Senate “Whale” Report Reveals JP Morgan as a Lying, Scheming Rogue Trader (Quelle Surprise!)

There is so much grist in the just-released Senate Permanent Subcommittee report on the JP Morgan London Whale trades that the initial reports are merely high level summaries, which is understandable. Even with the admirable job done by the committee in documenting its findings and recommendations, it will take some doing to pull out the critical observations and convey them to the public. Plus the hearings tomorrow should provide good theater and further hooks for commentary.

But some critical findings emerge, quickly. We here at NC were particularly harsh critics of JP Morgan’s conduct, and disappointed in the media’s failure to understand that the information JP Morgan presented as it bobbed and weaved showed glaring deficiencies in risk controls. Yet the failings described in the report are even worse than we imagined. For instance, Michael Crimmins, in a post, Why Hasn’t Jamie Dimon Been Fired by His Board Yet? wrote last July:

The first stunner, that JP Morgan was restating the first quarter financials, should have caused a deafening ringing of alarm bells. For a company of JP Morgan’s stature to be compelled to restate prior period financials is a very clear signal of bigger problems with their overall financial reporting. In isolation we would normally expect to see a massive selloff with an event of that seriousness. Analysts and reporters may have missed the significance since it was dropped into a footnote and overshadowed by the other disclosures. …

But the real cause for alarm is the reason for the restatement. JPM was forced to disclose that it relied on its traders to provide honest and accurate valuations for its financial statement disclosures. That’s like putting the foxes in charge of not just the henhouse, but the entire farm. Much to its chagrin that was a costly choice. Note that was not a mistake, but a conscious choice….

t appears that JPM is attempting to make the case that rogue traders, with criminal intent, mismarked the books. That may be so and relevant criminal charges against those traders should be pursued. But that strategy does not protect management. If there was mismarking, especially to the extent that occurred here, it is the responsibility of management to know or have procedures in place to alert them to the potential for fraud. Step one in that control process: Don’t let your traders mark their own books. If you do you have no excuse. Your controls are worthless and as CEO, you are responsible for ignoring that fundamental control gap. Full stop.

Which leads to the second underreported stunner.

It is a very big deal when a firm is compelled to disclose a material weakness in internal controls. That’s the worst level of internal control failure a going conern can report. In JP Morgan’s case its more damning since Dimon, as recently as May 10, 2012, certified that all was well with internal controls as of the end of 1Q2012.

That assessment means that it is impossible for the firm’s external auditor to sign off on the financial statements until and unless the control breakdowns are remediated sufficiently for the auditor to provide assurance. The description of the control weaknesses at JP Morgan appear to be design flaws, so it’s likely the weaknesses existed in periods earlier than the first quarter of 2012, when it was ‘discovered’. The fact that the unit with the weaknesses by all accounts was under the direct control of the CEO throws doubt on the validity of his prior certifications about the quality of the internal controls. The external auditors will be under extreme pressure to either support or refute the earlier certifications. Falsifying the certification is the worst Sarbanes Oxley violation there is, so Dimon is going to have to come up with an airtight rebuttal.

Not only does the Senate report hew to the Crimmins’ take, it presents an even worse picture. Just to give a few highlights:

Management hid the existence and role of the unit within the JP Morgan Chief Investment office that entered into the “whale” trades, the Synthetic Credit Portfolio, from its inception, even as its exposures ballooned, from the OCC

The bank made repeated, knowing misrepresentations about the size of the losses, the severity of the control failures, and the degree of management knowledge to regulators and investors

The contempt for regulators and for the need for timely and adequate disclosure is symptomatic of an out of control environment. Between the beginning of the year and end of April 2012, the SPG breached risk limits 330 times, sometimes even violating bank-wide limits. Yet staff and management regarded them as an inconvenience rather than treating them as shrieking alarms that warranted swift action

JP Morgan managers and risk control officers were aware of and complicit in the mismarking of positions (this is a very big deal in a financial institution)

One illustration of how damning the report is in the discussion of the Value at Risk measure used. Those who followed this debacle closely may recall that JP Morgan disclosed that it had changed its VaR model for the SCP portfolio in early 2012 and that it showed much lower levels of VAR. JP Morgan then reverted to the older VaR model after the Whale trade blew up. The impression the bank gave and the media duly parroted was that this was a big “oopsie,” that the bank had implemented a model that had a serious bug in it and just happened to flatter the SCP. We doubted it and assumed the bank had implemented the model knowing full well that it would allow the CIO to take much bigger risks (and thus book more profits if the trades worked out) with the new model. In other words, our belief was that the model didn’t innocently allow the SCP to take more risk, that more risk-taking was the entire point, but we also assumed the bank was being truthful in implying that the model contributed to the trade getting out of hand. As Crimmins wrote in a May post, Why the Cops Should be Knocking on Jamie Dimon’s Door Soon, noted that the model was implemented with unusual haste and was not vetted by the OCC and added:

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?

So how can reality turn out to be worse than our cynical take? JP Morgan implemented the new VaR model as part of its extensive efforts to cover up the risk limit breaches:

The SCP’s many breaches were routinely reported to JPMorgan Chase and CIO management, risk personnel, and traders. The breaches did not, however, spark an in-depth review of the SCP or require immediate remedial actions to lower risk. Instead, the breaches were largely ignored or ended by raising the relevant risk limit.

In addition, CIO traders, risk personnel, and quantitative analysts frequently attacked the accuracy of the risk metrics, downplaying the riskiness of credit derivatives and proposing risk measurement and model changes to lower risk results for the Synthetic Credit Portfolio. In the case of the CIO VaR, after analysts concluded the existing model was too conservative and overstated risk, an alternative CIO model was hurriedly adopted in late January 2012, while the CIO was in breach of its own and the bankwide VaR limit. The bank did not obtain OCC approval as it should have. The CIO’s new model immediately lowered the SCP’s VaR by 50%, enabling the CIO not only to end its breach, but to engage in substantially more risky derivatives trading. Months later, the bank determined that the model was improperly implemented, requiring error-prone manual data entry and incorporating formula and calculation errors. On May 10, the bank backtracked, revoking the new VaR model due to its inaccuracy in portraying risk, and reinstating the prior model.

If you believe the problem with the new, risk friendly VaR model was that it was “improperly implemented, requiring error-prone manual data entry and incorporating formula and calculation errors,” I have a bridge I’d like to sell you.

In another example of the aggressiveness and the ineptitude of the cover-up, the traders were mis-marking the position. And it was not, as is already being well reported in the media, of their own discretion and with management either not noticing or pretending not to notice, it was at the instigation of management in the CIO and known and sanctioned at the top levels of the bank, at least for a while.

Rather than using the “mid-mark,” the midpoint of the bid-asked spreads, as the basis for its valuations in keeping with established JP Morgan policy, the Whale positions were valued according to trader wishful thinking:

According to notes of an interview of Bruno Iksil as part of the JPMorgan Chase Task Force review, Mr. Martin-Artajo, told him that he was not there to provide “mids.” Mr. Martin Artajo thought that the market was irrational…Recorded telephone conversations, instant messaging exchanges, and a five-day spreadsheet indicate that key CIO London traders involved with the marking process were fully aware and often upset or agitated that they were using inaccurate marks to hide the portfolio’s growing losses..

On January 31, 2012, CIO trader Bruno Iksil, manager of the Synthetic Credit Portfolio, made a remark in an email to his supervisor, Javier Martin-Artajo, which constitutes the earliest evidence uncovered by the Subcommittee that the CIO was no longer consistently using the midpoint of the bid-ask spread to value its credit derivatives. Mr. Iksil wrote that, with respect to the IG9 credit index derivatives: “we can show that we are not at mids but on realistic level.”648 A later data analysis conducted by the bank’s Controller reviewing a sample of SCP valuations suggests that, by the end of January, the CIO had stopped valuing two sets of credit index instruments on the SCP’s books, the CDX IG9 7-year and the CDX IG9 10-year, near the midpoint price and had substituted instead noticeably more favorable prices.649

This change in the CIO’s pricing practice coincided with a change in the SCP’s profitloss pattern in which the Synthetic Credit Portfolio began experiencing a sustained series of daily losses.

And these differences were large:

On March 23, Mr. Iksil estimated in an email that the SCP had lost about $600 million using midpoint prices and $300 million using the “best” prices, but the SCP ended up reporting within the bank a daily loss of only $12 million. On March 30, the last business day of the quarter, the CIO internally reported a sudden $319 million daily loss. But even with that outsized reported loss, a later analysis by the CIO’s Valuation Control Group (VCG) noted that, by March 31, 2012, the difference in the CIO’s P&L figures between using midpoint prices versus more favorable prices totaled $512 million.

Now recall the plot so far: this optimistic marking is still all within the CIO. Here’s where we get to upper management weighing in officially:

On May 10, 2012, the bank’s Controller issued an internal memorandum summarizing a special assessment of the SCP’s valuations from January through April. Although the memorandum documented the CIO’s use of more favorable values through the course of the first quarter, and a senior bank official even privately confronted a CIO manager about using “aggressive” prices in March, the memorandum generally upheld the CIO valuations. The bank memorandum observed that the CIO had reported about $500 million less in losses than if it had used midpoint prices for its credit derivatives, and even disallowed and modified a few prices that had fallen outside of the permissible price range (bid-ask spread), yet found the CIO had acted “consistent with industry practices.”

So the Controller is fully on board with a substantial, erm, deviation from long established practice. And why did he do that? To legitimate the public financials reflecting the flattering marks:

The sole purpose of the Controller’s special assessment was to ensure that the CIO had accurately reported the value of its derivative holdings, since those holdings helped determine the bank’s overall financial results. The Controller determined that the CIO properly reported a total of $719 million in losses, instead of the $1.2 billion that would have been reported if midpoint prices had been used. That the Controller essentially concluded the SCP’s losses could legitimately fall anywhere between $719 million and $1.2 billion exposes the subjective, imprecise, and malleable nature of the derivative valuation process.

Now get this bit:

The bank told the Subcommittee that, despite the favorable pricing practices noted in the May memorandum, it did not view the CIO as having engaged in mismarking until June 2012, when its internal investigation began reviewing CIO recorded telephone calls and heard CIO personnel disparaging the marks they were reporting. On July 13, 2012, the bank restated its first quarter earnings, reporting additional SCP losses of $660 million. JPMorgan Chase told the Subcommittee that the decision to restate its financial results was a difficult one, since $660 million was not clearly a “material” amount for the bank, and the valuations used by the CIO did not clearly violate bank policy or generally accepted accounting principles. The bank told the Subcommittee that the key consideration leading to the restatement of the bank’s losses was its determination that the London CIO personnel had not acted in “good faith” when marking the SCP book, which meant the SCP valuations had to be revised.

So why did the Comptroller flip his position? Because there was incriminating evidence in the bank! You really have to get what happened: the Comptroller tried to play along with wildly unrealistic marks, figuring it would somehow not come back to bite the bank. May 10 was the day the bank disclosed that the Whale losses were $2 billion and might be higher. So this looks to be a CYA contemporaneous document. The New York Times reported on May 11 that the SEC had opened an investigation “in recent days.” But it may have been the opening of an FBI investigation later that month that led the bank to decide to take a harder look at how exposed it was. As CNN reported at the time:

Erik Gordon, a law and business professor at the University of Michigan, said the opening of an FBI investigation escalates pressure on the bank.

“The FBI are not guys looking for violations of civil and and securities law,” Gordon said. “They look for one thing, and one thing only: criminality.”

James Cox, a professor at Duke Law School, said that it is unusual for the FBI to launch an investigation so soon after an incident in which no malfeasance is immediately apparent.

Ahem, this blog disagreed with the “no malfeasance apparent” bit, and explained why.

One last bit: The Senate committee also went hard after the bank’s claim that the SCP was as hedge. Readers may recall Dimon’s astonishing claim the Whale trade was a “economic hedge.” To understand the significance, you also need to appreciate why Dimon located a proprietary trading unit (the Senate report makes a forceful case for this description) in the CIO.

The CIO can hold “available for sale” portfolios, and their purpose is to meet bank liquidity needs. The bank of course can also seek to get some profit from them, but in theory, that is a secondary objective. Because they are supposedly to help the bank manage its Treasury, the special “available for sale” treatment means, basically, that the bank can trade them at any time (they are “available for sale”) BUT does not realize gains or losses until sale. In other words, it can be traded like a trading book but not be marked to market! How perfect is that for speculating? Now you can understand why this book got so big and why Ina Drew and her team were paid so handsomely.

Crimmins explained how disingenuous Dimon’s claims about the CIO’s “economic hedge” were:

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.

This is only a small section of the Senate report’s evisceration of the claim that the portfolio was a hedge:

When asked – despite the lack of contemporaneous documentation – to identify the assets or portfolio that the SCP was intended to hedge, CIO and other bank officials gave inconsistent answers…[several examples]… At the same time, the CIO’s most senior quantitative analyst, Patrick Hagan, who joined the CIO in 2007 and spent about 75% of his time on SCP projects, told the Subcommittee that he was never asked at any time to analyze another portfolio of assets within the bank, as would be necessary to use the SCP as a hedge for those assets.

While it is possible that the portfolio the SCP was meant to hedge changed over time; the absence of SCP documentation is inadequate to establish whether that was, in fact, the case. 251 In fact, he told the Subcommittee that he was never permitted to know any of the assets or positions held in other parts of the bank.252

Given the lack of precision on the assets to be hedged, JPMorgan Chase representatives have admitted to the Subcommittee, that calculating the size and nature of the hedge was “not that scientific”253 and “not linear.”254 According to Ms. Drew, it was a “guesstimate.”255 She told the Subcommittee that there was “broad judgment” about how big the hedge should be, and that she used her “partners” as “sounding boards” if she later wanted to deviate from what had been agreed to.256

The report makes clear that the OCC didn’t see this as a hedge and thought that any insurance-style tail-risk hedging should be done at the business unit level, not on a bank-wide basis, as the CIO claims it was doing.

I’ve been astonished that the press and the markets have bought Dimon’s bluster as long as they have. The Senate revelations, combined with Josh Rosner’s documentation of massive control failures across the JP Morgan and the Fed slapping the bank for “weaknesses” in its capital management may finally lead to a long-overdue reassessment of Slimin’ Dimon. Bullying is a poor substitute for basic operational blocking and tackling.

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  1. 4D

    Can things become any more corrupt and distorted in favour of banks than they already are?

    I fear there is only one way that this will end, and that is with an ugly market reboot.

  2. Hugo Stiglitz

    At this point, I think Jamie Dimon and his ilk could admit to nearly any crime and nothing will happen. The attitude seems to be “Yah, I did it, what are you gonna do about it?” And everyone who matters in DC simply yawns because they know (or think) the eyes of voters glaze over the minute there is any discussion complex financials instruments. Maybe they are right. But I think at this point that is a risky assumption at this point. The plebes are catching on.

  3. Can't Help It

    The Big Picture blog is also reporting that JP Morgan is following MF Global’s best practices in terms of customer funds segregation and that it’s been repeatedly fined for it.

    For all of the above Jamie should probably be promoted to Treasure secretary or something. Takes a crook to catch other crooks or so someone said …..

  4. Chris Engel

    James Kwak has some interesting insight into the London Whale debacle:

    He outlines how the big trade went bad because of a failure of an Excel formula to properly apply Value-at-Risk, and actually underestimated it, leading to excessive risk-taking.

    I’m hesitant to jump to the conclusion that it’s all part of a cover-up of a scam from the start (and there’s no direct evidence provided in your post, even if you strongly imply that it is the case).

    Instead it seems consistent with the point that the traders saw that something was wrong, manually entered more realistic mid-points, and it was all due to an underlying model problem due to Excel.

    I’m certainly inclined to believe that there’s widespread Accounting Control Fraud (Bill Black, Eliot Spitzer, Yves, and others have done a fine job of outlining this for the public) among a lot of underlying mortgage fraud as well.

    But, and maybe I am being naïve, but it seems that a poorly-constructed Model using Excel that doesn’t have safeguards can actually produce these series of observed events at JPMorgan. It often takes after-the-fact analysis by quants and academics to reveal it, but at the time it can lead to a lot of strange activity by traders who aren’t quants before it’s fully understood.

    Perhaps this is actually outlined in the Senate’s report, but in order for such an offense to prosecutable, doesn’t there have to be direct evidence of prior knowledge that this wasn’t a hedge, and that risk was purposely mismanaged, and that the “coverup” was indeed a coverup and not a “what the hell is going on with this broken model? we have to do some manual entry to fix it.”

    I’m not trying at all to play devil’s advocate. I know these banks have gotten away with murder and avoided criminal prosecution for very obvious misdeeds. But there has to be a strong legal footing for every case, and perhaps this London Whale trade wasn’t a nefarious case of excessive risk-taking and fraud, but just a bad model that produced a strange series of events.

    And i’ve read Crimmins’ analysis of the case, but that was about a year ago, before more information has been revealed about what went wrong.

    That bit of concern aside, I look forward to the Senate grilling today, which incidentally Matt Taibbi will be liveblogging:

    1. notabanker

      Taking this at face value, what does it say about JPM’s control structure if an excel formula can cost it billions of dollars. How much do they spend on IT annually?

    2. Finnucane

      Quoting Ms. Smith: If you believe the problem with the new, risk friendly VaR model was that it was “improperly implemented, requiring error-prone manual data entry and incorporating formula and calculation errors,” I have a bridge I’d like to sell you.

      I don’t understand the reluctance to attribute malfeasance to white-guys-in-ties. We do it on a routine, daily basis to the weak, poor, and – in the US at least – brown. That’s what our criminal justice system is for. Yet we’re to believe in that the Whale trade debacle was an incident of “innocent fraud”? Somebody forgot to update their Office suite or something, so sorry won’t happen again? Is that even plausible? Would you be interested in purchasing a certain bridge in which I have an ownership interest, but which I’m willing to sell relatively cheap?

      A few times, or maybe more than a few times, I’ve heard it stated that “we should never attribute malice when mere incompetance serves as an explanation.” I never really understood the logic of this methological maxim, but at this point, I’d say it’s actually pernicious.

      1. monday1929

        Reality, and facts, long ago established that the banks do not deserve the “benefit of the doubt”. It would be sweetly ironic though if Jamie did go down over an innocent mistake, rather than for the multiple crimes he has committed.
        He might shout, as they drag him from the dock, ” I did not commit this (particular) crime! It was an (economic) hedge!
        Please parse my words carefully (my lawyer has)!”

        1. monday1929

          And the “more realistic mid-points” is an inacurate characterization on your part- these people to whom the Market is a god they would have us die for decided to mark outside the bid/ask for the express purpose of taking on even more risk.

      2. Chris Engel

        I’m in no way trying to absolve them of a need of any regulation or anything. I’m a strong proponent of better regulation (far, far beyond Dodd-Frank) and I think this is a great case that shows we need to have more statutory controls.

        My problem was mostly in the tone of the article that this case in particular indicates criminality or something particularly egregious, when the bottom line to me looked more like “okay, bank loses a ton of money on a bad trade and we beat the shit out of him for bad risk management”. That’s all fine and well, as long as there isn’t lost focus on actual criminal acts.

        I mean, Obama was out doing a PR campaign praising Dimon as “one of the best bankers we’ve got” and playing up the JPMorgan brand the day of the announced investigation:

        There’s a lot of embarassing risk-management fails and details of some pretty dopey bank behavior in this case, but there seems to be more to indicate that there’s nothing criminal than there seems to be evidence that it actually was. A lot of innuendo and conflation of certain investigations announced with the bad trade reported is suggestive, but I don’t see a major moment from just the aftermath of the report. Whether the hearing today yields anything new is another story, but so far the markets don’t seem spooked and perhaps for good reason?

    3. Yves Smith Post author

      With all due respect, you REALLY have this backwards.

      You don’t decided to put make or liquidate a trade based on your friggin’ risk model. The risk model is a management tool to constrain total risks. And this VaR model was one of five they were using to assess risk. All the other 4 were saying this position was too risky. Did you read the post? They breached risk limits 330 times in 4 months. That is 90 business days, roughly. That means over three limit violations a day. They were simply ignoring risk limits, period.

      And stunningly, from what I can tell, there were no risk controls around basic liquidity, that is, taking a position too large relative to the underlying liquidity in the position. This is a basic risk management fail.

      The other part you miss, which was clearly set forth in the post, is that they implemented this new VaR model AFTER they started losing money in a big way on this position. This was to cover the fact that they were breaching risk limits. VaR is the risk model used primarily by regulators. The dorking with VaR looks designed to fool regulators.

      The most charitable interpretation is with a better VaR the position would have been smaller, not different.

      1. Consicence of a Conservative

        This would not be the first time a desk head or higher up had the models changed to make a position appear better than it really was. The guys in charge of monitoring the risk or in charge of building the models are often not properly empowered, incentivized etc to be teh cop on duty.
        We saw this at MF Global, wall street firms could be expected to have the prepayment model for mbs make a high coupon mortgage look better than it really was…

      2. Chris Engel

        Well perhaps I’m mixing up the timeline, but either way there doesn’t seem to be anything criminal that has gone on in this case. Poor risk controls, a sloppy system all around, violation of standards, sure.

        And Dimon lost billions on this, what good is it to bust his balls more on it and over-hype a case that has little to do with the more systemic problems regarding outright fraud? There’s a difference between control failure and control fraud. This case seems more like the former than the latter.

        And while both have been leading only to fines, one can at least lead to criminal charges and MAYBE we can get that sometime in the future, but in other cases where there’s a stronger possibility of such things.

        You say VaR is used primarily with regulators, but I’ve seen it (at least in Europe at multinationals) used in a lot of in-house risk management divisions as well. I’m just struggling to really see the case for egregious criminal fraud that is implied throughout your post. But I’d like to see more about the senate report and the hearing today and see if anything new comes out.

        As a side note, the more we talk about the salacious trade that made a bank lose billions, the less we talk about the criminal accounting control frauds and mortgage frauds perpetrated and the gross inequality that should be tackled.

        It seems like a good talking point though in favor of stronger regulations against the banks, I just don’t see the strategic value in attacking a bank over a trade they already have gotten their asses kicked on and then we ignore TBTF and past prosecutable acts of fraud, etc.

        I know i’m seeming like a major shill for banksters right now, i assure you that’s not my agenda at all and i’m not a shareholder or employee of any banks currently. I’m just trying to put this into perspective.

        1. OpenThePodBayDoorHAL

          Yes it’s a nice apologia for the banker class. And yes if they were a normal business like accountants or software or food service, one might agree, it’s a business loss and they should be left alone about it. Unfortunately that is not the case at all here: these “businesses” are merely gambling houses with a direct line to the public purse when they lose. For now we are beholden to these “suicide bankers” in the worst possible “heads they win tails we lose” situation. We should be insisting it’s either one way or the other: either we apply some basic capitalism (you lose, you fail) or they should be regulated like public utilities. Jamie’s so cocksure proud he’s such a badass capitalist, surely he wouldn’t mind being yanked from the public teat?

        2. monday1929

          You don’t sound like a shill but the “control failure” was intentional, thus part of the control fraud. It does relate to the systemic risks you cite because they were 1.)gambling with depositors’ money, and 2.) the losses welfare queen banks take often become taxpayer losses.
          There is no doubt a Sarbanes case here, it is pretty clear cut and Yves has laid out the case. Will it happen? Of course not.

        3. BondsOfSteel

          If Dimon was gambling with his own money, I might agree with you.

          Technically, it’s the customer’s and shareholder’s money. They were told the bank would only take one level of risk, and they were intentionally misled. That’s what’s criminal.

          Of course, in reality, it wasn’t just the customer’s and shareholder’s money. The bet was so big, and since the bank is too big to fail, they were gambling with taxpayer money. Heads they win, tails you lose. This is what congress has to fix.

          1. William C

            I used to have professional dealings with JPM many years ago. They always had the highest standards of expertise/competence. I am sorry, but if the story now being fed is that they subsequently inexplicably let their standards slip, I am highly sceptical.

          2. Chris Engel

            But isn’t that essentially what financial intermediaries are in the business of? Risk.

            Banks are going to lose money from time to time, unexpected market turns occur, and lapses of judgment, bad risk management, bad oversight, whatever you want to call it also occur.

            It’s a stretch to make these criminal implications. It’s a good talking point to help bolster the case for tightening regulation, splitting up the banks, etc.

            Writers at Bloomberg have been on board with these kinds of ideas, most recently Matthew Klein:


            WSJ as well:


            So that should be the focus of this case. I think it hurts the argument to try and get into speculation about criminal behavior without the proper evidence.

            There’s more than strong evidence here that can be used to promote serious strengthening of regulations and to help keep the public sentiment with a good negative picture of banking operations as they currently are.

          3. bob

            Bank appologist Mr. Engel-

            What does constitute “criminal behavior” in your book? What would be necessary?

          4. William C

            Chris E

            In the JPM I knew bad risk management and bad oversight were totally unacceptable. What is the suggestion – they got rid of the people who knew what they were doing and replaced them with incompetents? Whilst greatly increasing pay levels?

            As I understand it the traders were being allowed to mark their own books. Totally unacceptable, schoolboy error. By people who were being paid a fortune?

            All just some honest mistakes?

        4. Yves Smith Post author

          You seem to be of the school that no white collar activity is criminal, except maybe embezzlement.

          We’ve discussed Sarbanes Oxley at length. Sarbanes Oxley provides for criminal prosecution for making false certifications about the integrity of financial reports and internal controls. JP Morgan restated its 1Q financials and has yawning chasms in its risk controls. This is a slam dunk Sarbox case, if any had the guts to bring it against Dimon. But I can’t imagine that will happen.

          1. LucyLulu

            After 10 years, and only a handful of criminal prosecutions, and none related to the financial crisis, does anybody take Sarbanes-Oxley seriously anymore?

            Lynn Turner, a former chief accountant at the SEC, one of the agencies that enforces Sarbanes-Oxley, said: “It’s like any legislation. It only works if you’ve got a regulator and a cop enforcing it.”


            Then excellent, must-read article by Allison Frankel (as always) on why cases are hard to prove:

            After Sarbanes-Oxley was passed, said former Enron prosecutor Thomas Hanusik, now a partner at Crowell & Moring, most large corporations put in place multiple layers of subcertification, requiring lower-level officials to attest to the accuracy of financial reports all the way up the chain to the CEO and CFO. [snip]

            But subcertifications also insulate CEOs and CFOs from false certification charges. To prove SOX charges, prosecutors have to show that top officials signed off on financial reports they knew to be false. That’s much tougher when CEOs and CFOs can point to the certifications they received from lower-rung execs.

            and why other charges are brought instead when Sarbox violations are found:

            In those cases, SOX false certification charges are almost always a less-desirable alternative to fraud or other criminal false reporting charges. When prosecutors have strong evidence of corporate wrongdoing, they have an array of options, from wire and mail fraud to lying to auditors or making false statements to federal officials.


  5. Conscience of a Conservative

    Of course the CIO played along; I’ts called control fraud. Dimon wanted to make some real money , was limited by real opportunities and the balance sheet he had, so he took a page out of AIG and MF Global and decided to take some risk, never mind that this was both nefarious and stupid, he had the tax-payers covering his ass.

    We need to stop the subsidies that come out of the Fed, Treasury and Tax-payer and make the banks work like other companies so they understand that if they make mistakes, stock holders and bond holders take the hit, and if they commit crimes they will be prosecuted.

    1. ArkansasAngie

      How about jail?
      How about clawbacks?
      How about breaking TBTF/TBTJ/TBTE up?
      How about obstruction of justice charges against Holder et al?

      1. Screwball

        Exactly, and for a start, make sure they are under oath this time. Dimon wasn’t put under oath when he testified about this. Why?

        1. monday1929

          Because he was wearing presidential cuff-links. Don’t underestimate the symbolism there. HSBC was the Governments admission that fascism is HERE, NOW.
          JPM tens of trillions in interest rate derivatives is keeping the American delusion alive; nothing will be allowed to interfere with that. If Jamie must retire, so be it, another criminal waits in the wings.
          Just like the Geithner/Lew transition.

          1. OpenThePodBayDoorHAL

            These are unarguably grotesquely huge hyper-fascist organizations that have utterly bought and paid for the entire global political control system. They have a stranglehold on the operating narrative myths of our entire civilization. They are now comfortably and confidently and permanently above the rule of law. The only question is when the supine, overworked, uninformed, jaded, hopeless, broke, beleaguered, cowed, and brainwashed public awakes from their slumber to do something, anything, about it. My guess is the first of never.

          2. hunkerdown

            OpenTPBDH, what can’t go on forever, won’t. Can aristocratic rule go on forever? The theory of anacyclosis suggests that it cannot, but it does not suggest that any particular distribution of power and fiduciary duty cannot last a bloody long time before the wheel clicks to the next phase.

  6. John

    My company has its 401k and pension managed by JPMorgan. Should I be concerned that management malfeance could overlap into their other divisions?? I’m picturing them skimming from one company ledger to boost the botton line of another. I’m I being paranoid?

    1. monday1929

      No. They are a criminal enterprise. You should document your concerns about JPM with the “fiduciaries” who selected JPM. You should ask them to document to YOU that they are aware that JPM has signed inumerable consent decrees, has repeatedly violated those decrees, and pays hundreds in millions per year in fines related to their mis-deeds. Any assurance you receive from them MAY give you a bit of standing when it all goes belly-up, and when they say “not one customer ever questioned the integrity of JPM” you can refute that. You may get 20 cents on the dollar while your co-workers get 10 cents on the dollar.
      Good luck.

    2. Ms G

      You might also ask your 401(k) manager whether JPM used the funds in your plan to engage in a Securities Lending Program (SLP) and whether, if so, the plan has been “charged” fees in connection with losses relating to such SLP. (A lot of the SLPs that were going on in 05-08 were done against . . . you guessed it, CDOs and other mortgage-backed dreck.)

      1. monday1929

        Also, you can apparently ask your broker NOT to hypothecate (ie. “borrow”)any funds in your account, and they will comply. You might want to get that in writing:) , and probably won’t work for a 401k?

        1. different clue

          I am a total layman here, obviously. If John is going to try and find these things out in writing, should John send every letter of inquiry by Certified Letter (or whatever form of Letter including forced need for a signature by the recipient of the letter)? Would John need that level of proof that he sent these letters asking these questions? Should John have every such letter that he sends read and signed by a Notary Public or something like that first, so as to be able to prove that the letter asked what John will later be asked to prove the letter asked? How often should John send notarized follow-up letters by Certified or Registered (whichever is stronger) Mail asking why his questions have not been yet been answered?

        2. Ms G

          Maybe if you have a private broker on an indiividual account. I very much doubt that you can ask a 401(k) sponsor to not allow “your” shares in whatever mutual funds are on the plan’s “menum.” 401K holders are pretty much captive money at the mercy of incompetent or corrupt plan managers who consistently do whatever the financial “adviser” tells them to do (which usually coincides with that the money manager told the financial adviser to say, in exchange for a “fee.”)

    3. Ms G

      You could also just move every cent you have in the 401k into whatever cash offering the plan has (assuming they have one). The “fixed income” things are not as conservative as they are made to appear to be, by the way (those were (are?) stuffed with toxic mortgage assets and other very risky though AAA rated “products”).

      Knowing what I know now about the whole 401(k) scam I would opt out of a 401k unless it offered broad index funds from Vanguard, and even then, to preserve principal you may be better off parking the cash at no interest. At least you won’t lose what you have.

      1. different clue

        But if JPMorgan is managing the “cashplan” along with all the other plans at this place of work, then the problem still exists, does it not? The problem is that it is it is the untrustworthy JPMorgan managing the plans, is it not?

        And if it is JPMorgan managing the cashplan at this place of work, then the same hyperdefensive courtroom-quality papertrail of asking all these questions will still have to be documented footprint by footprint, will it not?

  7. NotTimothyGeithner

    If the U.S. Senate can put out a report like this, I can’t even fathom what JP Morgan must have really done. I have no doubt this report isn’t the best white wash the Senators could put together.

    1. Uncle Bob

      read, “jamie deal”; a term coined in TBTF, reffering to the deal between JPMorgan and the govt. to bailout Bear Stearns in 2008

  8. Brian B

    MF Global, JP Morgan… it doesn’t matter the institution. Management just wants positive numbers for quarterly EPS. If a risk manager gets in the way you show him the door and get a new yes man. If something blows up you claim ignorance or it was all too confusing or throw a few “rogue” underlings under the bus. Toilet paper has more value than those CEO and CFO certifications that Sarbanes required be attached to any quarterly or annual reports. The only internal controls managment cares about is controlling the price of their stock options.

    1. Doug Terpstra

      “If a risk manager gets in the way you show him the door and get a new yes man.”

      That’s exactly what Jon Corzine, Obama’s key bribe-bundler, did repeatedly at MF Global, just before he used customer money to attempt to cover losses at JPM. One untouchable “savvy businessman” to another.

    1. earnyermoney

      I’ll suggest a question to the WH pres corps.

      Q. Mr. President, Do you swallow when Jamie pulls out?

  9. Uncle Bob

    Mostly agreeing with all of the above, I offer my 2 cents worth. Again..
    After reading the above article and the story in this morning’s newspaper, I sense surreality having just finished reading,”Freefall” by Joe Stiglitz and now halfway through, “Too Big to Fail” by Andrew Sorkin. The same characters mentioned in the above article are the sane characters in those two books!
    It’s like, “wait a minute, this sounds familiar”..oh yeah..that’s because these guys are pulling the same stunts as they were 5 years ago!
    By “the guys”, I mean Congress as well as Wall Street. Maybe the ultimat reason JPMorgan is doing what they are doing, is because THEY CAN!! If they can get away with it, they will. As long as the rules and policies are administered by folks whose livelyhood depends on those they are supposed to be regulating..nothing will change but the date..i.e. 2008..2013!

  10. briansays

    the question that needs to be asked at the hearing but won’t be

    what will it take mr. president??

  11. Lloyd C. Bankster

    Over lunch at Masa’s yesterday, Jamie Dimon told me that while he was pleased JP Morgan is being described as a criminal enterprise, he was confused by the term “mostly criminal enterprise”, as if there were something wrong with them.

    He asked me if I thought they’d missed something, like maybe some drug cartel money they’d failed to launder?

    I thought about this and took my time answering. First I took a bite of fatty bluefin tuna tartare cloaked in osetra caviar, followed by a toro-and-caviar dish, then proceeded to the elegant kaiseki-style preparation of sea trout in a shabu-shabu broth.

    Finally I told Jamie to chill, not to take it personally. While it’s true Goldman is 100 percent criminal, we’ve had a lot of practice. JP Morgan’s being “mostly criminal” is nothing to be ashamed of. At the rate they’re going, they should catch up to us within 6 to 12 months.

    As Jamie calmed down, the sea trout was followed by an indulgent bite of shaved summer truffles pressed onto sushi rice, and we finished up with a grapefruit granité.

  12. barrisj

    Pardon my cynicism, but the takeaway from all of this is that the TBTF banks just need “new modelling”, and the banksters and the regulators are quite prepared to let “business as usual” continue, after the quant boys polish up their formulae.

  13. LucyLulu

    So here’s the analysis from the “expert” that just ran on MSNBC…………

    “So why should people watching at home care?”

    “There are two things. JPMorgan is a privately held organization but holds deposits by the public. But the money they lost was on internal trades on their own money, not customer money. No laws were broken that we know of.

    Then there’s the TBTF issue but that’s an ongoing issue we’ve been dealing with since 2008. It’s unclear why the Senate is even involved in investigating what happened here.”

    Okay, this isn’t verbatim but it’s a pretty accurate paraphrasing of what was said. I kid you not. No mention of out-of-bounds risk-taking, lying to regulators, cover-ups, lack of controls, etc. I almost lost my teeth listening to the exchange.

    1. Ms G

      Uh, not to mention the non-mention of FDIC insurance and the implicit backstops a-la QE/ZIRP/Maiden Lane etc?

  14. kimsarah

    Even on Project Runway, they can’t get away with blaming the models. While I still don’t understand who lost money in the failed trades, and who gained, or who the overall winner was designed to be, it’s high time that the “awe shucks” and “rogue trader” arguments be laid to rest. As Yves says:
    “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?”


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