Mirabile Dictu! JP Morgan Finally on Regulatory Hot Seat for Widespread Control Failures and Alleged Lying by Blythe Masters Under Oath

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It’s been far too long in coming, but Jamie Dimon may finally be getting his comeuppance. A New York Times report reveals the Morgan bank is in the crosshairs of multiple regulators for poor controls and dishonest dealings with the authorities:

Government investigators have found that JPMorgan Chase devised “manipulative schemes” that transformed “money-losing power plants into powerful profit centers,” and that one of its most senior executives gave “false and misleading statements” under oath…

In a meeting last month at the bank’s Park Avenue headquarters, the comptroller’s office delivered an unusually stark message to Jamie Dimon, the chief executive and chairman: the nation’s biggest bank was quickly losing credibility in Washington. The bank’s top lawyers, including Stephen M. Cutler, the general counsel, have also cautioned executives about the bank’s regulatory problems, employees say.

The Times reports that the bank faces actions across eight regulators including: FERC, for a series of “schemes” to dupe state authorities to overpay for power and includes allegations that JP Morgan executive Blythe Masters lied under oath; using false documents when collecting credit card debt; and a failure to report suspicious trading activities by Bernie Madoff.

The fact that JP Morgan is in hot water isn’t news. Josh Rosner revealed in an extensive report released in early March that the bank had paid out over $8.5 billion in fines since 2009, nearly 12% of its net income, for violations across virtually all of its operations. This account showed the carefully cultivated picture of JP Morgan as a well-managed operation was an artful fabrication. As Dave Dayen wrote here in his overview:

….as you read the report, it’s hard to see the bank as anything but a criminal racket just days away from imploding, were it not propped up by implicit bailout guarantees and light-touch regulators. Rosner paints a picture of a corporation saddled with pervasive internal control problems, which end up costing shareholders, and which “could materially impact profitability in the future.” ….It’s hard to summarize all of the documented instances in this report of JPM has been breaking the law, but here’s my best shot….

Bank Secrecy Act violations;
Money laundering for drug cartels;
Violations of sanction orders against Cuba, Iran, Sudan, and former Liberian strongman Charles Taylor;
Violations related to the Vatican Bank scandal (get on this, Pope Francis!);
Violations of the Commodities Exchange Act;
Failure to segregate customer funds (including one CFTC case where the bank failed to segregate $725 million of its own money from a $9.6 billion account) in the US and UK;
Knowingly executing fictitious trades where the customer, with full knowledge of the bank, was on both sides of the deal;
Various SEC enforcement actions for misrepresentations of CDOs and mortgage-backed securities;
The AG settlement on foreclosure fraud;
The OCC settlement on foreclosure fraud;
Violations of the Servicemembers Civil Relief Act;
Illegal flood insurance commissions;
Fraudulent sale of unregistered securities;
Auto-finance ripoffs;
Illegal increases of overdraft penalties;
Violations of federal ERISA laws as well as those of the state of New York;
Municipal bond market manipulations and acts of bid-rigging, including violations of the Sherman Anti-Trust Act;
Filing of unverified affidavits for credit card debt collections (“as a result of internal control failures that sound eerily similar to the industry’s mortgage servicing failures and foreclosure abuses”);
Energy market manipulation that triggered FERC lawsuits;
“Artificial market making” at Japanese affiliates;
Shifting trading losses on a currency trade to a customer account;
Fraudulent sales of derivatives to the city of Milan, Italy;
Obstruction of justice (including refusing the release of documents in the Bernie Madoff case as well as the case of Peregrine Financial).

In other words, the New York Times account is a pale rendition of the rap sheet against the bank.

In reality, there’s been evidence for years that the image of JP Morgan as a well-run bank with its oft-touted “fortress balance sheet” was more hype than reality. The bank got more credit than it deserved for having lower exposure to subprime loans than other “too big to fail” institutions, which made it the rescuer of choice during the financial crisis. That status resulted at least in part from the banks have suffered large losses in a business it had helped pioneer, that of corporate credit default swaps, when Delphi went bankrupt in 2005 and got gun-shy in taking on more CDS related risk (and recall it was also CDS that turned what would otherwise have been a “contained” subprime meltdown into a global financial crisis by creating economic exposures that were considerably greater than the value of the underlying loans). Mortgage securitization industry participants also say another reason JP Morgan was an also-ran in the mortgage business in the runup to the crisis was that the bank blew hot and cold about hiring people with the needed experience and contacts. In other words, the fact that JP Morgan escaped the worst of the crisis looks to be due to luck rather than great foresight.

Recall that banking expert Chris Whalen has been saying for years that JP Morgan’s balance sheet quality was also mythologized. While the traditional bank looks solid, the risks it is taking in its $75 trillion derivatives clearing operation dwarf that. And the bank hasn’t been the most astute player there either. For instance, it was snookered for months by Lehman into taking collateral that employees of the failing investment bank called “goat poo.” And when the bank realized the risk it was taking, it struck the fatal blow by seizing over $7 billion Lehman cash and collateral that it held. The bank also looks to have played fast and loose in the failure of MF Global. Recall that it suspected that the broker was using client funds, asked for written assurances from assistant treasurer Edith O’Brien that it wasn’t, and didn’t press the matter when she ignored the requests.

The London Whale fiasco alone demonstrated beyond doubt that JP Morgan was, as Rosner put it, out of control. Even before the Senate investigation, media reports provided compelling evidence of astonishing risk management failures, such as having risk management reporting to the CIO, rather than being independent. Sarbanes Oxley expert Michael Crimmins saw the risk management and control failures to be so severe as to firing Dimon. As he 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.

But the lapdog financial media refused to take these stunning lapses seriously, apparently more taken by the Dimon mythology, as reflected in Warren Buffett recommending Dimon for Treasury chairman last November.

And the Senate hearings revealed Dimon’s and the CIO’s conduct to be markedly worse that the previous press reports had unearthed, including:

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)

And despite this impressive history of bad conduct, JP Morgan was getting special treatment from regulators as recently as January of this year. Marcy Wheeler noted the OCC failed to clean up “previously identified systemic weaknesses” in its anti-money laundering compliance. Eighteen months of intransigence and all the OCC did was scold a bit. It issued no fine.

Even though regulators are finally waking up to the fact that JP Morgan is a dangerous institution that thinks it can act as a law unto itself, the bank does not appear ready to change its ways. The New York Times reports that FERC recommended pursuing Masters and traders over its energy market violations:

For now, according to the document, the enforcement officials plan to recommend that the commission hold the traders and Ms. Masters “individually liable.” While Ms. Masters was “less involved in the day-to-day decisions,” investigators nonetheless noted that she received PowerPoint presentations and e-mails outlining the energy trading strategies.

Masters has apparently lied under oath in offering the usual “I was in charge and I knew nothing” defense. The normal behavior is to cut miscreants loose and at least make a good show of wanting to operate lawfully. But the bank is taking the high-handed route:

“We intend to vigorously defend the firm and the employees in this matter,” said Kristin Lemkau, a spokeswoman for the bank. “We strongly dispute that Blythe Masters or any employee lied or acted inappropriately in this matter.”

Fish rot from the head, and JP Morgan looks to be no exception. Dimon repeatedly made statements to the media and in Congressional testimony about the London Whale trades that were flagrantly false. He wasn’t sworn in and apparently thinks he’s not obligated to be honest with investors, lawmakers, or the public. That sort of arrogance is mirrored in the bank’s pervasive rulebreaking. The upside of JP Morgan’s continued defiance of the law in the interest of its profits is that this latest round of scandals might finally engulf the perp-in-chief.

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      1. from Mexico

        Not just the NY Times, but apparently San Francisco Pride too.

        With Lisa L. Williams, the president of the Board of SF Pride and a Democratic Party aparichnik, the GLBT community has now found its voice with its own 21-century version of Ernst Röhm.

        Using a time-honored process of selecting Grand Marshalls for the annual San Francisco Gay Pride Parade, Manning was chosen for the honor. Daniel Ellsberg was to ride in Mannings place and had already been contacted and agreed to do so. Williams capriciously and arbitrarily overtuned the decision. As Glenn Greenwald explains:

        Williams proclaimed that “Manning will not be a grand marshal in this year’s San Francisco Pride celebration” and termed his selection “a mistake”. She blamed it all on a “staff person” who prematurely made the announcement based on a preliminary vote, and she assures us all that the culprit “has been disciplined”: disciplined. She then accuses Manning of “actions which placed in harms way [sic] the lives of our men and women in uniform”: a substance-free falsehood originally spread by top US military officials which has since been decisively and extensively debunked, even by some government officials (indeed, it’s the US government itself, not Manning, that is guilty of “actions which placed in harms way the lives of our men and women in uniform”). And then, in my favorite part of her statement, Williams decreed to all organization members that “even the hint of support” for Manning’s actions – even the hint – “will not be tolerated by the leadership of San Francisco Pride”. Will not be tolerated.


        Somewhere along the way, human rights for the orthodox GLBT activist transmogrified into rights for no one except right-wing neocons. It’s a disturbing and unsetling trend, as Greenwald surmises:

        But the fact that such lock-step, heel-clicking, military-mimicking behavior is now coming from the SF Gay Pride Parade of all places is indeed noteworthy: it reflects just how pervasive this authoritarian rot has become.

        1. Doug Terpstra

          Why bother with a trial for Manning? The verdict is already in:

          “We’re a nation of laws. We don’t individually make our own decisions about how the laws operate [except in the case of Jon Corzine] . . . [Manning] broke the law.” (Barack Obama, Constitutional scholar, law professor and drone assassin).

          No one can ever be permitted to reveal imperial war crimes, but I suppose residual concern for the optics of justice have forced the kangaroos to go through the motions of a trial — although it will be an oxymoronic “secret show trial” of course “for national security reasons”.


        2. Working Class Nero

          What I find astonishing is that any surprise at all is shown when elite gays, Jews, blacks, women, whatever, are shown to be just as corrupt as elite straight gentile white men.

  1. Larry

    For the auditor to present a material weakness in internal controls on an audit client as large as JPM means that they probably know something is coming and are covering their asses. They’re not about to pass on the fees but want a wall between them and the looming litigation. My 2cents.

    1. AbyNormal

      6/12 Jim Sinclair posted this

      There is a big problem brewing again in the OTC derivative market.

      A major international financial auditing firm is currently involved in a massive project on Wall Street that presently has over 900+ consultants involved, which is massive and beyond even the size/scope of the Fannie Mae restatement several years ago. They’re grabbing any senior financial analyst and software expert that they can to help this “unnamed” major Wall Street bank calculate valuations for a suddenly devaluing portfolio of Credit Default Obligations that they have heavily invested in. This auditing firm is charging nearly double their normal billing rate and is getting it, no questions asked.

      (still no word on ‘who’…but can only imagine the counter parties fallout)

      1. sierra7

        Not surprising!!

        Anyone who thinks this mess is “over and done with” is smoking some crazy weed!!

  2. Susan the other

    JPMChase is “rapidly losing credibility with Washington.” Like losing cred in prison.

    1. profoundlogic

      Perfectly compliant to look out for JPM’s bottom line. Rules and regulations are for little people when you have Presidential cufflinks.

  3. ftm

    Dimon won’t be dethroned by the board as he holds the criminal enterprise together. If he goes, look for the bank to unravel into a long series of scandals.

    And no regulator will try to take Dimon out given his closeness to Obama.

    The best we can hope for is a Masters perpwalk.

    1. JCC

      Actually the best we could hope for is the sound of the guillotine blade… sometimes an eye for an eye is appropriate, but I would be just as pleased with some frog marches down Wall St.

      At the rate we’re going I don’t expect to see it in my lifetime, but despite our L.I.C., his cabint and his cohorts (Congress) in crime, I still have hope something positive will come out of all this.

    2. bhikshuni

      While Dick and Liz Cheney are still around, they could find away to feasibly manage this. History shows the GOP will do whatever it can to take down a president in the opposition.

      If it happens, we will be assured that NC did try to warn the administration and anyone else who would listen, spelling it out in vivid detail, week after week, year after year, these systemic swamps of corruption, to no avail.

      It is like a heroin addict who will overdose and die rather than take a lower dose of gratification. Same pathology of desire and addiction, on the steroids of power.

  4. sd

    How is JP Morgan not a criminal enterprise at this point? Crime seems to be its sole purpose.

    I don’t doubt that there are some honest employees within the company, but I suspect they are the exception and not the norm.

  5. profoundlogic

    Couldn’t happen to a nicer person, and that would apply equally to both Dimon or Masters. Perhaps the squid will lose a few tentacles?

  6. psychohistorian

    So what.

    Will we be given a new pope for JPM while Jamie slouches off to find people to suck his gold plated dick?

    Will this change the rules of inheritance that give Jamie’s puppet masters the power to hire sociopaths like Jamie?

    The rich need to be tried at the Hague for crimes against humanity, have their wealth returned to the global commons and inheritance changed so that none can accumulate enough to set/change social policy in any future.

    1. Doug Terpstra

      Hear! Hear! Apparently the Department of Just Us Rich Guys has tagged Jamie as untouchable as Jon Corzine. He must be another of Obama’s favored bribe-bundlers and Eric Coat-Holder can’t be bothered. You’d think JPM’s 29-strikes rap sheet, like HSBC’s, BAC’s, and Well’s, would at some point entail the death penalty for the banks and its cronies, but it seems the upper caste is truly untouchable.

      In time, that term “untouchable” will finally revert in the public’s consciousness to its earlier meaning: “leprous”. Then, IF he escapes the lamppost, Jamie-boy won’t find many fellatio vounteers; instead he’ll be the one kneeling and bobbing in the supermax.

  7. Susan the other

    And for more of the surreal. Last nite a broadcast on Cspan2 of the annual meeting of the Investment Company Institute. The keynote speaker was Lloyd Blankfein. Who talked in circles of disjointed sentences to emphasize the importance of “pools of capital.” Whatever. Wouldn’t want to stifle their creativity. He said that Money Market Funds were a banksters best friend because, I assume, GS could siphon pension funds out of MMFs without a twinge of conscience because the pensioners were not GS clients but the clients of their clients. Levels of denial so critical to the working processes of big capitalists. Like MERS-super agent of the banksters: It doesn’t matter that there is not a formal contract because we say they are our agent, in fact the agent of our agent is also our agent if we choose because there is no law against it. And etc. ad infinitum. Funny, this time Lloyd didn’t even mention Africa – supposedly the new recipient of all of GS’s investments. Oh well.

  8. sierra7

    “He wasn’t sworn in and apparently thinks he’s not obligated to be honest with investors, lawmakers, or the public.”

    If I remember correctly the heads of the “big” banks prior to their testimony before Congress in 2009 (?) also were not sworn in…….which shows how Congress kow-tows to the banking sector.

    We can’t expect anything more from the JD’s of that industry (or from Congress)…..


  9. Lune

    I like the NY Times title: “JPMorgan Caught in Swirl of Regulatory Woes”. As if poor JPMorgan was just an unfortunate kayaker who happened to unwittingly get caught in some malevalent regulatory whirlpool that might unjustly cause it injury. JPMorgan is an innocent bystander and the regulators are the malevalent disease.

    The real title should be “The noose tightens over JPMorgan’s criminal actions”. That it isn’t shows how much of an industry mouthpiece NYT’s DealBook column is.

  10. Skeptic

    What could have occurred Behind The Curtains so that now some Prosecutor will go after one Big Bank? What happened to TBTF? What happened to crashing the World Financial System? Suddenly, the rotten Political System which runs the Injustice System is honest and ethical?

    Sorry, but until someone produces evidence that JPMorgan has fallen out of favor with Obummah and Bunch, then this will be Slap-on-the-wrist, business as usual.

  11. Simon

    Sorry to disappoint y’all.. but this will come to nothing.

    Insiders? Justice?



  12. timotheus

    Two dissonant notes in the NYT article: the COC is the agency getting ready to go after JPM in a big way? Quick! Duck! There are pigs flying overhead.

    Also, Masters is accused of lying to feds, and the result might be a fine? Not even a hint of a possibility of a thought of a suggestion of criminal prosecution? Pathetic.

  13. jfleni

    This is not just another load of “whale droppings” but a latter day imitation of many of Enron’s worst crimes.

    Not even the smuggest of the plutocrats and their political enablers and butt-kissers think Enron was totally wonderful; “Blow Dry” Dimon might just be setting himself up for a hard fall, accompanied by a clutch of “executives” who forgot (or never knew) the long and severe sentences similar executives got there!

  14. talktotennessee

    No one is big enough or unbiased enough to put the brakes on these guys. Like Olympus, endoscope manufacturers who spent over a decade hiding off the books losses in massive fraud to the tune of 1.7 billion, sweeping under the rug unil their CEO dropped a dime on them. JPM is just another player doing what they can get by with. Too many foxes in the house! Simon Says is right, just another story, nothing to see here.

    1. tennessee w

      “Take us the foxes, the little foxes, that spoil the vines: for our vines have tender grapes.”
      Maybe Tallulah starring as Jaime Dimon in the movie made for tv, or maybe Bette Davis. Small town Alabama of days gone by is a lot like Wall Street of today.

  15. thurbs

    Not that anything will come of it, but doesn’t anyone remember that Martha Stewart was not convicted of insider trading, but of giving false statements to investigators. Statements that came without her being sworn in to anything or having been given a Miranda warning.

    Unless there have been considerable changes to the statute used to send Stewart to prison, pretty much every major banker in America could be convicted tomorrow of lying to investigators. There is just no will to do so.

  16. bhikshuni

    Thanks so much for keeping up with this long and tedious nightmare, Yves.

    As a sign of heartfelt appreciation, kindly enjoy:

  17. rob

    I wouldn’t hold my breath waiting for any real punishment to be metered out to the likes of dimon or jpm for that matter.There will be lawyers making big returns,accountants with extra billing hours.Lawmakers and regulators grandstanding in the mirror,pretending they are not total pieces of shit……But not a damn thing will happen.New papers will be filed somewhere.Time will go by,fees will be collected.Revenue streams will still flow.The house of cards will need more glue-gunning….And at worst, dimon will take a billion dollar severence “package”,and go look for more people to screw,in a decade…
    I mean c’mon people, what is lying under oath?what is swindling a nation and a global economy…..what is stealing a decade from the millions of people dealing with the “economic downturn”.What is hollowing out the edifice of economic stability and leaving populations subject to the collapse,if it comes…
    I mean, our legislators and regulators and “free press”, have bigger fish to fry…maybe marion jones or lance armstrong or some other sports figure can be charged with lying under oath when asked if they used performance enhancing steroids or something really important.

  18. elite proxy

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