By Michael Crimmins, who has worked on risk management and Sarbanes Oxley compliance for major banks
Two former finance and political influence gods (Jon Corzine and Jamie Dimon) have tumbled back to earth. Yet, troublingly, the mythology that’s cowed the political establishment and the financial press for so long remains very much intact.
Almost without exception, mainstream commentators are still desperately trying to frame the train wrecks at MF Global and JP Morgan as outliers, tail risk situations, if you like. They seem unable to acknowledge that that these were simple cons, while dutifully reporting them as examples of ‘regulatory arbitrage’.
The term is appropriate, but it’s fancy enough to be off-putting to the folks who can spot a con a mile off and who would normally be enraged enough to take to the streets if these scams were framed in simpler terms.
Consider the backhanded compliment the financial press and the regulators, even PBS, bestowed on Occupy the SEC and the OWS Alternative Banking group. These outlets acknowledged that the barriers to entry to protest against bankster abuse can be breached, yet missed the real point: those barriers are lower than the banks and politicians believe they are. The various specialist groups in Occupy Wall Street prove that opposing a corrupt oligarchy isn’t attractive only “dirty hippies” but also to academics (Simon Johnson and Amat Admati), former and current regulators (Sheila Bair, Andrew Haldane) and industry professionals (the members of the aforementioned OWS groups); They also fail to get on board with the concept that the banksters’ line should be challenged even though that’s supposed to be the role of a free press….
The OSEC comment letter was wonky enough to ensure it couldn’t be ignored, but the real objective was to call the too-clever-by half banking lobby and their enablers out in plain language. As a first step in alerting the powers that be that the Occupiers and the folks they represent will be heard, I like to think it was effective.
Dimon and Corzine have made the second step, translating the fancy regulatory arbitrage language into plain English, much easier.
In Corzine’s case, the entire business model for MF Global was built on a simple scam. Pretend that one part of MFG took a huge and risky position and ‘sold’ it, or as accountants call it, “de-registered” it. The fact that it sold it to itself could and would be ignored by most everybody that mattered. From a US perspective, all appeared to be well. It doesn’t matter too much that the MFG London guys were stuck with the risk, since there was a side deal with the US that’s not reported anywhere, that the US unit will (wink) cover London’s risk. This is bucket shop level scamming and its good work if you can get it, until those greedy London counterparties start making margin calls. Shit hits fan and you end up with dopes like assistant Treasurer Edith O’Brien pleading the Fifth. Every back office in every major bank is fully staffed with ambitious enablers like O’Brien who convince themselves that they have the goods on their bosses. It’s hard to find clearer signals that this is a third rate con, even if you can’t quite put your finger on exactly where the legal liablilty is.
In Dimon’s case the con was more complex, but no more elegant than Corzine’s. Dimon controlled a book that was larger than the combined trading books of his entire mega-bank’s trading operation. The fact that this book wasn’t even on the radar screen of it primary regulator, the OCC, screams for a Saturday night massacre purge of the staff incoming OCC head Thomas Curry has inherited, beginning with General Counsel Julie L. Williams.
In his testimony today, Curry signaled that he was the new sheriff in town at the OCC and that he was cognizant of its reputation as the coziest-to-bankers regulator. William’s lurking and agitated (and kind of creepy) presence over his left shoulder was great theater, but I’m not sure what it was meant to project. Retiring her tomorrow would be my highest priority if I were in his shoes.
Dimon’s scam is actually easier to debunk than Corzine’s. There was an over $300 billion ‘investment portfolio’ that needed to be hedged. Apparently it had been managed, until the Treasurer quit in 3Q 11 (quietly- although the regulators are notified of key-man gaps, so JPMs regulators were aware there were significant control gaps at YE). This wager looks a lot like AIG’s gamble that writing CDS was free money. This risk position was housed in the CIO but was additive and unrelated to the hedging of the $300 billion investment portfolio.
This portfolio is Dimon’s great crime and scam, in my mind. It was not a hedge of the tail risk of the
$300+ billion investment portfolio. Nor was it a hedge of the tail risk the rest of JPM’s banking book. It was purely a gambler’s flyer (with the backing of the US government’s full faith) that heads I win tails you lose. And the media has not focused on the fact that the risk in this portfolio eclipsed the risk taken in the rest of JP Morgan.
I think its past time to ask Jamie to retire.
For me the bottom line is simple. If I could convince the regulators that the law (Dodd-Frank- Volcker) gave me free rein to do what ever TF I wanted to, then I would be tempted to do that. If I could convince the rulemakers that what I was complying with the letter of the law and making money, I would do that. If it came to light that I was actually losing money because you dopes let me do that, I’d blame it on you.
I’m a bankster. Catch me if you can.