As a follow up to my recent posts on the trading loss at the nation’s biggest bank, JPMorgan Chase – JPMorgan Chase And The Problem With Self Regulation and JPMorgan Execs Voiced Concerns Over CIO Bets in 2oo7, it’s clear that many of the facts are still not known and there are troubling questions that need to be answered.
Now that the Securities and Exchange Commission and the Federal Bureau of Investigation are looking into ’s JPMorgan Chase’s huge trading loss, serious questions of wrongdoing need to be asked. And perhaps they will now that shareholders have filed two lawsuits against the bank accusing it and its leaders of taking excessive risk The lawsuits filed in New York charge that JPMorgan changed its risk model without telling investors which led to the losses, and that company leaders misled investors. One suit was filed by California shareholder James Baker. A second was filed by shareholder Arizona-based Saratoga Advantage Trust’s financial services portfolio.
Dealbook implies that there are troubling suspicions of wrongdoing:
The first lesson [of the financial crisis] is that when they are in trouble, banks will mislead the world about their financials. And some will lie. Richard S. Fuld Jr. of Lehman Brothers, E. Stanley O’Neal and Charles O. Prince of Citigroup all played down their banks’ exposures before their institutions took vast losses. Were they deliberately misleading? Because of the failures to investigate the financial crisis adequately, we still don’t know. But we do know that when banks hide their problems, they metastasize and can hurt the economy.
What Did They Really Know?
Questions that will need to be answered include these:
- What did Jamie Dimon, the bank’s chief executive, and Doug Braunstein, the chief financial officer, know and when did they know it?
- Were JPMorgan’s first-quarter earnings accurate?
- Were top JPMorgan officials misleading when they discussed the chief investment office’s investments?
- Why did JPMorgan change a crucial measure of risk during the first quarter. Was that adequately disclosed?
In other words, before discussing reform, the first question should be whether any existing laws were broken. According to Dealbook:
That it hasn’t been asked shows how little true accountability there has been since the financial crisis. No top-tier banker has gone to prison for the many bank failures, the deceptive sales practices or the misrepresentations of the books. As a society, we have thrown up our hands at Too Big to Prosecute financial fraud.
What Were They Hiding?
Although JPMorgan fired the three top executives responsible for the trading loss, we still don’t know much about the timing of these losses. The trades first came to pubilc awareness in early April, 2012, when Bloomberg News and The Wall Street Journal wrote about the “London Whale.” When JPMorgan reported its first-quarter earnings on April 13, Dimon and Braunstein downplayed problem, which Jamie Dimon called “complete tempest in a teapot.” Really?
The inconsistency here is that, while he dismissed concerns then, now the bank says that the big losses in fact happened after the first quarter, in late April and early May. They were clearly executing a damage control strategy worried that, had they admitted the extent of the problem, the losses could have multiplied as investors might have forced JPMorgan to give up its positions at “fire-sale prices.” The bluff didn’t work.
From the losses that have been reported so far, the underlying value of the derivatives contracts was likely $250 billion to $300 billion, and we still don’t know what were these trades were, when the losses occurred and whether the positions were being marked correctly. The one big “London Whale Trade” — buying and selling credit default swaps on the same index but at different expiration dates — appears to amount to only $50 billion or $70 billion, and likely accounts for only $600 million to $1 billion of the $2 – $5 billion loss.
The trades had been initiated months ago and were widely known, and, as Dealbook points out, earlier in 2012, bank insiders reported that
“Mr. Iksil was ‘defending his positions,’ implying that he was doubling down to force the market in the opposite direction. That’s a rookie trading mistake, one presumably approved by his bosses.”
Still No Accountability for Dimon?
So far CEO and Chairman Jamie Dimon has somehow managed to sweet talk his way through the debacle, trading in on his charm. He spent all of four minutes talking about the trading loss and steps the company has taken to address it, and two more talking about accomplishments of the company over the past year. After offering a quick apology to shareholders, he survived a push to strip him of the title of chairman of the board, which he simultaneously holds with the CEO title. The vote to strip him of the chairman’s title won only 40% support. Experts in corporate governance believe that the dual role is abusive.
Also passed was a shareholder endorsement of his pay package from last year, totaling $23 million, with 91% of the vote, according to an Associated Press analysis of regulatory filings. Of course, most of the shareholder ballots were cast in the weeks before Dimon revealed the trading loss. He has received the same amount, in addition to a $17 million bonus, for two years straight.
When confronted at the meeting by shareholders upset about the trading loss, he was not very expansive in his answers. Reportedly, to some questions, he offered a simple, “OK, thank you.” According to the Register Guard:
The Rev. Seamus Finn, representing shareholders from the Catholic organization Missionary Oblates of Mary Immaculate, said that investors had heard Dimon apologize before for the foreclosure crisis and other problems.
“We heard the same refrain: We have learned from our mistakes. This will never be allowed to happen again,” Finn said. “I can’t help wondering if you are listening.”
One wonders: are answers like these worth $23 million dollars? And just what does it take for a powerful CEO to be held accountable these days? Even the president’s response to these risky derivative trades that Dimon himself admits should never have been made was muted. On the television show The View, all he said was: “JPMorgan is one of the best-managed banks there is. Jamie Dimon, the head of it, is one of the smartest bankers we got and they still lost $2 billion.”
As Robert Reich points out:
Not a word about Jamie Dimon’s tireless campaign to eviscerate the Dodd-Frank financial reform bill; his loud and repeated charge that the Street’s near meltdown in 2008 didn’t warrant more financial regulation; his leadership of Wall Street’s brazen lobbying campaign to delay the Volcker Rule under Dodd-Frank, which is still delayed; and his efforts to make that rule meaningless by widening a loophole allowing banks to use commercial deposits to “hedge” (that is, make offsetting bets) their derivative trades.
Nor any mention of Dimon’s outrageous flaunting of Dodd-Frank and of the Volcker Rule by setting up a special division in the bank to make huge (and hugely profitable, when the bets paid off) derivative trades disguised as hedges.
Nor Dimon’s dual role as both chairman and CEO of JPMorgan (frowned on by experts in corporate governance) for which he collected a whopping $23 million this year, and $23 million in 2010 and 2011 in addition to a $17 million bonus.
Wall Street’s biggest banks were too big to fail before the bailout. Now, led by JPMorgan Chase, they’re even bigger. Twenty years ago, the 10 largest banks on the Street held 10 percent of America’s total bank assets. Now they hold over 70 percent.
Regulatory Conflicts of Interest
In the meantime, the loss of at least $2 billion in trading practices similar to those that caused the 2008 financial meltdown again illustrates the need for meaningful financial reform. Jamie Dimon is a director at the Federal Reserve Bank of New York, and has used this position to become the leading voice against regulation of Wall Street. As the Federal Reserve is currently working on crafting and implementing some of the most important aspects of the 2010 financial reform bill, voices are calling for Jamie Dimon to resign from the Federal Reserve Bank of New York.
You can sign the petition here.