Michael Crimmins: Jamie Dimon’s Illegal “Cookie Jar”

By Michael Crimmins, who has worked on risk management and Sarbanes Oxley compliance for major banks

The bad news just keeps on coming in the JP Morgan CIO scandal. We’re getting a lot of salacious detail, but the media manages to continue to miss the bigger picture.  On Tuesday, David Henry at Reuters coined a wonderful catch-phrase that should prove difficult for JPMorgan to explain away to its depositors and to the rest of us –  “JPMorgan dips into cookie jar to offset ‘London Whale’ losses”.

The main point of the article is that the ‘cookie jar’ contains $8 billion of unrealized gains from the profitable investment of excess deposits. The tricky bit for JPM, its depositors and inquisitive regulators, investors, external auditors, and disgusted citizens  is explaining why $1 billion of that reserve was gifted to the CIO desk to cover its trading losses. Trickier still is Dimon’s pledge of the entire $8 billion to cover any further CIO trading losses. Henry reports:

‘JPMorgan Chase & Co has sold an estimated $25 billion of profitable securities in an effort to prop up earnings after suffering trading losses tied to the bank’s now-infamous “London Whale,” compounding the cost of those trades.’

The story estimates that JPM sold $25 billion of the Investment portfolio assets to generate the initial $1 billion gain used to offset the $2 billion losses Dimon disclosed in the May10 press conference. There is no word yet on the size of the losses JPM has incurred since the announcement.

The size of the investment portfolio was reported as $381 billion as of March 31, 2012. At that time the $381 billion portfolio contained underwater assets of $84 billion. Those underwater assets were worth $1.4 Billion less than JPM paid for them. JPM can’t sell them without realizing additional losses, so they will probably not be touched.  That leaves investments of $297 billion that can be sold at a profit. The unrealized profit on these items was reported as $9.8 billion as of March 31, 2012. Since then JPM has liquidated assets in the portfolio to realize the $1 billion gain used to offset the CIO trading loss. Based on Reuters estimates the balance of the profitable trades remaining in the portfolio is $272 billion and the remaining unrealized gains available to cover additional losses are $7.4 billion.

As a result of the sale, at least 12% of the total investment account reserves that were, in theory, set aside to protect depositors in the event of a market shock, have been raided to prop up the second quarter bottom line. But that assumes you buy the Dimon’s “excess deposits” party line. As Amar Bhide pointed out, much of these funds are actually hot international money, not the cash reserves of retail investors and ordinary businesses. So no matter how you look at this, it isn’t pretty. Either you have JPM raiding deposit reserves to preserve trader and executive pay, or you have Dimon  misleading investors and regulators in depicting a profit-driven, risk-seeking trading unit engaged in “hedging” on behalf of “depositors.”,

The Reuters article focuses on the stupidity of the decision to sell Investment account assets from a tax perspective but barely address the larger long term problems facing the bank.

The financial industry has gone through periods in the past when banks cashed out good assets to cushion losses, said former SEC Chief Accountant Turner. It happened during the U.S. savings and loan crisis in the 1980s, abated during a period of tougher regulatory scrutiny and fewer losses, and then came back during the latest financial crisis.

But the costs are significant. In statements about the latest losses, Dimon has been careful to emphasize the disadvantage of paying more taxes, said Chris Kotowski, an analyst at Oppenheimer & Co.

“I think he was trying to tell you, ‘Don’t expect us to offset all of these losses,'” Kotowski said.

Turner pointed to the elephant in the room, but didn’t address it directly, and Reuters’ David Henry didn’t follow his lead.

Turner is pointing out that one only raids the cookie jar in times of systemic stress. JPMs inclusion of the Investment account assets as part of the trading portfolio defies both accounting norms and historical precedents.

And Kotowski’s conclusion is wrong.  ‘What he was trying to tell us’ is that these losses will continue to be buried in the investment account until such time as JPM determines that it is tax efficient to recognize offsetting gains. He has already hinted that these loss-generating CDS positions will take time to unwind, which signals that JPM will make every effort to reclassify the loss-producing hybrid trading-hedges as held to maturity positions against the investment portfolio.

Or until such time as the SEC and DOJ or any other regulator or the PCAOB  or Congress finally have had enough and call JPMs bluff. That time is now!

Why is all This Accounting Detail Important?

Normally, investment account gains resulting from standard Treasury management operations are earmarked for protection of depositors’ accounts. This is ‘boring utility banking stuff‘.

One of the underreported elements of the JPM scandal is that the CIO considered the investment account as part of the CIOs trading portfolio. This is unprecedented in the historical financial statement interpretation of investment accounts and undermines the basic logic underlying the favorable accounting standards treatment for investment account, or Available for Sale assets.

In the pre-crisis era Available for Sale (AFS) portfolios were relatively small and benign and provided Treasurers with a pool of assets they could tap in a systemic emergency without violating either the spirit or the letter of the accounting rules.  Most assets were designated either as trading account assets, which were marked to market, or as “held to maturity” assets, which were booked at historical cost. Treasurers were given some discretion to designate assets as neither, with the understanding that they were intended to be tapped only in emergencies (as Turner pointed out in the Reuters piece).

Post crisis, the reality set in that the banks were loaded to the gills with toxic assets in their trading accounts. A compromise was reached among the regulators, accounting rule-makers and policymakers that the AFS portfolios could be used to house those assets ( i.e super senior tranches of CDO, …etc) that the banks felt they could unwind profitably over time.  The result was a massive transfer of assets from the MTM trading account into the Available for Sale accounts. One major condition was imposed. The changes in the value of the assets would need to be disclosed and recorded as an adjustment to the Equity account. However, the banks were given a great deal of leeway to determine how those assets should be valued while they were parked in the AFS portfolio.

Over time investors stopped paying much attention to the changes in the AFS portfolios. But the CIO offices knew that was where the game was being played and went to town.

So Jamie’s raid on these accounts to cover short term trading losses undermines and abuses the dubious underlying crisis management efforts of the regulators, policy-makers and accounting rule-makers in one fell swoop. Needless to say JPM betrayed the spirit of the US government attempts to salvage the US financial system.

It also violates the letter of the law re SOX: If Dimon knew he was violating GAAP by being so indiscreet as to admit that non-trading assets were available to cover trading losses then his certification was fraudulent. Full stop, He should be prosecuted.

As a result there should be very grave concerns on the part of the SEC and DOJ (and the PCAOB for that matter) that the financial statements covering the periods the CIO was in operation at JPMorgan have been misstated. At its most basic level, it begs the question, if investment account assets were sold to cover trading account losses in 2012, then why weren’t they reported as trading account assets in previous reports? Additionally, if the assets were managed as part of a trading strategy in prior periods then the prior period reports are also wrong.

Prior year gains on the CIO portfolio were included in income (and bonuses were paid to individuals on the performance of the assets in the ’trading account’ portion of the  portfolio, in the hundreds of millions), yet corresponding losses on the ‘hedged’ portion of the portfolio booked as investments have been buried in the Investment account and deferred. These embedded losses had not been properly disclosed in prior periods.

On Wed Cardiff Garcia at FTAlphaville reported that this isn’t the first time Jamie Dimon managed  the CIO and investment portfolio as one unified trading portfolio. It looks like he did the same thing at Bank One.

Bank One did not note whether the underlying hedged items increased in value or not to offset this decline, which may reveal one of the pitfalls of using credit derivatives for credit risk management. For instance, there can be an accounting mismatch if the credit derivative is marked-to-market downward, while the loan is kept at book value and can’t be marked up.

Financial statements matter. SOX exists to ensure that CEOs and CFOs understand and accept the consequences if they don’t. The SEC and DOJ and every regulator have the opportunity and incentive to throw Dimon under the SOX bus. What’s the delay?


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About Matt Stoller

From 2011-2012, Matt was a fellow at the Roosevelt Institute. He contributed to Politico, Alternet, Salon, The Nation and Reuters, focusing on the intersection of foreclosures, the financial system, and political corruption. In 2012, he starred in “Brand X with Russell Brand” on the FX network, and was a writer and consultant for the show. He has also produced for MSNBC’s The Dylan Ratigan Show. From 2009-2010, he worked as Senior Policy Advisor for Congressman Alan Grayson. You can follow him on Twitter at @matthewstoller.


  1. Usha A

    The delay is that all these crooks are holding hands with each other, with the regulators, with our legislators, with our executive, and so on…

  2. scraping_by

    One thought: it doesn’t say who the counterparties were in the $25 billion sale. The NYSE HFTs? Pension funds? (not likely: retail is gone for this generation, and maybe a couple more) Arab sovereign funds? Chinese national banks?

    Or is it another sale of dreck to the Fed? If so, that $84 billion would shrink massively, and the taxpayers will find bigger numbers on their government’s debt.

  3. Gil Gamesh

    When pigs fly.

    If the heat gets too bad, they will change the rules. The worst for Dimon: an exit with a 100,000,000 pay packet.

    Crookedest place on earth, Vidal said. Damn straight.

  4. bluntobj

    This is the most awesome part:

    “It also violates the letter of the law re SOX: If Dimon knew he was violating GAAP by being so indiscreet as to admit that non-trading assets were available to cover trading losses then his certification was fraudulent. Full stop, He should be prosecuted.”

    He’s right, it’s a clear violation of the law. Do not pass Go, go directly to to criminal court. True enforcement would perpwalk Dimon right now.

    Oh, and for the MOAR regulation crowd, this story is good:


    My fav quote in this story:

    “Regulators are allowing banks to escape counting their country’s debt against capital requirements and loosening other rules to create a steady market for government bonds, the study says. ”

    Less regulation, regulators, and civil courts please, MOAR cops, MOAR criminal courts and MOAR prison time!

    Of course it’s a little hard when the Corporate Elite and Plutocrats own the government. I could get cynical about it, but I think I’ll Opt-Out. You should consider it, too.

    1. F. Beard

      That article ignores the difference between monetarily sovereign governments and non-monetarily sovereign governments.

      1. enouf

        Didn’t you get the memo?

        “Sovereignty has been made Illegal” ;-)

        (Though you and I both know it can never be made Unlawful)


    2. Justicia

      Add this to the SOX indictment:


      JPMorgan CIO Swaps Pricing Said to Differ From Bank

      The JPMorgan Chase & Co. (JPM) unit responsible for at least $2 billion in losses on credit derivatives was valuing some of its trades at prices that differed from those of its investment bank, according to people familiar with the matter

      The discrepancy between prices used by the chief investment office and JPMorgan’s credit-swaps dealer, the biggest in the U.S., may have obscured by hundreds of millions of dollars the magnitude of the loss before it was disclosed May 10, said one of the people, who asked not to be identified because they aren’t authorized to discuss the matter.

  5. Decline

    Those Liberty University grads are on a mission of Justice:
    pot smokers, three strikes scofflaws, various pick pockets, small time swindlers, sex perverts, environment huggers, civil rights crybabies and debtors will fill cell blocks for as far as the eyes can see! SOX is too complicated, the cheat sheet clearly says Banks do no evil.

  6. White 'Murican

    “every regulator have the opportunity and incentive to throw Dimon under the SOX bus” Weren’t most regulators lobbyists before the revolving door gently padded their asses with more money, power and access?

  7. steelhead23

    Michael Crimmins? Are you the same Michael Crimmins, Esq. who worked for Gibson, Dunn, and Crutcher in the 90s? If so, good to hear from you bro and welcome to my favorite blog.

    I think I am missing something from your post. You are stating that the investment gains from deposits should not be co-mingled with prop-desk activity. How is this different from what MF Global did in pledging deposits as collateral? Also, isn’t it fairly normal for players to game the accounting rules? I suspect that somewhere in Jamie’s files is his own version of the Yoo memo, exculpating his torture of the accounting rules.

  8. emptyfull

    Can someone translate this article into a bit less financialized English for those of us who have never worked in finance?

    Is this saying that JPM is guilty of mislabeling its accounts as hedges when they weren’t (which is common knowledge by now)? Of hiding losses over a number of years to inflate its balance sheet (thus temporarily allowing for higher stock valuation and bigger bonuses)? Of misusing customer money (a la MF Global)? What’s the new claim here?

    Just watching the theatrics of Dimon’s disclosure a couple of weeks ago made me feel like there were other corpses hidden in the London office and that a few more worms would wiggle out into public view…

    Please help a layman understand!

    1. Ray Duray

      Dear emptyfull,

      I’d love to be able to give you your layman’s translation, but I’m afraid that some topics really are complex. The best suggestion that I have is that you continue to read Naked Capitalism. I’ve found that topics I once found complete foreign became manageable over the months. For example, I now understand the Magnetar scandal much better than I did the first time I saw the word in print.

      Also, you can’t go wrong by reading some of the authors who either contribute here or are mentioned in articles. Yves Smith’s “Econned” is a great starter. You might consider some of the work of Satyijat Das, who was a derivative trader. For a more simplified idea about what a scoundrel Jamie Dimon is, you might pick up Bill Black’s “The Best Way To Rob A Bank Is To Own One”.

      I’m sure you’ll find plenty of suggestions if you peruse these pages for a while.

      Best of luck on your research endeavors.

  9. Mansoor H. Khan

    Here is how the bankers’ game works:


    The money was taken from the people when it was issued (i.e., credit money creation by private banks).

    All banks do the same thing. They issue currency and lend it. JPM simpy issued currency and bought crap assets.

    The focus is wrong. Currency issuance by private banks (i.e., fractional reserve banking) is in itself the main problem. All this stuff (JPM’s investment losses) is just noise.

    We need to get rid of private currency issuance itself and give the currency creation powers to the state only. Likes of JPM will quitely die once that is done.

    Mansoor H. Khan

  10. Enraged

    “This is unprecedented in the historical financial statement interpretation of investment accounts…”

    Well, so is MERS to bypass recording fees, so is illegally backtracking hiding poorly securitized loans by forging documents, so is taking huge “bailout” monies and not repaying them, so is the Federal Reserve lending banks at 0% in order for government to borrow at 1.25, so is… Well, we’re not in this mess without a few “unprecedented” good reasons. Now is the time to set the record straight once and for all and jail a few bankers. Create a “precedent” of sort, an example for future generations, something they will never forget.

    I hope JPM will soon croak. I hope it takes B of A with it, along with Goldman Sachs, Deutsche Bank and all the playuers who have ruined an entire civilization for many generations to come.

    I hope Dimon goes in history as such a bad guy that when kids misbehave, parents will only have to say: “If you don’t shape up right this minute, the Dimon and the Stumpf will come and take you away!” and everyone in the room will shiver with fear…

  11. Anonymous

    “As a result of the sale, at least 12% of the total investment account reserves that were, in theory, set aside to protect depositors in the event of a market shock, have been raided to prop up the second quarter bottom line.”

    Not trying to be overly technical, but by selling 12% of the investment portfolio to lock in the gain, JPM actually raised cash. You know, when you sell something someone actually pays you for it as part of that process. In this case, $1B more cash than they spent buying the securities in the first place. The cash now sits on the balance sheet or has been reinvested in a another security. Either way, the 12% is still there. No reserves to protect depositors have been raided. If you are worried about the security of depositors funds, they probably actually become more secure if they were shifted into more liquid or shorter-duration securities.

  12. Conscience of a Conservative

    If Giving the CIO billions to invest in credit default swaps was deemed the best use of JP Morgan investment dollars, then I would suggest banks are in worse trouble than generally realized and the return on equity numbers are worse than advertisized. The major banks have huge fixed costs and represent a business model that cannot justify the infrastructure without taking large bets at tax payer expense. The massive trading and speculation have nothing to do with the core mission of what being a commecial bank is, do not help companies or individuals save money or raise funds or allocate capital.

    1. enouf

      the TBTF banks are “Insolvent” (and have been for a long long time, hence all the ‘mergers’ starting in the ’80s and balooning in the ’90s (re: Travellers meets Citibank == Citigroup == repeal Glass-Steagal and the passing of the ‘CommFutModAct’ to reflect new Rules enacted via the Cartel)) – plain and simple really.

      Lovely names ain’t they? Just like “The Patriot Act” ..has a nice ring to it, don’t it?


  13. Anonymous

    Right or wrong, I don’t completely follow the accusation that JPM was in violation of GAAP. Can someone explain? Just because investment account assets were sold to cover trading account losses?

    1. MichaelCrimmins

      I realize the accounting stuff is a snooze, but the beauty of framing the whole JPM thing as an accounting issue, is that every skeptical granny and investor wants to trust their accountant to worry the details for them and explain the scam in terms they can understand. In this case it looks like JPM abused the rules on an epic scale. SOX is supposed to exist to call these guys on accounting abuses and send them to jail.

      So to address your point:

      There are 3 Asset designations a bank can elect under GAAP

      Trading Account Assets are intended to be held for trading purposes. They can be held for a day or forever, but the documented intent is to have them be available for sale at all times as part of the management of the trading portfolio. These assets are appropriately Market to market to reflect their current liquidation value.

      Held to Maturity Assets (HTM)are intended to be held to maturity. Loans and Long Term Investments fall into this category. They are not marked to market, since they are not intended to be sold in the short term. They should be boring banking assets.

      Those assets that are designated as neither Trading nor Held to Maturity, but are intended to be held for some period between one day (i.e Trading assets) and final Maturity (HTM Assets) are called Available for Sale (AFS) and given favorable accounting treatment to reflect the stated (and documented) intent of the bank to hold them for a longer than short term, but not quite till final maturity.

      In principle the GAAP rules allow the bank to prudently build an investment portfolio to manage liquidity risk for the long term free from concerns about short term MTM volatility impacts on the bottom line.

      Since the crisis, that principle has been stretched to facilitate the longer term unwind of the toxic trading account assets the banks put on in the lead up to the crash by allowing them to be reclassified as AFS.

      In the current case, JPM has stretched the rationale for designated Assets as Available for Sale beyond the breaking point. The Assets sold from the AFS portfolio were clearly not intended to be used for longer term liquidity management.

      In fact, it turns out, the AFS assets were available at all times to cover trading losses. The fact that Dimon has publicly confirmed that the entire portfolio ( or more precisely, the built up gains in the portfolio) are available to cover short-term trading losses belies the argument that the initial intent that permitted them to be mis-classified as non-trading assets was invalid.

      The AFS assets at JPM were ALWAYS intended to serve as a hedge against the CIO trading portfolio, not the other way around. No one in the MSM or at the regulators has allowed that idea to enter their consciousness yet.

      Given the relative size of the risk position amassed by the CIO desk (larger than the combined risk of every other trading desk at JPM) JPM has materially mistated their financial statements for all the prior periods that the CIO desk has been in operation.

      Material mistatements are outlawed under SOX.

      Taken to its logical conclusion, Dimon’s description of the CIO mission – to hedge the ‘structural’ risks of the entire bank, then all the assets of the bank are hedges against the ‘tail risk’ structural hedging bets of the CIO desk. In other words, JPM can do whaterver the F^&% it wants, Dodd-Frank (and Volcker) be damned.

      My clever granny would slap me silly if I tried to convince her that a hedge was whatever I wanted it to be. She survived the depression,after all, and heard all this nonsense before and despairs at the stupidity of her silly but brilliantly educated progeny who run the agencies that are supposed to protect her from con artists with the intelligence of a Trump from achieving the stature of Dimon as the most brilliant head of the the most well run bank in the world. She’s not alone.

      That suggests that JPM operated on a higher level of duplicity than any of its regulators or accounting rulemakers ever imagined possible for a publicly traded, gov’t backstopped financial institution.

      When Dimon was forced to own up to the intial losses he seemed to be communicating that GAAP is for little people, the big folks would be covered with short term gains from sales the bank had set aside to cover them.

      By the time the hoi polloi got wise, it would be too late.

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