The Fat Lady Has Yet to Sing for Dimon and JP Morgan

I thought I was late to write about JP Morgan’s $920 million multi-regulator settlement last week on the London Whale, but breathless news of a possible $11 billion settlement of mortgage-related liabilities has pushed the bank and its chief back under the hot lights.

Let’s go in reverse chronological order. The $11 billion settlement, if it comes together, is less of a hit than it seems. JP Morgan’s stock traded up 2.7% when the news broke. First, the $11 billion is really more like $7 billion, which is the cash component. The remaining $4 billion is various forms of borrower relief. If this settlement bears any resemblance to the mortgage settlements of 2011 and 2012, these are junk credits, with the bank being allowed to claim relief for things it would have done anyhow. If the economic value of bona fide borrower relief gets to be as much as 10% of nominal value, that would be a large by historical standards.

The reason the numbers being bandied about are large is that the total includes FHFA putback claims, which the Wall Street Journal puts at $6 billion out of the total. FHFA suits against all the banks were pencilled out as carrying a price tag of as much as $200 billion. But that estimate likely based the total on the value if the agency litigated and prevailed (which frankly was pretty likely, the GSEs have well-defined rights). The Department of Justice is leading the negotiations and the New York state is also a participant.

In addition to an apparently large bid-asked spread (the Morgan bank proposed a mere $3 billion versus the $11 billion bruited as the sought-after figure) and the fact that the bank wants a global settlement for all mortgage-related liability (the DoJ is reluctant to settle criminal liability), another potential sticking point is an admission of wrongdoing.

But in many ways, the $920 million London Whale settlement last week is a much bigger deal. It’s been remarkable to see how much confused or deliberately misleading commentary has been published about the pact. To wit: Jonathan Weil reveals he does not understand that SEC rules implement legislation. Ouch. And Matt Levine wrote such an absurd piece that I don’t need to do a takedown. If he keeps this sort of thing up, he’ll have a great future at the Onion.

I’ll probably have more to say about this in future posts, so let me stick to a few big issues:

JP Morgan is not out of the woods on the Whale matter. This settlement was for the SEC, the FSA, and the OCC. Given how Senate testimony the degree to which JP Morgan flat out lied to the OCC and the severity of the control failures, I’m surprised the dollar value wasn’t bigger. One small consolation is that the CFTC was not part of the deal, and its settlement is likely to be 50% of what JP Morgan has already agreed to pay.

And it’s important to understand how world class terrible JP Morgan’s oversight of the CIO was. The SEC order makes for juicy reading. One of the stunners is that Dimon lied to his audit committee. Some executives were loath to sign valuations that were important components of the CFO’s and Dimon’s certifications of financial statements. And we have this remarkable tidbit:

33. The CIO-VCG staff actively involved in price-testing the SCP’s 132 positions at the end of the first quarter of 2012 consisted of one person, who worked at CIO’s London office. That person was also responsible for price testing all of CIO’s other London-based portfolios.

One person responsible for price testing of a major portfolio? That’s all you need to know that JP Morgan’s controls were utter rubbish. The Globe and Mail adds:

Whale aficionados also now have more information on just how ineffective JPMorgan’s compliance staff were at monitoring their traders. JPMorgan’s senior management did not inform the relevant back-office department in London that it was reviewing the valuation of the Whale portfolio for over two weeks. Given recent rogue trading incidents at Société Générale and UBS, the low regard in which the control function at the bank was held is extraordinary.

An admission of how grossly deficient they were comes in how much the bank is spending to bring them up to snuff. From Reuters:

JPMorgan Chase & Co (JPM.N) plans to spend an additional $4 billion and commit 5,000 extra employees to fix risk and compliance issues after a slew of investigations by regulatory authorities, the Wall Street Journal reported on Thursday.

JPMorgan will spend $1.5 billion on managing risk and complying with regulations and plans to add $2.5 billion to its litigation reserves in the second half of the year, the Journal reported.

The bank will also increase its risk-control staff by 30 percent, the WSJ said, citing people familiar with the matter.

JPMorgan said on Monday that it would add more than $1.5 billion to its legal reserves in the third quarter and 3,000 people had been added to control functions.

Another 2,000 assigned to the bank’s various business lines are also working on compliance issue, a personfamiliar with the matter who would not provide the total cost told Reuters.

Now even though we agree with the Bloomberg editors, who deem the Whale settlement to be too small, why do we still think it’s hugely significant?

Dimon screwed Corporate America. Did you notice the howling about the $920 million settlement from much of the financial media? They may be upset about the precedent set by JP Morgan admitting to wrongdoing. But far more significant is something that the SEC perversely did not play up, which is that JP Morgan ‘fessed up to Sarbanes Oxley violations. And that means that the normal fig leaf of having a complaint auditor say everything was fine is no protection.

Remember, heretofore Sarbanes Oxley has been a dead letter, at least from an enforcement perspective. To my knowledge, there were only two previous times the SEC tried using it: in HealthSouth, where it lost in court (not necessarily a meaningful indicator, since Richard Scrushy had huge home court advantage with an Alabama jury [he went to considerable lengths to taint the juror pool by large donations to and regular appearances in black churches]) and against Angelo Mozilo, where the SEC lost a ruling that seemed to put it off trying to use Sarbox (discussed at length in this post).

The reason that this is a big deal is Sarbanes Oxley was designed expressly to get past the “I’m the CEO and I have no idea what happened” defense. Sarbanes Oxley requires corporate executives, which generally is at least the CEO and the CFO, to certify the adequacy of internal controls. And for a big bank, that includes risk controls. You can’t pretend to have adequate controls when, as the SEC describes, management is shocked to learn that your counterparties are demanding hundreds of millions in collateral because everyone in the market (as well as your own investment bank!) is marking positions differently than your biggest trading unit in the bank. But it isn’t just banks that have to now take Sarbanes Oxley seriously, although they are the most obvious targets. Everyone who signs Sarbox certifications is now at risk, as they were supposed to be all along.

Dimon is not out of the woods. The SEC only settled liability with the bank; it is still looking into charging individuals. The Wall Street Journal reported:

“Our counsel has had discussions with the SEC staff and the staff has informed us that, based on the evidence now known to them, they do not anticipate recommending any actions against our CEO,” a J.P. Morgan spokesman said

A compliance expert e-mailed to say that Dimon met all the conditions for a criminal prosecution under Sarbanes Oxley. So it’s the reluctance of the regulators to take on a TBTF CEO (particularly one that has no credible successor in the wings) that is keeping him safe for now.

But remember, the CFTC’s investigation and resulting order may provide additional damning information. And recall the FBI and the Southern District of New York are trying to extradite two Whale traders. One is likely to be beyond their reach, but the other may not be. If he turns useful state’s evidence, the desire among the officialdom to Do Something About Dimon could change.

I was hearing concerns voiced about Dimon over two years ago. Among other things, he’d browbeaten Ben Bernanke and Mark Carney, then the head of the Bank of Canada, within a span of week (Carney kept his cool and issued what everyone recognized was a dressing down within 24 hours). The concern was that either Dimon was becoming more erratic, or the bank was actually in trouble of some sort, and Dimon was going on the offense to divert attention from his problems. And worse, even though all TBTF are systemically dangerous, if anything JP Morgan is more so by virtue of its massive tri-party repo operation.

Now even if more damning fact emerge about Dimon, they’d have to be awfully damning for him to be the target of litigation. But I could see the threat of litigation to be used to get JP Morgan to clean up its corporate governance act. At a minimum, the bank needs to split its CEO and Chairman roles (Dimon threatened to quit over that, but that was before the Whale shoes started to drop and analyst Josh Rosner released his rap sheet against JP Morgan, cataloguing the astonishing range and costs of regulatory sanctions) and force Dimon to have a real successor lined up, not some candidates who are clearly years away from being ready to take the helm.

It’s way too early to tell how meaningful these actions against JP Morgan will prove to be. One robin does not make a spring. But they are at least an improvement over the abject regulatory dereliction of duty we’ve seen by regulators in the wake of the crisis, and if we are lucky, may represent them re-learning how to use their muscle.

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  1. LAS

    As a Chase customer (through acquisition not choosing), I can tell you they are back to their old tricks with forced place insurance and other devices to get more fees under fraudulent threats. I am now planning to pay down the rest of my mrtg out of savings because I am so fed up.

  2. Chauncey Gardiner

    Thank you so much for this insightful and elegant analysis. I especially appreciate your observations regarding the resurrection of Sarbanes Oxley.

  3. Pwelder

    Thanks for this valuable review – an instance of what NC does best.

    A big part of the public disgust with these situations is that we seem to get settlements which further hammer the battered shareholders of the TBTF’s, while the merry pranksters who carried out and/or profited greatly from the scams are high and dry with the loot.

    Does Sarbox or other provisions of the law give the class-action bar a route to shareholder derivative actions against the insiders on behalf of the shareholders?

    If it doesn’t, it should.

  4. theshizz

    Sick and tired of the meme that it is the poor shareholders who bear the brunt of these fines. If you invest in sketchy banks like JPM you ought to be prepared for the risk that comes with your choice. Further it is not as if the actions against JP Morgan haven’t been telegraphed giving any shareholder the opportunity to sell their holdings.

    1. Yves Smith Post author

      First, something like 40% of equities are owned via indexes. These people don’t pick stocks individually.

      Second, investors don’t exercise anything resembling control. Part of that is many of the people who aren’t in index funds are in other types of equity funds (mutual funds) that they either bought directly or own via a 401 (k), where they are limited to the funds their employer chose to offer.

      Those fund managers (Fidelity, etc) don’t want to rock the boat with big companies, who send 401 (k) business to them.

      So most individuals have the deck stacked against them.

      So yes, it IS the poor investors. And you’d seriously rather have them hurt than Dimon and Ina Drew and the CIO employees?

      1. theshizz

        Of course not. And I don’t think that is implied.

        I’d would prefer the Attorney General to refuse to even meet with scum like Dimon.

        If you are paying attention, the meme that it is the “poor investors who suffer” is a recent talking point that is being circulated by the typical pro-corporate mouthpieces. Sorkin in Dealbook, Cramer, and the Fox “News” team.

        The poor investors who don’t control where there funds are allocated had their day when the regulators were sleeping at the wheel. If they are actually diversified the “hit” they are taking is negligible compared to the benefits they have received from other government agencies actions such as the Temporary Liquidity Guarantee Program.

  5. Dino Reno

    The government’s message to Dimon is “Please don’t make us hit you again.”
    They are simultaneously going after him and protecting him at the same time.
    They just want him to resign and it’s the one thing he won’t do. He has become the government’s biggest TBTF embarrassment ( although Bob Benmosche at AIG is running a close second).

    This is boiling down to the biggest epic struggle since the whole crisis began. The government was bought by the likes of Dimon many years ago. They served his every wish. All they asked for in return is please don’t disrespect us like the whores we are. But Dimon couldn’t resist slapping those bitches around. It made him look tough and smart and kept everyone in line.

    This whole thing is looking more like a domestic violence case with the cops being called in to make an arrest. “He beats me, but I love him. I don’t want him arrested. I just want to leave.” The cops are on the take and just want him to leave too.

    1. Synopticist

      “They served his every wish. All they asked for in return is please don’t disrespect us like the whores we are. But Dimon couldn’t resist slapping those bitches around. It made him look tough and smart and kept everyone in line.”

      Nasty analogy, but true none the less.

  6. Barbara Roper

    While I find much to agree with in this post, I can’t agree with your characterization of Jonathan Weil’s article. In it he makes what I think is clearly a valid point: while the SEC’s getting an admission of wrongdoing is a step in the right direction, allowing JP Morgan to get away without specifically acknowledging which laws and rules it violated still lets them off the hook to a certain extent. Certainly, it leaves JP Morgan better positioned to defend itself in private litigation.

    1. Yves Smith Post author

      Did you actually read the article????

      It amounts to Weil saying the SEC didn’t say what laws were broken.

      Based on that, I’ve had to seriously question Weil’s competence to cover this beat. If you read the order, they clearly state what RULES were broken. That is tantamount to saying what law was broken, since SEC rules promulgate laws.

      For instance, the classic, CLASSIC securities lawsuit is a SEC RULE 10 (b) (5) violation. You do a PACER scrape on that term, you’ll get a zillion cases.

  7. Chris Rogers


    Can we publish this article, or a condensed follow-up in the Journal of Regulation & Risk – North Asia. It needs distributing globally and its not only JP Morgan who’s playing these sort of games and getting away with it!

    1. Yves Smith Post author

      Yes, thanks, that’s fine, provided you give attribution and a link back. And you can clean up any typos you see.

      1. monay1929

        The admissions of guilt by the SDIs (William Black’s Systemically Dangerous Institutions) gets us closer to the point where Fiduciaries will have no legal defense when they lose clients’ money investing in criminal enterprises like JPM, Citi et al.

        Another step in that direction is Dallas Fed Head Richard Fisher stating this week that the “TBTF banks are a dagger pointed at the heart of the economy”.

        Attention fiduciaries: You do not want to be jailed for consorting with thieves. Do the prudent thing and divest your holdings in insolvent, criminal banks. you now have admissions of guilt and condemnation from the Fed. How will a jury view that?

      2. monday1929

        Jamie now spending billions on compliance sounds like the new BP ad:

        “We now have a state of the art command center watching all of our operations worldwide, staffed with experts”.

        Well, you mean you never had that before?

  8. Hoser

    To Hell with Dimon and JPM! When will Blankfein and GS be layed upon the altar of Justice? God’s work my arss!

  9. TomDority

    Sarbanes Oxley – Sarbanes Oxley
    Yea….. probably to little to late – but hey, it keeps the door open a little longer

  10. down2long

    Thanks Yves. Really. Thank you, thank you for keeping on top of this and explaining things and putting them in context for those of us victimized by Chase and not well versed in the cesspool of Wall Street.

    As we well know, these little patty pats on the hands are all we will ever see of justice. When what I want is to see Slimin’ in chains and ruins, and then live long enough to dance on his grave. One of the reasons I eat/live healthy. I will outlive that mother**ker vermin pile of steaming excrement. And I will dance on his grave in some very stylish spiked golf shoes. (I don’t play golf, but still worth purchase.)

    I am convinced the fix is in. Obama, Debevoise and Covington DC subsidiary employees Eric Holder and Mary Jo have made clear to Dimon there must be a show trial, so to speak, and he will have to pay out poquito dinero, but his sinecure is safe, and he may continue the fleecing. It’s just that “something had to be done” the populace is screaming for blood, and at least a drop, very small and not even missed, must be presented smeared on the white sheet après le denouement to the starving eyes of the hoi polloi. And then the subject will get changed, long before Slimin’ faces any personal peril.

    I agree with Dino Reno that the caterwauling about the “poor shareholders” is quite ridiculous. I was posting a lot at NYTimes during the CEO/Chairman vote cycle. The shareholders who kept using the metric of “he made me a lot of money” (regardless of its illegal origins) was quite astounding.

    Anyone with half a brain knows that investing in Chase is like investing in the Mafia. You know the takedown may come, or some competitor may kill the Don, you just gamble on cashing in as long as you can. But please, really, spare me the victim talk. As a shareholder you are a co-conspirator.

    I have made it very clear to my tenants that Chase checks are not welcome. (I have to accept them, but that comes with a lecture.)

    My manager at Union Bank says that Chase is so aggressively expanding in Cali that they are not taking third party checks to expand their market share.

    (I am moving to credit unions, but Union was the only bank I could find who would handle my Chapter 11 BK accounts.) You can have perfect a perfect payment history and Union/Mitsubishi will not loan to you unless you are a huge commercial player. Ridiculous.

    I m

    1. participant-observer-observed

      “My manager at Union Bank says that Chase is so aggressively expanding in Cali that they are not taking third party checks to expand their market share.”

      In my area of LA county (east near San Bernadino county line)Chase has bought every scrap of 7-11 size land in town after town and put up a retail bank in the past 18 months, they look like a McDonald’s fast food joint, but 5 banks for every 1 McDonalds!

      I always wonder how the public feels confident to open accounts in those banks: they will lose money once for banking and then later in taxes or lost social security support to bail out the TBTF playboy and his pals.

      “I am moving to credit unions, but Union was the only bank I could find who would handle my Chapter 11 BK accounts.”

      BEWARE California’s FIRST CITY CREDIT UNION thuggery: Credit unions such as First City Credit Union in Los Angeles are now starting to behave like the Wall St banksters: They told me they had to put a 3 day hold on a deposit, claiming it was “not a typical deposit for my account;” even though in fact a check just like it has been deposited every 6 months for the past 3 years, as a full member of the CU. When I asked if they didn’t have money to cover the check, they claimed that wasn’t the issue. When I told them they could call the issuer of the check (just up the street from the bank) to verify it, they also claimed that was also not a problem.

      I may be wrong about this, but I thought that a hold goes on a check if there is something questionable or suspicious. There was no such questions about this check, nor the depositor/target account holder.

      I told the supervisor plainly, “I thought with a credit union I could avoid Wall St bankster antics; if I want that, I can go up to Chase and open an account there!”

      I am planning to close that CU account with FCCU next week and will next try my luck with the United Methodist Credit Union.

      1. down2long

        Thanks for the heads up. Well, the biggest complaint of the banksters viz the credit unions is that they have growm too large and are benefitting from unfair competition. (In that they are non-profit) Of course, the same goes for ALL banks, espeicially the TBTF, except THEY get free money from the FED and an implied guarantee. Without those two facts, no TBTF would have shown a profit for five years.

        And yes, there are other scoundrel CU’s here in Cali. There’s one that starts with a W that has the most extortionate ATMs (fee wise) that are worse than Chase or B of A for non-customers.

        More money = more criminality I guess. Welcome to Amerikkka.

    2. down2long

      Yves, I have read your responses to several of the poster which you put up after my little diatribe.

      I am sure there are many stockholders out there who have been hurt by JPM. I have always made it clear in the elective foreclosure of my performing loan, and the subsequent loss to the bank at auction of almost $600K off the principal was eaten by WaMu and Chase shareholders, when the property was fully collateralized and the loan performing. But there were an abundance of arrogant asshole shareholders who came to Dimon’s defence with “he made a lot of money.” Which is of course what Chief Bank Whore Richard Bove always says to give Chase a pass, as if making money a) proves innocence of malfeasance (OK, OK, it does for oligarchs) and B)is the only metric one can use on a bank.

      I am somewhat shocked by your optimism re: holding Dimon accountable. I always say you see around corners, but wow, that is x-ray vision deep into the heart of Debevoise and Covington alums that I can’t believe will come to pass. From your lips to God’s ears.

      I can’t help but feel Dimon calling Holder to set up a meeting is just the very same act, both in form and substance, as when Dimon called up Holder at Covington (when Holder repped Chase) to set up a meeting. I hope you are right mon chere.

    3. down2long

      S/B Chase IS accepting third party checks. (Along with laundering drug money, money transfers to Iran, you name it, Just not here in Cali) As the next poster points out, Chase is expanding faster than any fast food chain here in California. It is spreading like Class 4 cancer. uggg

  11. chris m

    “the DoJ is reluctant to settle criminal liability”

    does anyone genuinely believe this? no offense intended, but this seems like wishful thinking to me. my uninformed instincts suggest that the DOJ is just awaiting the proper combination of shaken-down emoluments and fig-leaf fictions.

    1. Yves Smith Post author

      First, that is what the WSJ says.

      Second, drumroll, the prosecutors really do want to see if they can get the traders extradited and what they can wring out of them. And I do believe they want to rein in Dimon.

      As I ALSO clearly wrote, I think the odds of an indictment of anyone really senior are zero, but the threat of making Dimon even enter into a costly settlement (as in pay a few million bucks personally to settle civil liability) would be such an embarrassment to the board that they might be persuaded to put the screws on Dimon re corporate governance. That’s what the officials really want here, not a big show and a check.

      1. chris m

        i hope ur correct, mon ami. your blog here is the best thing on the internet although it’s often over my head. thanks for caring.

      2. zygmuntFRAUDbernier

        If there are no meaningful consequences (such a fines for executives when they make false or misleading Sarbox certifications), then how is one supposed to believe TBTFs will take the law more seriously? I support DOJ prosecutors _not_ “settling away” potential criminal charges. And I say: Go Prosecutors!

    1. Yves Smith Post author

      That’s a misconstruction. The SEC settled with the bank. The SEC hasn’t lost its ability to file civil cases against individuals, nor was the DoJ part of the $920 million settlement (only the DoJ can file a criminal case).

      Now in the past, the DoJ has filed civil cases against individuals on the same time frame as filing civll cases, but there is a completely new enforcement leader at the SEC.

      So while it is PROBABLE that no cases against individuals will be filed, that door has not been closed. And if I were in their shoes, I would see if I could wring anything out of the traders who were charged criminally before I made any moves.

      1. ScottS

        Perhaps I should aim higher, but it does please me to see the New York Times advocating criminal charges against Jamie Dimon, even if only obliquely. I especially enjoyed this:

        It’s an improvement for a regulator to display the ferocity of a mealworm, rather than a banana slug, but let’s hold the celebrations until it reaches at least the level of a garter snake.

        And it’s the SEC that refers criminal case recommendations to the DoJ, so Eisinger does have the correct target.

  12. allcoppedout

    Find me a bank that isn’t sketchy! I’ve been with the tiny Coop for years on ethical grounds and it now has a £1.5 billion plus hole. My UK Post Office account is marked JP Morgan!

    The UK approach to the banksters is a bit of public vilification accompanied by golden parachutes. The next guys fill the deads men’s shoes and it’s all business as usual. I’d guess our fines are worked out as a percentage of whatever US authorities claim.

    Banks have a very long history of losing money they loan and trade without showing losses. There is some model involved in this not to do with risk management. If we really wanted to clean up banking, our ploy would be to nick Dimon and a few mates and offer Queen’s evidence deals after total asset sequestration under the Proceeds of Crime Act. Relevant banks would have to go through weekend turnaround with clean slates. Until I see this I won’t believe there is any law in Dodge City. We need to make these people poor.

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