasury, SEC, OTS, and the Federal Reserve or with Hank "the mole" Paulson, Ben "the bag man" Bernanke, Tim "the patsy" Geithner, or the members of Congress who took money to facilitate the criminal enterprise.

    Senator Carl Levin and the Senate Permanent Subcommittee on Investigations have subpoenaed Goldman Sachs, Deutsche Bank, and JP Morgan Chase, seeking evidence of fraud in last year's mortgage-market collapse. Investigators will examine email and other internal communications to see if bankers had private doubts about the financial soundness of the mortgage-related securities they were peddling.

    Senator Levin appears to be launching the fraud investigation that Americans have been waiting for…an investigation into the masterminds and ringleaders of the greatest financial crimes in U.S. history. The Senate Permanent Subcommittee on Investigations provides the grist for prosecutions. One injustice that really disturbs Americans is that the hundreds of billions in bailouts has not been accompanied by prosecuting the criminal frauds that led to the bailouts. Many of the criminals who caused the financial crisis are the same people the taxpayers are bailing out.
    Senator Levin is a tenacious investigator. If he takes off the kid gloves, and hits the criminals with the iron fist of justice, he will become a national hero.

    http://www.reuters.com/article/newsOne/idUSTRE56T0X620090730

  11. LeeAnne

    Anonymous
    "…but I think the fact that the FSA is investigating JPM (who self reported) and it is now public is an indication that the system works. The FSA is not to be messed with.

    "…Your cynicism is misplaced, and your editorial is amateur at best ideologically hackish at worst. Try posting about topics on which you've actually been paid to be a subject matter expert on."

    What bank is paying you? If the blog is so amateurish why waste your time with it?

    Sure, the system works so well that the banks are handed billions in taxpayer money at little or no interest for their risk taking after defrauding the public by gambling with the people's life savings and retirement funds, and now declare record earnings to pay larger bonuses after last year's losses than the previous year.

    No blame here -and it takes geniuses paid millions in bonuses to think it up.

    The 'unlimited fine' should be high enough to pay competitive salaries and bonuses in the millions for Wall Street trained professionals for regulators since the banks have specialized in outsmarting the young inexperienced and underpaid regulators of the past.

    That is, the fine should be an open ended fee in the $billions annually, high enough to pay for professionals on the same level, with the same training and experience as the people in the banks they will be auditing.

  12. Purple

    I can imagine some good coming out of this such that the number of people left that have any regard for the two parties will be vanishingly small come 2012

    A coup is more likely, if the two parties collapse, than some sort of 'revolution'.

  13. Jesse

    Persistent denial in the face of increasing amounts of data to the contrary is an interesting phenomenon. Why is it usually accompanied by anger and lashing out?

    Cognitive dissonance. There is a lot of it going around. Eventually it even seeps down into the bunkers.

  14. Hugh

    "One has to wonder if they ever intended to deliver on their promise of change at all."

    No. This is has been another case of simple answers to simple questions.

    "the system works"
    "Try posting about topics on which you've actually been paid to be a subject matter expert on."

    Somehow I see these two statements as related. There were armies of well paid experts and economists who missed or were wrong about every single aspect of the run up to our current crisis, its bursting upon us, and its ongoing consequences. So if even at this late date these were the only voices that can speak authoritatively, the first statement becomes more understandable. It is still just as wrong but we would expect this given the stated preference for bad "expert" sources.

  15. Erica Smith

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  16. Ginger Yellow

    Um, English law doesn't require client and proprietary assets to be separate, unless the contracts between the bank and the client demand it. In fact, the government just put out a consultation paper on this very subject, triggered by the fallout from the Lehman collapse. The UK has pretty much the most flexible brokerage regime in the world, with all sorts of asset holding arrangements. Presumably, JPM wasn't meeting the terms of its contracts.

  17. Anonymous

    I'm probably the stupid one here, but I'm not sure the Yves basher knows what s/he is talking about. I'm happy to be proven wrong.

    Yves basher wrote:
    The FSA is not to be messed with. It wasn't until the end of 2008 that the internal controls imposed by the FRB/OCC were lifted so that deposits from retail banking could be moved into the holding company to shore up the balance sheet. The money moved into the holding company is supposed to sit in reserve and not be used to gamble. I can promise you that the FRB/OCC are checking up on this monthly, for the banks given an exception

    but isn't the FSA a UK regulator? and the FRB/OCC US regulators.

    Is it common practice for US regulators to check into UK regulations on banks operating in the UK?

    why on Earth would a change in FRB/OCC rules have anything to do with JPMorganChase's London operations?

    and if the FRB/OCC *and FSA for that matter) are checking into this diligently then why did it take some JPMorgan Chase insiders to bring this to the attention of the FSA?

    the Yves basher's post really just doesn't make sense to me.

    it would appear here that we have yet again terrible oversight and regulator arbitrage by the big banks. They are not only too big to fail, but too big to regulte/govern.

  18. Anonymous

    Jesse-

    I believe Ginger Yellow is correct.

    HSBC, Barclays, and other UK banks have had capital markets divisions for years.

    That may be part of the reason AIGFP was in London, not the US; when AIGFP was founded, pre-GLBA, insurance firms couldn't originate securities in the US. But I admit, that last bit is conjecture on my part, but it makes sense…

  19. Siggy

    Levrenti,

    Great moniker, do you know what and who he was?

    By the by, ours is NOT A Democracy! Ours is a Constitutionaly Empowered Federal Republic. If you wish to shorten that, the more appropriate style is: A Republic.

    If you do not really understand that, then, your education has been incomplete and you will never understand what one of the principle pillars of nation is.

    Being substantially past 30, it is very apparent to me that we have come to a fork in the road and we took the wrong one!

    What lies before us is the fact that we need to create a fork in the road that takes to a better path. In that regard we should consider the concept of attaching joint and several liability to the managing directors and officers of our corporations whether they be sited domestically or in other nations.

  20. DownSouth

    Jesse,

    Really a great post! The insight about Obama having "lost the high ground" is right on.

    Of course it's not just Obama, even though I agree Obama has royally f*cked himself. The Democrats are victims of their own success. What's killing them is the fact they now control the presidency, a majority in Congress and a filibuster-proof majority in the Senate. And yet Obama persists in cutting insider deals with big Pharm that preculde true reform? The Democrats, stripped of the trusty excuse they could always fall back on–blame the Republicans–are now seen in all their splendid nudity. And it's not a pretty sight.

    As to all the atrocious behavior at the town hall meetings, is this not predictable? George Orwell, writing in "Charles Dickens, observed how Dickens "delights in describing scenes in which the 'dregs' of the population behave with atrocious bestiality."

    "Dickens shows a most profound horror of mob violence," Orwell explains, but realizes that, in politics, abuse is met with abuse:

    Dickens sees clearly enough that the French Revolution was bound to happen and that many of the people who were executed deserved what they got. If, he says, you behave as the French aristocracy had behaved, vengeance will follow. We are constantly being reminded that while "my lord" is lolling in bed, with four liveried footmen serving his chocolate and the peasants starving outside, somewhere in the forest a tree is growing which will presently be sawn into planks for the platform of the guillotine, etc. etc. etc. The inevitably of the Terror, given its causes, is insisted upon in the clearest terms:

    "It was too much the way…to talk of this terrible Revolution as if it were the one only harvest ever known under the skies that had not been sown–as if nothing had ever been done, or omitted to be done, that had led to it–as if observers of the wretched millions in France, and of the misused and perverted resources that should have made them prosperous, had not seen it inevitably coming, years before, and had not in plain words recorded what they saw."

    And again:

    "All the devouring and insatiate Monsters imagined since imagination could record itself, are fused in the one realisation, Guillotine. And yet there is not in France, with its rich variety of soil and climate, a blade, a leaf, a root, a sprig, a peppercorn, which will grow to maturity under conditons more certain than those that have produced this horror. Crush humanity out of shape once more, under similar hammers, and it will twist itself into the same tortured forms.

  21. Steve Koch

    IIRC, the last poll on party affiliation I saw (2 or 3 months ago) was something like 39% independent, 33% Democrat, and 22% Republican. I don't know what the remaining 6% were (maybe some Libertarian and Communist, who knows).

    Party politics in the USA have had a devastating effect on the country. It encourages all these unholy alliances between groups who have little common cause except to gang together to extract more benefits from the government.

    Party politics encourages the majority party to act like a gangster, ignoring the views of the minority. Party politics in the House leads to the House leader (currently Pelosi, previously Hastert and Delay) having political views that are toward the extreme rather than toward the center.

    Party politics leads to corruption.

    A positive step would be to decrease the power of political parties. Party line votes (where the party leadership threatens retribution if the party member does not vote the party line) is a violation of democracy and should result in the threatener being ejected from office.

    Another improvement would be to elect the leaders of the Senate and the House in Senate/House wide votes rather than effectively restricting the vote to majority party voters only.

    Huge bills are routinely voted on by legislators who have not read the bills. These ignorant legislators are simply voting as instructed by their party leadership. Legislators should be forced to pass a test on the content and implications of legislation before they are permitted to vote on that legislation. If they flunk out enough tests, then boot them out of the legislature.

    Only individual people (not corporations and unions and non profits, etc) should be able to make campaign contributions and these contributions should be limited to something like $500 (or even less).

  22. LeeAnne

    Steve Koch, the following may interest you about political contributions:
    NY Times: Adam Cohen

    The Supreme Court could open the flood gates to corporate money in politics -has decided to force the question …and rushed to put oral arguments on the calendar in September before the new term even starts.

    could this be one of the reasons Obama pushed for a health care bill before August recess?

    "The court has gone to extraordinary lengths to hear the case. And there are worrying signs that there may well be five votes to rule that the ban on corporate contributions violates the First Amendment."

  23. Autopoeisis

    Is the Daily Mail legitimate enough of a news organization to be posting their article. It is a bit of a tabloid from what I recall, and you can see the political motivations in going after Blair. In the It actually portrays the issue as if he had orchestrated it. Are they also the outfit that published the MP expense scandal?

    The article also keeps returning to citing insider sources. I'm not saying that this isn't true, but I am hesitating until these sources are confirmed.

  24. skippy

    @Doc H,

    Yeah, its getting like that, let the feral's do the dirty work, then address that problem later. Will they be the latter day Templars?

    @DownSouth,

    The similarity's are frightening eh.

    ——

    If fate is kind and when I leave, may my discharge be, the Task Master in the 3rd Hell of Gluttony, for it is the precursor to many crimes, unpunished.

    Skippy…"Patriots aways talk of dying for their country and never of killing for their country" – Bertrand Russell.

    PS. the above is not an incitement to violence, but recognition of the pendulum, and its swing. How much stored energy is present after 40 odd years of ever increasing wealth to the few and how far will it swing to correct this deficit, what will be its level of retribution.

  25. Jesse

    Thank you Ginger Yellow for this information.

    It does seem odd that JPM had what you purport is a private contract for the huge amount of private deposits at its bank to be separate, when as you say it had no compunction to do so.

    But as it changes nothing in the blog, it does not particularly matter to me.

    I would be curious to know the exact details of this however. Is it custom? For accounts to be guaranteed separate in 'private contract?'

    Jesse

  26. Ginger Yellow

    "It does seem odd that JPM had what you purport is a private contract for the huge amount of private deposits at its bank to be separate, when as you say it had no compunction to do so."

    It's not that odd. In the UK, the legal ability to claw back "your" assets if your broker goes bankrupt depends almost entirely on the degree of segregation in practice. So safety conscious investors would demand segregation (either into a global pool of client assets, or an entirely segregated account), but they would pay a higher price than those who allowed pooling with bank assets. And many investors were very greedy and just took the cheapest option. On top of that, there's the question of hypothecation.

  27. Ginger Yellow

    By the way, if you want more info on this subject, the best place to start is probably HM Treasury's recent consultation paper on a new investment bank insolvency regime, which is on their website. It lays out the legal position and market practice for client assets with admirable clarity.

  28. Anonymous

    Everyone do their business! If we gave banks our money then, we depend on them, so no way without them in any case… system should be changed, but it will change when world ends…

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