Conflicted JP Morgan Next up for a Reputation Hit

Louise Story at the NYT has this:

In the summer of 2007, as the first tremors of the coming financial crisis were being felt on Wall Street, top executives of JPMorgan Chase were raising red flags about a troubled investment vehicle called Sigma, which was based in London. But the bank chose not to move out $500 million in client assets that it had put into Sigma two months earlier.

Sigma collapsed a year later. Now, new documents unsealed late last month as part of a lawsuit by bank clients against JPMorgan show for the first time just how high the warnings about Sigma went — all the way to the office of the bank’s chief executive, Jamie Dimon.

Industry group SIFMA thinks the lawsuit has little merit:

The Securities Industry and Financial Markets Association, a prominent trade group, wrote a brief in support of JPMorgan last month saying that the pension funds that are suing had an “unprecedented and novel theory” that “contradicts decades of Congressional and regulatory guidance.”

Where was the fiduciary duty? And where was the Chinese Wall? From a legal standpoint SIFMA may well turn out to be absolutely right. Reputationally, things aren’t so great, though. Follow the money:

By September 2008, when Sigma defaulted, JPMorgan had lent it a total of $8.4 billion and had received $9.3 billion of assets as a security deposit, according to the suit. The value of the collateral was dubious at that point, given the panic of the financial crisis, and it was unknown if the assets would decrease in value.

But a year later, many investments had risen in value, the suit says. JPMorgan made over $470 million in profit within a year of the default by selling off some of the collateral and had recorded a paper gain of $1.2 billion on assets it still held, according to the suit. The bank had also made $228 million in fees from Sigma in exchange for the loans. The total gain was nearly $1.9 billion, the suit says.

The pension funds whose money JPMorgan had put into Sigma lost nearly all of their investment. The suit said their $500 million became worth 6 cents on the dollar.

Mr. Evangelisti, the JPMorgan spokesman, said the bank disputed the profit figures but he would not say how much the bank believed it made on the Sigma transactions.

It all looks like the JP Morgan version of the GS Abacus lawsuit.

Even if no liability is accepted, or perhaps, particularly if it isn’t accepted, JP Morgan’s Asset Management division will find its pitches get a wee bit more difficult, for a while.

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  1. Yearning to Learn

    I think you may be over optimistic on this. “reputation”? who cares about reputation? it is all about who is connected and who is not. who is a govt-favored and govt supported entity and who is not. Who has the full faith and credit of the US Taxpayer.

    And JP Morgan has it.

    investors clearly couldn’t care less about anything else. if they did, they would have left these Wall Street parasites long ago.

    besides, where would investors go? to Goldman? Citi? Societe Generale?

    in the end, there is only one game in town. Regardless of how corrupt it is, there is no alternative. Thus, pension fund investors and ma and pa and Sovereign funds have no choice but to use the Jackals (that is, if they want to play).

    and the money is way too good for all except the end user… (i.e. grandma’s pension). but everybody threw her under the bus as they rushed for the riches. caveat emptor and all that.

    it’s been like this for longer than I care to admit. For instance, how long after merriweather imploded at LTCM did he open his new fund with the onslaught of millions/billions of dollars??? (which of course reimploded in the most recent financial debacle).

    1. Peripheral Visionary

      As you noted, they do not need clients for funding their operations, as they have Ben Bernanke and the Federal Reserve for that. They also have a certain amount of guaranteed profit by way of the Federal Reserve’s free money operation (borrow from the Fed at next to zero interest, buy risk-free Treasuries, profit).

      But they do need clients for a different purpose: information. Their insights into the financial world’s inner operations come, in large part, from the tremendous volume of position and trading data they get courtesy of their own clients. Clients have long suspected that JPM et al. have been profiting from that information, e.g. using it on their trading desk, but as long as the clients were making money as well they were inclined to keep their mouths shut about it. Now they are losing money while the banks are still making big money, and they are complaining long and loud, and they should be.

      And they do have options. There are independent operations for investment advice, brokerage, custody, administration, etc. run by dedicated firms that don’t have these extensive conflicts of interest. University and private endowments, which tend to understand the risks better, have been leaning toward independent, unconflicted service providers, and if that trend builds, it could cost the banks in more than just reputation.

      1. Francois T

        There are independent operations for investment advice, brokerage, custody, administration, etc. run by dedicated firms that don’t have these extensive conflicts of interest.

        The gentleman above wins a cigar! :-D (Cohiba Esplendido, no less!)

        Investing your money with CTA firms like the ones owned by real top guns performers such as Liz Cheval, Jerry Parker, Salem Abraham, John Henry, Bill Dunn and the likes would’ve yield better returns and none of this politico-financial Wall Street bullshit to investors, pension funds included.

    2. sgt_doom

      Exactly, I mean the “reputation” of having paid out over $7 billion in the last decade from fraud and criminal lawsuits??

      The “reputation” of colluding fraudulently with Enron in hiding all those billions of loans as commodity trades?

      What “reputation” is being spoken of?

      I, for one, am perplexed! (Maybe the rep of creating the credit default swap, and numerous variations on CDOs???

  2. Peripheral Visionary

    From the article:

    “The bank’s chief risk officer, John Hogan, wrote back that JPMorgan needed to protect its own position and not worry about what its clients were invested in.”

    That is completely unacceptable. The fiduciary duty is the exact opposite, it requires the manager to put the client’s interests first and its own interests second.

    This all relates to a larger issue: the biggest diversified financial institutions have consistently been treating their advisory clients as if they were nothing more than transactional customers, which is not in keeping with the fiduciary standard. This is certainly an area both regulators and litigators should be pressing them on. They have a duty to manage their clients’ interests across the firm, not just within the “silo” of the investment advisement function.

    1. TurtleBay

      Nobody in the articles adequately explains how the Chinese Walls works, which makes JPM and the risk officer look bad. The risk officer made the right response (but worded it very poorly).

      The asset management subsidiary has a fiduciary duty to the clients. They invested in Sigma. The investment banking subsidiary has inside information about Sigma (companies give their lenders non-public information in the course of making loans, and the banker knew the loan was not going to get renewed). If the investment bankers called the asset managers and the managers divested the clients out of Sigma, it would be a breach of client confidentiality on behalf of the banker and insider trading on behalf of the asset manager.

      Basically, when you invest in an asset manager at a big bank you need to realize that there is a buy-side and a sell-side, and as smart as the sell-side may be, you are investing in the buy-side. The buy-side research often contradicts the sell-side(ex.

  3. KnotRP

    Is fudiciary duty like a pinky promise? I pinky promise I won’t
    gut you like a fish, the first chance I get? Of course everyone thinks they have a *special* relationship with JPM, or at least
    that’s what JPM will be busy doing for the next few months…hand holding and double pinky swearing.

  4. G.S

    Like Madoff, these people do not believe they are doing anything wrong – Madoff denied being a bad person, Ken Eisold, psychoanalyst here:
    diagnosis’s him as a ‘narcissist’ an inability to tolerate the guilt and shame of exposing his wrong doing and destroying the idealized image he had cultivated for so many years.

    I think that this may be a similar case of narcissism.

  5. Francois T

    Economics of Contempt dropped an intriguing tweet this AM:

    EconOfContempt EconOfContempt
    Has anyone ever noticed that the dealers that effectively failed all used JPM as their clearing bank? Think about it: Bear, Lehman, Merrill


    1. TurtleBay

      That should be no suprise. Look at the size of JPM’s derivative book compared to everyone else’s. Who do you think everyone uses?

  6. Lyle

    More proof that sophisticated investors were not such. They trusted the advice of the banks and got burned. Our system assumes that big investors are big enough to look out for themselves. There is one lesson here for pensions funds and the like PARANOIA in all cases and at all time is a good thing, your bank is out to get you, don’t believe a thing they tell you! It is amazing how much the large investors got snookered this time. Its sort of like the small investors in 1928 1929 who were sold bills of goods, this time its the large investors and investment advisors that got snookered.
    After all the first long term statement of capitalism is let the buyer beware. However the advisers wanted their fees with no work so they just trusted the advice of the big banks. (Note that if a bank is an investment adviser to an institution it should be forbidden to trade with that institution, as if you trade with and advise X is not there at least the appearance of a conflict of interest?

  7. Urban Tenting

    The Syndicate is throwing 6 millon + Americans out of their homes but “reputation” is more important. Sounds about right.

  8. TurtleBay

    After reading the article again, it sounds like the clients are accusing JPMorgan of fraudulent conveyance, not breach of fiduciary duty. Perhaps we should focus on what is actually being accused here.

    Basically, the accusation is that JPMorgan lent money to Sigma (probably on a Senior Secured basis) to jump ahead of the institutional investors in line for who would get Sigma’s assets in bankruptcy.

  9. Vaughn Chiffriller

    Property solicitors are solicitors, which we would almost all require at some point during our life time. This is because property solicitors mainly deal with conveyancing transactions. Conveyancing refers to the sale or purchase of a property and is the transfer of legal title usually from the seller to the buyer. Although, the transaction is a little more complex than that.

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