Strengthening the Understanding of the Vital Role of Regulation and Compliance

JPMorgan Chase was regarded as having sound accounting practices. That is until they disclosed a $2 – $5 billion loss based on risky transactions involving synthetic credit securities, or hedges.  To put this in perspective, it cost JPMorgan nearly 10 percent of its stock price.

So what are synthetic credit securities? Bloomberg Business Week defines them as “derivatives that generate gains and losses tied to credit performance without the owner buying or selling actual debt.” In other words,  betting on the direction of the economy. As Sen. Carl Levin (D-Mich.) explained, this is more evidence that what banks call ‘hedges’ are often actually “risky bets that so-called ‘too big to fail’ banks have no business making.”

So, despite the meltdown of 2008 caused by the very same derivatives, big banks continue to take risks that imperil the entire economy leaving taxpayers, employees and consumers on the hook.

Now A Criminal Probe

Appropriately, the Securities and Exchange Commission has launched an investigation into the bank’s accounting and disclosure practices, as is the Federal reserve, and the Justice Department through the FBI’s New York office, according to Reuters.  An investigation by the FBI means JPMorgan is now in the midst of a criminal probe.

The investigations are appropriate because this bad bet wasn’t due to a trader gone rogue as with UBS. Since all the JPM people who should have known about the big bet on corporate debt knew about it, the ouster of the bank’s Chief  Investment Officer Ina Drew and others were inevitable. Drew, a 30-year veteran of JPM, apparently volunteered her resignation weeks befire as it became apparent that the trades were losing money. We can also expect resignations from, among others, Achilles Macris, head of the CIO, who ignored concerns from the unit’s internal risk manager in 2009 and Doug Braunstein, who, as Chief Financial Officer since 2010, tolerated a too-high level of risk,

The Disconnect Between Word and Deed

JPMorgan Chase was supposedly a well-run self regulated bank. Then why did CEO Dimon lobby so hard to erode proposed banking regulations created after the 2008 financial collapse  that was precipitated by exactly the same kind of risky and secretive deal-making that resulted in JPMorgan’s incredible loss? Why did he blame excessive regulation for banking woes, and hold that the Volcker rule, designed to prevent financial institutions from taking risks with federally insured deposits, would only make things worse?

You might say that JPM violated the proposed Volcker Rule, but it has yet to be written. and Jamie Dimon’s lobbying efforts can be held largely responsible for the fact that we have a regulatory system that only reacts when it’s too late.

According to the Star Ledger, Democratic Senate candidate Elizabeth Warren of Massachusetts called on Dimon to resign from New York’s Federal Reserve Board, from which he could presumably advise banking regulators how best to regulate his bank, a clear conflict of interest.

It’s Not The Politics Stupid!

Will this loss strengthen the argument for stronger controls when the decision about how to interpret the Volcker rule is made in July? Will legislators finally be prepared to stand up to the financial lobby?

I wouldn’t bet on it.

It’s important to remember what got us here. Another banking giant, Sandy Weil of Citibank, succeeded in convincing a Republican Congress and Democratic President (Clinton) that what was left of Glass Steagall needed to be completely dismantled. This also coincided with ongoing organized efforts to establish “corporate personhood” across the country, via an agenda of judicial activism that was originally initiated by Supreme Court Justice Lewis Powell on behalf of the Tobacco Industry and continues to this day.

Partisan Republicans and Democrats may point fingers at one another, with calls by just about every politician on the Hill for more regulation, as well as the president. However, the causes are neither partisan nor even political per se.

How A Judicial Activist Agenda Led to Today’s Debacle

Although both 1972 Nixon-appointed Supreme Court justices Powell and William Rehnquist were conservatives, the principled Rehnquist resisted Powell’s radical corporatist views. From Alter Net a brief background of the under-the-radar agenda that got us where we are today:

Despite the Rehnquist dissents, Powell’s vision of an unregulated corporate political “marketplace,” where corporations are freed by activist courts from the policy judgment of the majority of people, won out. Powell, of course, could not have…moved a majority of the Court to create corporate rights if no one had listened to his advice to organize corporate political power to demand corporate rights. Listen they did — with the help of just the sort of massive corporate funding that Powell proposed.

Corporations and corporate executives funded a wave of new “legal foundations” in the 1970s. These legal foundations were intended to drive into every court and public body in the land the same radical message, repeated over and over again, until the bizarre began to sound normal: corporations are persons with constitutional rights against which the laws of the people must fall.

Huge corporations, including Powell’s Philip Morris, invested millions of dollars in the Chamber of Commerce’s National Chamber Litigation Center and other legal foundations to bring litigation demanding new corporate rights. In rapid succession, corporations and supporters funded the Pacific Legal Foundation, the Mid-Atlantic Legal Foundation, the Mid-America Legal Foundation, the Great Plains Legal Foundation (Landmark Legal Foundation), the Washington Legal Foundation, the Northeastern Legal Foundation, the New England Legal Foundation, the Southeastern Legal Foundation, the Capital Legal Center, the National Legal Center for the Public Interest, and many others.

These foundations began filing brief after brief challenging state and federal laws across the country, pounding away at the themes of corporations as “persons,” “speakers” and holders of constitutional rights. Reading their briefs, one might think that the most powerful, richest corporations in the history of the world were some beleaguered minority fighting to overcome oppression. The foundations and the corporate lawyers argued that “corporations are persons” with the “liberty secured to all persons.” They used new phrases like “corporate speech,” the “rights of corporate speakers,” and “the corporate character of the speaker.” They demanded, as if to end an unjust silence, “the right of corporations to be heard” and “the rights of corporations to speak out.”

The results of endowing corporations more rights than individuals is not just restricted to the kind of damage shown in the video below. It has resulted in economic devastation that imperils taxpayers, employees and consumers. The analogy to this video is that the economic fortunes of the middle class are going up in smoke as the effects of unbridled corporate irresponsibility trickle down.

The Fox In the Henhouse

The rest, as they say, is history. In the current presidential election, there is a limited choice between a Powell-ite Republican, and a finger-in-the-dike Democrat, both of whom rely on the funding and council of the financial sector, and the same can be said of the gridlocked legislature. Rounding this out, judicial activism leaves little hope for an end to the policies that put the fox in the hen house, leading to greater income polarization, reduced economic opportunities and a weakened economy. And the corporate financial sector, as demonstrated by JPMorgan Chase and the SROs (the SEC and FINRA) does not do a proper job of policing itself. All of which means that the economy is at the mercy of individuals like Jamie Dimon.

A Time for Regulatory Compliance

In the months ahead, you’ll be reading a lot of opinion about the JPMorgan Chase debacle. The majority of it will be meaningless reporting. A good portion of it will be partisan propaganda. Hopefully, a very small part will shed some light on the real issues about the vital role that regulatory compliance plays in keeping the economic sector strong and stable.


The 2008 economic meltdown was the subject of a recent Frontline special “Inside the Meltdown” that explains how the 2008 meltdown unfolded.

Snap! principle of regulatory compliance:

Compliance is not the enemy – it’s the white blood cells in the body of the economy.