There’s been an unlikely yet welcome resurgence of chatter about breaking up the nation’s largest and most powerful banks. Bloomberg’s story quantifying the too big to fail subsidy grabbed some eyeballs (and there’s an upcoming GAO report on the subsidy that will do the same). Sherrod Brown announced an unlikely pairing with David Vitter working on legislation on the subject. Dallas Fed President Richard Fisher is going to give a big speech on Friday on breaking up the banks… at CPAC, the largest conservative political conference of the year.
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At the same time the unending stream of reports of abuses and fraudulent actions give fuel to the movement. And we’ll get another one Friday, when Carl Levin’s Senate Permanent Subcommittee on Investigations releases their report, complete with a companion hearing, on the London “Fail Whale” trades, the losses for which stretch as high as $8 billion.
Early reports suggest that the report will be unsparing. Levin’s committee did an excellent job in prior investigations of Wall Street, including Goldman Sachs (which they gift-wrapped to the Justice Department as a criminal referral, only to see DoJ toss it in the wastebasket). People I’ve talked to expect the hearing to be explosive.
As an excellent preview for the Friday fireworks, I urge you to read an astonishing new report, which I’ve embedded below, from analyst Josh Rosner of Graham-Fisher and Co. The best way to describe the report, “JPM – Out of Control,” is that it reads like a rap sheet.
Notably, Rosner takes mortgage abuses almost entirely out of the equation, and yet still manages to fill a 45-page report with documented case after documented case of serious fraud and abuse, most of which JPM has already admitted to (at least in the sense of reaching a settlement; given out captured regulatory structure the end result is invariably a settlement with the “neither admit nor deny wrongdoing” boilerplate appended). Rosner writes, “we could not find another ‘systemically important’ domestic bank that has recently been subject to as many public, non-mortgage related, regulatory actions or consent orders.”
Obviously this contrasts with Jamie Dimon’s spotless reputation (at least in Washington) and his bold talk of a “fortress balance sheet.” Yet 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.” He calculates that since 2009, JPM has paid out $8.5 billion in settlements for its outlaw activity, which equals nearly 12% of net income over the same period.
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. I try to keep up on these matters, and yet some of these I’m learning about for the first time:
- 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 Service members 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).
The sheer litany of illegal activities just overwhelms you. And these are only the ones where the company has entered into settlements or been sanctioned; it doesn’t even include ongoing investigations into things like Libor, illegally concealing inclusions of mortgage-backed securities in employer funds (another ERISA violation), the Fail Whale trades, and especially putback suits for mortgages, where a recent ruling by Judge Jed Rakoff has seriously increased exposure. While the risks are still very much alive and will continue to weigh on the firm, ultimately shareholders will pay, certainly not executives as long as the no-prosecutions standard holds.
Again, read the report, but two case studies stand out. First, JPM is trying to stick the public with losses related to its purchase of Washington Mutual and its related liabilities. Rosner documents painstakingly how JPM originally accepted the risks and responsibilities with the WaMu deal, and continued to do so for several years. But now that they see the actual possibility of mass mortgage-related putback claims, JPM wants to shift losses on over $190 billion in MBS onto the FDIC.
They hope to get out from under as much as $5 billion in losses in this fashion. It’s impossible to logically follow JPM’s claim that they purchased WaMu but not any of its risk-related activities. The case “demonstrates the unwillingness to accept responsibility for their own management failures,” Rosner writes.
Finally, we have the Fail Whale trade, the subject of the Friday Permanent Subcommittee on Investigations hearing. Rosner keys in on JPM’s internal “Task Force” report, which he compellingly characterizes as a complete whitewash. The Task Force was led by the heir apparent to the company, Michael Cavanagh (“like asking Joe Paterno to do the Penn State investigation instead of Louis Freeh,” in the words of former SEC chair Harvey Pitt).
It limited the scope of the investigation to late 2011 and 2012, when now-public data clearly shows the problems at the Chief Investment Office going back years earlier, and fully known to senior management at the time. Rosner correctly brings up Sarbox Title III violations in conjunction with this, as top executives annually attested to the accuracy of financial statements now known to be untrue. The Task Force tried to exonerate Jamie Dimon by actually saying in a footnote that he was out of town for a period of time covered by the report.
And this footnote from the Task Force takes the cake:
The description of “what happened” is not a technical analysis of the Synthetic Credit Portfolio or the price movements in the instruments held in the Synthetic Credit Portfolio. Instead, it focuses on the trading decision-making process and actions taken (or not taken) by various JPMorgan personnel. The description of activities described in this Report (including the trading strategies) is based in significant measure on the recollections of the traders (and in particular the trader who had day-to-day responsibility for the Synthetic Credit Portfolio and was the primary architect of the trades in question) and others. The Task Force has not been able to independently verify all of these recollections.
Hey, who knows, don’t believe anything we’re saying, it’s not an investigation so much as an impressionistic collage.
Rosner has compiled an impressive dossier for any systemic risk regulator, if we had such things in more than name only in America. And I trust this will be a contribution to the ongoing debate – there really is one – over whether these mega-banks have become too big to manage, and too corrupt to continue.
Here’s the Executive Summary:
- David Dayen: Out of Control – New Report Exposes JPMorgan Chase as Mostly a Criminal Enterprise (nakedcapitalism.com)
- Jaw-Dropping Crimes of the Big Banks (ritholtz.com)
- Jaw-Dropping Crimes of the Big Banks (washingtonsblog.com)
- JPMorgan’s Internal Control Problems, or HSBC’s Got Nothing On Us! (ritholtz.com)
- Senate Report Blames JPMorgan Senior Managers For Bad Bets That Led To ‘Whale’ Loss (huffingtonpost.com)
- JPMorgan: MF Global-like Segregation of Client Funds (ritholtz.com)
- Faux Outrage AT JPM Scheduled For Display In The Senate (dailybail.com)
- JPMorgan Chase: Out of Control (ritholtz.com)