Michael Crimmins: Why the Cops Should be Knocking on Jamie Dimon’s Door Soon

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

The scandal surrounding JP Morgan’s losses in its Chief Investment Office is not going away, and for good reason. Its trading book continues to lose money at an astounding rate. The most recent report estimates that the losses have increased by at least 50% more than the bank’s original loss estimates. The total damage is anyone’s guess at this point.

This fiasco is beginning to look a lot like accounting control fraud. The Justice Department and the FBI have begun criminal probes. The SEC is also investigating. So far, the objectives of these investigations are under wraps, but if I were an SEC or DOJ enforcement official I’d be laser-focused on bringing a Sarbanes-Oxley case against Jamie Dimon.

Sarbanes-Oxley emerged out of the Enron frauds. This law requires the CEO to certify that internal controls are operating effectively to give comfort to readers of the financial statements that the disclosures contained in the reporting are reliable. There are civil penalties for filing a false certification and criminal penalties, including jail time, for false filings found to be fraudulent. So far none of the obvious candidates like Dick Fuld at Lehman or Jon Corzine at MF Global have been prosecuted under the law.

Jamie Dimon looks like a very attractive candidate to investigate for SOX violations.

For starters, Dimon’s description of what happened rings SOX alarm bells:

First of all, there was one warning signal — if you look back from today, there were other red flags. That particular red flag — you know, we made a mistake, we got very defensive and people started justifying everything we did. You know, the benefit in life is to say, ‘Maybe you made a mistake, let’s dig deep.’ And the mistake had been brewing for a while, so it wasn’t just any one thing.

– Meet the Press, May 13, 2012

Warning signs and red flags were ignored. And they’ve apparently been ignored since 2007. Once again, echoing what happened at MF Global, risk managers who raised alarms about the riskiness of the positions in 2009 were replaced with more cooperative risk managers:

Several bankers said that risk controls were not sufficiently strengthened by Doug Braunstein, who took over as chief financial officer in 2010, another reason the bolder trades continued.

This indicates the firm was aware of deficiencies in the controls if other executives knew Braunstein had a mandate to improve them. These concerns are probably documented in the meeting minutes of the management committees responsible for risk, financial reporting and SOX compliance. It shouldn’t be difficult for the SEC to review these sources to determine who knew what and when about the state of the internal control environment.

JPM has issued quite a few financial statements since 2007 and 2009. If the controls and riskiness of the trades were as alarming and deficient as the managers indicate, then the reliability of the financial statements for the last 5 years are questionable. For a portfolio of this size and importance it’s inconceivable that the controls and risk issues were not reported up the management chain.

More damning is Dimon’s tacit admission that the controls designed to protect the firm from these sorts of blowups were ineffective, due to lack of intervention. Ignoring internal controls, or red flags as Dimon characterizes them, is a failure in the control environment. The failure to disclose inoperative key controls in the CEO certification is a violation the law.

That’s the big picture case. Recent reporting about the trade itself point to other areas that should be investigated for Sox violations.

When is a Hedge not a Hedge?

It appears that the JPM portfolio ‘hedge’ isn’t a hedge at all, at least according to current accounting standards. As Dina Dublon, CFO of JP Morgan Chase from 1998 to 2004, explained:

Dublon also pointed out that JP Morgan’s $200 billion mistake was not an accounting loss. “There is a difference between accounting and economic valuations,” she said. “You have a mark-to-market hedge against an accrual exposure that is not being marked to market. So you can have a gain or loss on the hedge, but you will not recognize the change in value of the loan portfolio, which is on an accrual accounting basis.

Translating this into non accountant language, JPM had a portfolio of assets which are available for sale. The change in the value of those securities is tracked, but since they aren’t considered to be trading assets, the change in value doesn’t hit the bottom line until they are sold. By contrast, positions held in trading books are “marked to market,” meaning they are revalued as market prices change and the resulting gains or losses are reported on an ongoing basis.

JPM reported that this portfolio contains significant unrealized gains. Indeed, it realized some of those gains to offset the losses on the portfolio ‘hedge’.

To hedge this portfolio JPM bought and sold credit default swaps. This portfolio ‘hedge’ is accounted for on a mark to market basis. This is odd since a true hedge should get the same accounting treatment as the asset it’s hedging. This indicates that the ‘hedge’ failed the hedge effectiveness test required by the accounting rules that would qualify it for hedge accounting treatment. More precisely the correlation between the hedge and the underlying isn’t strong enough to qualify it as a hedge.

Further confirmation that the ‘hedge’ wasn’t technically a hedge comes from Jamie Dimon himself.

In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored. The portfolio has proven to be riskier, more volatile and less effective an economic hedge than we thought.

As Dublon explained above, “There is a difference between accounting and economic valuations.” Dimon takes care to refer to the ‘economic hedge’, which is a term of art. It has no significance for financial disclosure purposes. It means whatever the user wants it to mean. If Dimon has not been vigilant in using the phrase ‘economic hedge’ in his disclosures and public comments about this portfolio then he’s made some false disclosures.

An “economic hedge’ is not a ‘hedge’ for financial disclosure purposes. ‘Economic hedge’ is a meaningless phrase. The abbreviated term ‘hedge’ when used to describe the trading portfolio embedded in the CIO book is a false characterization of the portfolio. He should not be permitted to describe this as a hedge in any of his comments about this book. At a minimum, he should be called on it every time he utters the phrase.

If It’s Not a Hedge Then What is It?

To recap, JPM owns a portfolio of securities it is ‘economically hedging” with a portfolio of credit default swaps. The purpose of a hedge is to reduce the risk of adverse price moves on the underlying portfolio.
The CDS portfolio consists of CDS purchased and CDS sold.

CDS purchased for the portfolio may have been put on as a hedge against the “available for sale” portfolio. But the CDS sold as a hedge doesn’t seem to make any sense. Selling CDS is equivalent to increasing the exposure to the underlying credits. The CDS sold don’t seem to have a risk mitigating role as part of a hedge, but to date JPM hasn’t provided the information to evaluate the overall portfolio.

It’s possible JPM was funding the CDS purchases by selling longer dated CDS and justifying the inclusion of the CDS sales as funding of the hedging purchases, but that would seem to be pretty expansive definition of a hedge. Perhaps ‘economic hedging’ as JPM defines it includes the funding sources of the combined ‘economic hedge’. That seems ridiculous but the term is open to any interpretation.

Since the combined CDS portfolio is accounted for on a mark to market basis, the position may not have raised any red flags with readers of the financial statements as long as it was in the money. That appears to have been the case for an extended period, as evidenced by the enormous pay packages (over $100 million for the chief trader, the infamous Whale, if reports are to be believed) for the CIO desk. You don’t pay that kind of money to hedgers.

But the position has cratered this year and JPM was forced to disclose the losses on the CDS portfolio. To offset those losses JPM sold off some of its AFS portfolio. We’re still waiting for a precise definition of economic hedge from JPM.

This characterization raises additional alarms, since it appears that JPM effectively viewed the AFS/CDS portfolio combination as a net trading position. Normally, you wouldn’t sell your AFS portfolio (or enjoy the beneficial accounting treatment) unless there was an extraordinary exogenous event that caused you to liquidate the portfolio. Trading losses on a portfolio jointly managed as part of the AFS portfolio wouldn’t qualify.

This raises the question of whether JPM has correctly classified the available for sale assets since they acquired them. That’s a serious issue. If JPM misclassified a $200B position for years, it should be investigated for a host of regulatory violations and fraud.

For all intents and purposes the hedge portfolio is a separate trading book, and the financial reporting reflects that fact. There should be no way JPM should be able to spin this as a hedge of anything and deny the proprietary trading characterization the accounting treatment signifies.

What’s up With the Value at Risk?

Another area the SEC needs to investigate is the curious restatement of the VaR, which is a measure of risk used in disclosures to investors and regulatory reviews.

As discussed above, the risk exposure of the marked to market positions (the hedge porfolio) must be disclosed in the financial statements. JPM recently replaced the VaR model for this portfolio. It appears that the new model significantly understated the risk exposure and the bank has hastily reverted to an “older” model. One benefit of a reduced risk exposure is a reduction in capital held against the portfolio. Under the new model JPM would only have been required to hold half as much capital on the portfolio, than it did under the original model

It is extremely unusual that a risk model for such a critical portfolio isn’t exhaustively vetted both internally and by the regulators before it was permitted to be installed. There was clearly a breakdown in the controls around that model replacement. This breakdown resulted in a significant and material underreporting of risk in the initial 1Q 2012 SEC reporting. The restatement validates that a material breakdown in internal controls existed before the model was implemented.

It also raises other questions. Blaming models for management failures has become a fairly standard first response during the financial crisis. When HSBC took their first big hit on their securitization business in the 2007 (for fiscal year 2006), and shut down their US securitization business, they attributed the losses to the discovery that their credit risk models were flawed. I have no doubt this was true, but the discovery of the flawed model also coincided with the beginning of the collapse of the RMBS market.

The revelation by JPM in the days immediately following the reports of the Whale’s trade, that the new VAR model seriously underestimated the riskiness of the portfolio, is more significant to a SOX investigation around adequacy of controls than an investigation into the adequacy of the model itself for risk management purposes.

This sort of “whoops our models understated risk” is a convenient way to shift blame off management to “model error” for a decision to take on additional risk. Given that easy profits in banking are vanishing, which are we to believe: that JPM, heretofore seen as a leader in the CDS marker, suddenly became grossly incompetent? Or did they decide to take on more risk and implement models that would mask from regulators and the public the scale of the wagers they were taking?

It also raises concerns about other models use for these portfolios. Many of the underlying assets in the portfolio are illiquid and complex securities. The models used for pricing these instruments and reporting valuations deserve additional scrutiny at this point as well.

It doesn’t look like JP Morgan made a bunch of egregious mistakes. It looks like they broke the law, at least the Sarbanes-Oxley law.

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  1. loverofham

    Jamie is Wall Street’s fair haired child. There is no way he gets in trouble.. no way. Corzine I could believe.. but Jamie? nope..

    1. Conscience of a Conservative

      This post feels a stretch. I’m still waiting for Jon Corzine to deal with SOX Violations, and in that case it feels more clear. Right now JP Morgan feels like a stupidity issue, and one best dealt with by its board. I do think JP Morgan raises legitimate policy issues with regards to what activities an FDIC insured bank should engage in and the danger of CDS in general.

      1. Dan Miller

        JP Morgan was intimately involved with MF Global, I agree that ignoring their culpability is a stretch.

        1. JamesW

          Exactly, I mean, if there was any law in this lawless country today, wouldn’t FBI Director Mueller recuse himself or even resign, as his family is distantly related to the Rockefeller family, and JPMorgan Chase is a Morgan/Rockefeller enterprise?

          Of course, since Goldman Sachs is a bank, they aren’t supposed to be involved in naked short selling, and since they received that bank holding company status virtually overnight, in violation of normal protocols, they should also be jailed overnight.

          And since JPMorgan Chase shouldn’t be involved in proprietary trading, but since they are . . . . .

  2. Richard Kline

    Michael Crimmins: “it appears that JPM effectively viewed the AFS/CDS portfolio combination as a net trading position. Normally, you wouldn’t sell your AFS portfolio (or enjoy the beneficial accounting treatment) unless there was an extraordinary exogenous event that caused you to liquidate the portfolio. Trading losses on a portfolio jointly managed as part of the AFS portfolio wouldn’t qualify.” That, to me, is the dead whale under the sitting room carpet; the stink emanating is one of fraud.

    What this looks like, sifting through your remarks Michael, is that JippyMo took on a $200B, unhedgable, speculative, market distorting, postion _BUT_ carried that on its books as a NON-trading, non-speculative postion. How to slip that by the regulators and the markets? Well, pasting a VaR on it appropriate for a non-trading position, and alleging that the dynamic parts of the whole rig were ‘hedge offsets’ to justify that low VaR seems like the way to go. Very like getting AAA ratings pasted on compacted zombie spam and alleging that the offsets in the resulting security were sufficient to the stated risk (which they may have been, but were insufficient to the actual risk). And as long as the whole behemoth was in the black, the material misrepresentation of the entire position wasn’t evident. And everyone involved made huge profits. When the speculation blew up, it’s “Aww shucks, we were just stoopid.”

    Such misrepresentation, if in fact it occurred, seems exactly the same as in the MBS con game, only the target dupes in this play would be the regulators and the market, not the sucker end investors of MBS ‘plague barges.’

    Proving that Dimon and his inner circle knew that the VaR published was not representative of the postion may be difficult. Proving that they knew the entire position was an active trade may be a bit easier to get in the crosshairs. . . . But who are we kidding?: This will never be effectively investigated in the present oligarchical political-economy, let alone prosecuted. A blue ribbon guy will be shuffled in to tie on ‘the fix,’ and the perps will walk away with their winnings. A few resignations of tricksters who walk away with their heists are the most we’ll see, while the same game is played again in 18 months or less, by many of the same players.

    1. financial matters

      I like this explanation. And I think this is an important point you brought up ‘And as long as the whole behemoth was in the black, the material misrepresentation of the entire position wasn’t evident.’

      I think many people look the other way as long as their stock portfolio/pension fund is going up and don’t really care about excessive executive compensation, lack of corporate responsibility etc. When their positions go way down, or they lose their pension or job then they start paying attention.

      This is another problem with papering over the losses and falsely inflating the stock market. It doesn’t allow these problems to surface. The too big too fail should have been let fail and the fraud aggressively prosecuted. We are now being forced into that position as the losses can only be papered over for so long. We need the structural change being talked about by Michael Hudson and in books such as Treasure Islands…

    2. Susan the other

      Thank you for this explanation Richard. The whole thing is way over my head. And i have heard about 4 different stories. The one which made the most sense in terms of timely possibilities was that JPM had huge risk on its European bank investments and they were trying to offset it. That first story didn’t really call it a hedge; it came out at the same time that other statements about the hopelessness of Greece finally broke through the fog. So I conclude it is also the hopelessness of JPM. I wish I understood it better.

      1. Richard Kline

        So Lambert, I’ve used that tag for four years, but anyone’s welcome to it. It’s the obvious pronunciation, and I don’t understand why it’s not on every tongue already . . . : )

  3. polistra

    It would be better to leave it uninvestigated. Rich people losing lots of money because of their own foolishness? That’s a beautiful and wonderful consequence, not a crime.

    The only way to stop the crime is to use up all the money. Total collapse. Faster, please.

    1. John

      Problem is the rich people make us pay for their losses.

      Only wish it worked the way you say.

  4. keepon

    …and you’ll recall Dimon being parlayed as successor to the Office of Secretary of the Treasury for the new administration.

    Why not Corzine? We have Geithner. Kind of clarifies the requisites of office alluded to by Mr. De Marco. Specialized expertise. Money Masters funneling “Hot Money” right into the White House. ‘Fessed up to’ and turned back only when caught.

    Hossanah in the highest! Four more years. How did we get here? What will we look like then?

  5. jake chase

    Finance is ultimately about borrowing from the Fed at negligible interest rates, shifting toxic assets onto the Fed balance sheet, enriching top management through bonuses and cheap stock justified by phony pricing of portfolio positions, and talking bullshit the entire time. Sarbox remains a dead letter and the idea that it will be unleashed against the poster boy for crony capitalism is the silliest one I have heard since the whole CDS disaster began.

    1. lambert strether

      Obama can implement “The Droshky Plan” just like Nixon. The term explained here, in a delicious historical irony, by William F. Buckley:

      The next trick in Mr. Nixon’s bad is “The Droshky Plan” named after the sled used by Siberian peasants to cross the frozen tundra. When a droshky crammed with people comes under attack by wolves, the passengers lighten the load by throwing one of their number under the load.

      Obama’s history is one of betrayal. Would he betray Dimon — despite his admiration for the man — to save his administration and, more to the point, his chance for a post-Presidential talk show or a job as a greeter for Goldman? In a heartbeat.

      So let’s not be satisfied with Dimon except tactically (and from the aspect of Schadenfreude). Our Jamie is, after all, just one bubble in the giant sack of pus.

      Adding… Tinkered with.

      1. TK421

        No doubt, Obama is perfectly willing to throw little people under the sled/bus, but I doubt he would do so to one of his golfing buddies.

      2. wmesquite

        I think “Goldman greeter” for NoHope’s post presidential ambitions is perfect- beats even the phrase “Jippy Mo” by half.

        As far as tossing Dimon under the bus- of course O won’t want to do it. But in this case it might be pretty easy- I’d be willing to guess every other bank is super pissed to have this happen just before a completely toothless Volker rule was finalized. So O might make himself more popular with his favorite constituency by busting Dimon. But SarbOx is too easy to prosecute with, would set a bad precedent for fellow travellers, so the busting will happen with some other approach.

  6. monday1929

    Why is an insolvent bank like JPM allowed to hold tens of trillions of derivatives? Because any attempt to unwind them would cause the disintegration of the United States economy.
    How many lifetimes in jail would Jamie have to serve to see Justice served? What kind of Man leaves a pile of rubble for his grandchildren, Jamie?

  7. Larry Headlund

    JP Morgan is a publicly traded stock, hence the SOX issues. Who owns the JPM stock? Not just ‘rich people’: insurance companies, mutual funds, pension funds. Not to mention all the taxpayers backstopping ‘banks’ like JPM.

    Believe me, the losses are your money. Only the profits are theirs.

  8. John

    I have a company sponsored 401K thru JP Morgan Investments which has equity (stock) and various bond funds. How does the fiacso affect me??

    1. Barney

      Cops may knock on your door. SIKE! Seriously, did you read before you invested? You took a risk with your retirement?

    2. Kmurp

      It doesnt. The bigger problem with a JPM 401k would be excessive fees and possibly a focus on their own proprietary funds.

      1. Ms G

        Egregious fees and use of in-house funds are indeed part of the problem. However, there is certainly a “trickle-in” effect in any of this gentlemen’s holdings that include JP Morgan stock (depending on the size of the JPM fund holdings this could be a bigger or smaller “hit”) and also the not so easy to calculate generalized negative effect that the JPM meltdown has had on the equities markets at large, which would also show up as decrease in value of any of the 401(k) funds invested in whole or in part in any equities. (No idea how it affects bonds or fixed-income (“bond”) funds.)

        Another issue this gentleman should be concerned about having his 401K with JPM, is whether the bank is using a Securities Lending Program that uses cash in the subject mutual funds as collateral for borrowing securities (it is a form of rehypothecation that few people are aware of). Such arrangements caused massive losses to nationwide 401Ks (and similar types or retirement accounts) when savers’ cash in mutual funds was used as collateral for Lehmann toxic mortgage bonds — the cash vanished when the bonds became worth $0 and Lehmann went bankrupt.

        There are large litigations out there around the Securities Lending Programs used by 401(k) plans involving Lehmann and other toxic mortgage bonds but for the most part all filings are being kept “under seal” at the banks’ requests.

  9. Jp Fun

    The whole affair is beyond amusing. Now law enforecment jumps in for added election year flavor. Obama has no choice but to raise a stink, the 4th estate is engaging in JP Morgan vitriol. Completely buried and ignored is the detritus from the housing implosion, conduct that should have obliterated JP Morgan, were the Bank not judge, jury and national security executioner.
    We see a fat defense contractor, Carl Levin, scold from his nose suported spectacles. The amused masses see the charlatans suddenly talk about rules or laws that are ordinarily broken on a high speed basis, daily. There’s an endpoint for the bullshit, it won’t be blogged.

  10. ftm

    There is no way Obama takes down Dimon — they are joined at the hip.

    The sheer complexity of this post shows the folly of SOX regulation. Bankers will forever run circles around regulators. Prosecutors and courts will rarely if ever convict — the complexity is too easily used to confuse.

    The only hope is to break the banks into fail-friendly chunks and re-institute simple regulations like

  11. F. Beard

    The failure to disclose inoperative key controls in the CEO certification is a violation the law. Michael Crimmins

    To this ex-software engineer, SOX smells like a kludge (a quick-and-dirty fix with all sort of unintended consequences) instead of the fundamental reform we need.

    In my work, software simulation of hardware for training purposes, there were two approaches people used to program the correct outputs for a given set of trainee inputs and malfunctions. One was to program to the training script so that the simulator performed correctly so long as the script was followed and the other approach was to emulate the hardware in software so that no matter how the simulator was exercised (various combinations of malfunctions and trainee inputs) it would always faithfully behave as the actual hardware would.

    To me, it is absurd that our money system be anything but fundamentally ethical. It is BEGGING for trouble that it is not no matter how many kludges and kludges to kludges are applied.

    1. Yves Smith Post author

      Actually, I differ. Sarbanes Oxley is elegant. It was designed to prevent the “I’m the CEO and I know nothing” defense. It requires (at a minimum) the CEO and CFO to certify the accuracy of financial statements and the adequacy of internal controls. The former is sorta redundant except SOX makes it a bit easier to get to criminal prosecutions. The latter blocks the “whoops, our risk management sucked? Not my problem.”

      The problem isn’t the law. It’s that the SEC has been kept budget starved for 20 years and under Chris Cox, risk assessment and enforcement were gutted.

      1. F. Beard

        …and the adequacy of internal controls. Yves Smith

        “The “sound” banker, alas! is not one who sees danger and avoids it, but one who, when he is ruined, is ruined in a conventional and orthodox way along with his fellows so that no one can really blame him.” – John Maynard Keynes

  12. off_leash

    The future of Jamie Dimon is wrapped up in election politics. The only way cops show up at Dimon’s door is if Governor Romney makes the unlikely decision to throw the bankers under the bus. Such a decision would force President Obama to deal with the situation more forcefully. As long as the President remains marginally less friendly to the financial industry than Romney – e.g. having a milquetoast SEC investigation – this will not become a campaign issue and little action of substance will occur.

  13. MontanaMaven

    I do not come from the world of finance. But all this talk of tinkering with rules and regulations misses the big picture. Seems that if a bank like any business is run badly with questionable assets and questionable practices, the shareholders should figure out what to do with them. But that should have nothing to do with the rest of us, the taxpayers. As Glen Ford of Black Agenda Report says, “If shareholders want to admire Jamie Dimon, fine. But we don’t have to.” These bankers are crooks and serve no useful social purpose. A real public bank would do much better. People like Hank Paulson said that the whole system would seize up if we allowed these banks to fail back in 2008. So the Fed pumped cash into the banks. Why couldn’t the Fed just pump the same money into virtual ATM machines so we the people could keep taking money out to pay for our meals and gardening supplies? Why not? Why do we need these middle men who take that money and gamble with it? Why are we having this discussion? Is it because we tell the banks that we the taxpayers will back them up no matter what? Is that it? Or?

    How many other businesses that fails through stupidity do we keep propping up in our daily lives? In my home town, you vote with your feet. If the restaurant food sucks, you try to go someplace else or cook yourself. It was trickier when there was only one good restaurant in town though. That led to a lot of grumbling but the place had a monopoly and could do what it wanted and charge what it wanted. But still you didn’t have to eat there. It could make a good profit or a small profit. That was its business. Now that another place opened up it has helped in our choices. But the restaurant still is not capable of bringing down the economy of the whole town. It won’t take your house away. So yes, banks are somewhat different in that we’ve allowed them to rule our lives and keep us in perpetual fear. We’ve allowed it. But we don’t need them. And trying to manage them won’t work anymore. That’s the truth of the matter.

    The reformist debate accepts the inevitability of private capital as the engine of economic – and, therefore, social – development. It seeks to hem in the T-Rex with fences of string or transform the beast into lots of vicious, smaller killers, without removing them as a class from the top of the food chain, and replacing them with public capital to create jobs and a better society. In the end, such tinkering reforms require the T-Rex’s permission to be enacted, resulting in diversionary drivel like the Dodd-Frank bill, which did nothing to slow down JP Morgan Chase and its fellows.


  14. Paul Tioxon

    Maiden Lane III sale delayed.


    JPM loses on complex risk management trade that belies its self described nature of managing risk in a way that is too risky to initiate when you actually try to profit and then lose. Hall of mirrors alert!!!

    There is a reason why firemen keep pouring water into what appears to be a very wet crumbling structure, with little smoke even coming out. The reason, is the fire can come back very quickly because you don’t know what is inside the structure that can still fuel the fire, what pocket of air and combustible fumes can still meet and what tiny red ember can contribute to an explosion. It is a black box of a disaster waiting to happen, kind of like now.

    Are you organizing a mutual aid society in your neighborhood? Find out how: http://www.ncba.coop/ncba/about-co-ops

    1. LeonovaBalletRusse

      PT, seems the only thing to do is to “pull it.” Who is the beneficiary?

  15. Johnny Fraudclosure

    “A federal judge in New York on Wednesday ruled in favor of a group of civilian activists and journalists and struck down highly controversial ‘indefinite detention’ and ‘material support’ provisions of the National Defense Authorization Act, enacted by Congress and signed into law by President Obama last December.”

  16. Sunburn

    following bill black’s formula we knew it was control fraud from day one.

    bill black (akerloff & romer) ftw once again!

    1. LeonovaBalletRusse

      They followed the formula cooked up by Boesky et al., by the grifters of the S&L scandal and Continental Illinois, of ENRON. The Frankengrifter never died. Follow the money and the DNA from generation to generation of Bushes. Tom Ridge was involved with ENRON grifting. Why did Bush name him the first Director of Homeland Security? What is the purpose of key Bushmen such as Ridge, Mueller, et al., and why do they keep resurfacing at times of crisis?

      Beat the Bushes connected to S&L, “Funny Money,” ENRON, BCCI, Luxembourg, Carbon credits, 9-11, Caspian Pipeline, “The Opium Wars” and Iran/Contra, “The Old Boys,” Wisner in New Orleans, Standard Oil in Baton Rouge, Shell in NORCO, Texaco/Gulf in River Parishes, “Knights” in RC New Orleans, Oil and Sugar, Sugar/Coke/Cuba/Miami; Silliman, Russell, Dulles, Bush, CIA at Yale.

      Michael Ruppert has been retired to stud in green pastures.

        1. Sunburn

          btw i learned the term and the “idea” of arbitrage from boeskey-milkan, the njoh nyou when he arbitraged a health emergency code to legitimiazing torutre, that ishe used ahealth code whic defined a medical emergency as one where, one’s life was in danger up to death via loss of limb(s), organ malfaunction(s) etc, so unoless torutre caused an emergency” , it wasnn’t torture. get it?

  17. Hugh

    I agree there are SarbOx violations here. I would go further and say there was fraud in that Dimon and JPM made material misrepresentations to JPM investors with regard to its CIO unit. I think the smoking gun is that the JPM CIO sold CDS on the underlying portfolio. If this had been in any sense a hedge it would have been buying CDS (quasi insurance) on it.

    I agree too that Dimon is unlikely ever to face a SarbOX charge. He is after all the favorite banker of “No prosecutions” Obama. If I had to guess, the current investigations will follow a familiar trajectory. They are announced now and then in 9-12 months, safely after the election and when memories have grown dim on even the few specifics we have now the investigations will go away. There will be a brief announcement that there was no hard evidence of wrongdoing. At most, there will be a deal in which, JPM, while maintaining it did nothing wrong, will pay what amounts to a token fine and promise not to do in the future what it says it didn’t do in the past. It will, of course, be lying.

  18. Joe Rebholz

    “… they attributed the losses to the discovery that their credit risk models were flawed …”

    “The revelation by JPM in the days immediately following the reports of the Whale’s trade, that the new VAR model seriously underestimated the riskiness of the portfolio … “

    “Blaming models for management failures has become a fairly standard first response during the financial crisis.”

    “ … the curious restatement of the VaR …”

    “JPM recently replaced the VaR model for this portfolio. It appears that the new model significantly understated the risk exposure and the bank has hastily reverted to an “older” model.”

    “This sort of ‘whoops our models understated risk’ is a convenient way to shift blame off management to “model error” for a decision to take on additional risk.”

    Therefore the models used for risk management are not realistic. Therefore risk management is not possible. VaR is a joke. SOX is a joke. Nobody can honestly certify that controls are adequate. As F. Beard said above, these models — and our financial systems — consist of kludges on top of kludges on top of kludges. As any present or former software person well knows more and bigger system crashes are inevitable.

    1. MichaelCrimmins

      Its lies, ‘this is a hedge’,on top of lies ‘the var figure accurately reflects the market risk embedded in the portfolio’ on top of lies, ‘the AFS porfolio is not part of a trading book’ on top of more lies ‘ this is a tempest in a teapot’.

      Lying on this scale was supposed to be outlawed with SOX.

      Why do the SEC and the DOJ not bother to pursue such clearcut violations of a fairly straightforward law?

      Its a simple question. I’d like the SEC and DOJ to answer.

      The core lie at the center of this piece is the CIO portfolio is neither an Available for sale portfolio as that standard is defined in the accounting principles or rules, nor are the ‘hedges’ real hedges as defined in accounting principles or rules.

      The entire description of the combined portfolio and its components are a fiction. Fiction is not fact, so misstating facts is fiction. Fictional finacial reporting is supposed to be illegal.

      The core lie is relevant to a SOX attack on the firms making the misstatements, but the central fiction here is also being used to undermine other regulatory initiatives, mainly the Volcker rule and other elements of Dodd-Frank

      All tools available to the regulators to rein in the banks should be used. It’s a crime this one just gathers dust.

  19. Eric L. Prentis

    US Washington politicians are as corrupt as they come.
    Jamie Dimon buys his way out of this one.

    Jamie Dimon, run, run, runs his mouth,
    Instead, resign, resign, resign, please!

  20. LeonovaBalletRusse

    Why can’t we get George Soros to “tell us what a hedge is?” His insights in “The Alchemy of Finance” were distorted and abused by these “bankers,” reduced to a global “tale told by an idiot,” signifying Fraud Writ Large by small-minded grifters and their quant accomplices.

    “A little knowledge is a dangerous thing.” (Alexander Pope) Et cetera. Every one of these idiots have distorted the meaning of “hedging” beyond belief, all but ruining the commodities markets in the process. The MF Global-JPM London play under the Agents Corzine and Dimon is the cardinal domino to pull.

    In the 1970’s the book, “The Merchant Bankers” made commercial bankers LUST for such power and profits. This lust is the root cause of JPMChase greed and fraud run amok.

    As for “economic growth,” it must come from the ground, as the Potemkin Village of Global Fractional Reserve Finance burns to ashes. Here’s the model:

    A sound “wholesale” business on the ground, run by a legitimate corporation with the following officers: President, Vice-President, Secretary-Treasurer, who hire sales and administrative staff in order to keep inventory, and conduct business according to “Standard Operating Procedure,” using “Standard Accounting Practices.” Actual goods are bought from manufacturers, warehoused, and sold to retailers and/or to contractors who build structures for customers @ retail. The “German” or other model of “worker” involvement in decision-making and investment is preferred. The “growth” of the economy at large derives from the practice of spinning off facets of the business after a SIZE CERTAIN is reached, so as to forfend the development of MONOPOLIES and TBTF corporations, and so as to encourage the CIRCULATION of business opportunities throughout the “ECONOMIC” BODY POLITIC. This facilitates sharing of “work,” “learning,” and “corporate experience” at various levels of society, encouraging grounded horizontal GROWTH, while impeding corporate hegemony through “vertical integration” designed to monopolize the business process to profit the 1% at the expense of the 99% of the “corporation.”

    The issue is BALANCED GROWTH for the good of humanity, where “Size” does not matter. it’s not about the “QUID” but about the “QUAL.”

  21. MichaelCrimmins

    JPMorgan Investment Unit Played by Different High-Risk Rules


    The JPMorgan Chase unit that lost more than $2 billion through a failed hedging strategy had looser risk controls than the rest of the bank, according to people familiar with the situation.

    The risk of losses is tallied by the bank using a so-called value at risk (VaR) calculation. However, the Chief Investment Office, the unit responsible for the high-profile loss that JPMorgan disclosed last Thursday, had a separate VaR system.

    It used a less stringent calculation that gave a lower risk assessment of its trades, according to people who previously worked at the bank.

    The unit also reported directly to CEO Jamie Dimon, a factor which allowed it to maintain a separate risk monitoring set-up to other parts of the investment bank, these people said.

    Despite repeated warnings from executives inside the firm as long ago as 2005, the CIO unit remained notably free from oversight. A source with knowledge of the situation said that these warnings included the size of the CIO, the fact that its risk reporting was not transparent and the scope for the unit to get “bigger and bigger” because it had a lower cost of funding than the rest of the investment bank.

    Until April, the CIO unit’s unusual autonomy allowed it to build up risky positions without triggering alarms.

    Further detail supporting the SOX arguments are included in the article.

    1. LeonovaBalletRusse

      And wouldn’t this “special” BESPOKE VaR show intent to do mischief? to trade for profit? to defraud?

      What is swept under the rug, even in the Volcker Rule without the JPM “loophole,” is the g-i-g-a-n-t-i-c loophole that permits the bank’s commingling of “client/customer” deposits with its own money. This is Fraud One.

      “Lawyers” at Sullivan & Cromwell and/or other “elite” firms are making these “laws,” even though it is a FELONY for an attorney at law to “commingle a client’s funds with his own.” This is because the ISSUE is SEPARATE PROPERTY: that of the client/customer and that of the firm.

      This is more of the grifter practice of WRITING THE LAW of the Land–a duty, and sole prerogative, of the Second Branch of Government, according to our Constitution. The MC’s who permit others to write the law of the land are accomplices, guilty of treason. The “Unitary Executive” writing of the law of the land by “Executive Order” is an act of treason.

  22. sunny129

    A simple answer to all the legal wrangling of was it legal or not, is to bring back Glass Steagal act and forget about working to improve on Volcker;s, lincoln’s rule etc!

    As long as the rampant institutional fraud goes NOT prosecuted, there will be NO RECOVERY.

    2008-II is evolving before ‘soon to be’ another financial explosion, b/c no one learned anything from 2008!

    KARMA reincarnates in many forms!

    1. LeonovaBalletRusse

      Reinstatement of Glass-Steagall means “game over” for grifters. This is why they “will” not do it: BECAUSE it is the obvious remedy for bankercanker.

  23. Gil Gamesh

    SOX was repealed sub silentio over cocktails at the White House. “Enforcing SOX” mused the Con Law Professor from Hell, “requires too much looking back.” Dimon, Blankstein, Geithner and Bernanke all chortled in agreement and clinked their glasses.

    And thus law is made and unmade in the World’s Greatest Democracy.

  24. different clue

    Are there ways for millions of “little people” to create their own shared survival-lifeboat miniconomies for some measure of resistance and immunity to this looting of money which can be used to extort wealth?

    Can millions of “little people” decouple their personal survival economies from the high level financial economies discussed here?

    Obama is Dimon’s friend and protector. Why would he permit his justice department to charge Dimon with anything at all?

  25. F Libertarians!

    Nice piece. I am no fan of Bush or Obama’s DOJs or Attorneys General. However, having read Section 302 of SOX several times and noted the DOJ’s failed attempt to convict Healthsouth CEO Richard Scrushy under Section 302 of SOX has really led me to believe that SOX’s Section 302 provision is very weak and difficult to prosecute. If you really read through the section on CEO/CFO certification, the burden of proof placed on the prosecution seems pretty heavy as the prosecution has to prove perjury beyond a reasonable doubt. I am no lawyer or legal scholar but it seems that convicting a CEO or CFO of perjury under SOX would require some mindreading on the part of prosecutors.

    A defense could always be mounted by Jamie Dimon claiming that he followed SOX meticulously setting up internal controls at JP Morgan in good faith that eventually failed because rogue subordinates acted unilaterally to perpetrate the fraud while he innocently sat in his office unaware about what was going on. Sounds like an unbelievable defense, right? However, that defense seemed to work well of Scrushy who was acquitted on all counts in his trial. The bottomline seems to be that SOX effectively helped to improve auditor independence by preventing audit firms from simultaneously conducting audits and nonaudit services for the same client. However, it seems somewhat clear that SOX is an abysmal failure when it comes to eliminating the innocence due to ignorance defense that CEOs/CFOs like to hide behind when accused of fraud. In addition, bear in mind that there really are no benchmarks for measuring the strength or efficacy of intenal controls as usually that certification of internal controls by external auditors and senior managers are matters of “professional judgment”. I know Yves likes to argue that the DOJ should at least TRY to obtain a conviction using SOX; however, it may be the case that SOX Section 302 is too weak a provision to hold up in front of a jury such that SOX is not the best avenue for prosecution of control fraud. I’ve done a cursory examination and perhaps I am wrong (and please correct me if I am wrong) but, since 2002 when SOX was enacted, there have been ZERO successful prosecutions of senior managers under SOX.

    However, I do agree that the DOJ should at least prosecute senior managers of the Wall Street banks using some other securities law (RICO, 1934 SEC Act, or some other act which one I don’t know). In that sense, Yves is correct that Obama’s DOJ seems to be intentionally sitting on its hands and giving a implicit green light to well-connected CEOs on Wall Street to commit accounting and securities without fear of ever being investigated or prosecuted. The best example of Obama’s DOJ’s failure to prosecute is MF Global and Jon Corzine. There are internal memos indicating that Corzine ordered client account funds to be transferred to MF Global’s own proprietary investment funds which is a clear violation of the law. Yet, to date, Corzine has yet to be arrested even though it seems there is sufficient probable cause for an arrest.

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