Corporate leaders getting free legal pass on cleaning up financial crisis

From today’s New York Times Editorial Observer by Teresa Tritch:

In recent years, it has become increasingly clear that no prominent banker would be prosecuted for fraud in the run-up to the financial crisis. In the current issue of The New York Review of Books, Judge Jed Rakoff of the Federal District Court in Manhattan asks why.

The comforting answer — that no fraud was committed — is possible, but implausible. “While officials of the Department of Justice have been more circumspect in describing the roots of the financial crisis than have the various commissions of inquiry and other government agencies,” he wrote, “I have seen nothing to indicate their disagreement with the widespread conclusion that fraud at every level permeated the bubble in mortgage-backed securities.”

So why no high-level prosecutions? According to Judge Rakoff, evidence of fraud without prosecution of fraud indicates prosecutorial weaknesses.

This is not the first time Judge Rakoff has weighed in on the prosecutorial response to the financial crisis. In 2011, he rejected a settlement between Citigroup and the Securities and Exchange Commission because it did not require the bank to admit wrongdoing.

His insights on financial-crisis cases also apply to cases that have emerged since then, like JPMorgan Chase’s settlement with the government this week over the bank’s role in Bernard Madoff’s Ponzi scheme.

Under the deal, JPMorgan Chase, which served as Mr. Madoff’s primary bank for more than two decades, must pay a $1.7 billion penalty, essentially for turning a blind eye to Mr. Madoff’s fraud. It must also take steps to improve its anti-money-laundering controls. And it had to acknowledge, among other facts, that shortly before the fraud was revealed, the bank withdrew nearly $300 million of its money from Madoff-related funds.

By adhering to the settlement terms, the bank will avoid criminal indictment on two felony violations of the Bank Secrecy Act. No individuals were named or charged.

And that is the problem. Until relatively recently, it was rare for corporations to face criminal charges without the simultaneous prosecution of managers or executives. That changed over the past three decades, as prosecutors shifted their focus away from individuals and toward corporations, as if fault resides not in executives, but in corporate culture.

Read the entire article here.

Five regulatory agencies approve Volcker Rule, curbing risky banking

Five federal regulatory agencies approved the so-called “Volcker Rule” today, restricting commercial banks from trading stocks and derivatives for their own gain and limits their ability to invest in hedge funds. The five agencies include the Federal Reserve, the Federal Deposit Insurance Corporation, Securities and Exchange Commission, the Commodity Futures Trading Commission and the Comptroller of the Currency:  all five agencies approved the Volcker rule, named after former Fed Chair Paul Volcker who championed restrictions on proprietary trading by banks, which puts into effect the centerpiece of the Dodd-Frank Act’s attempt to reign in financial corruption on Wall Street.

Congress passed and regulators approved the legislation despite the lobbying efforts of Wall Street banks, and the rule itself includes new wording aimed at curbing the risky practices responsible for the $6 billion trading loss, known as the so-called “London Whale,” at JPMorgan Chase last year. The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed by Congress and signed into law by President Obama in July 2010, but the complex nature of financial regulation and the lobbying efforts of Wall Street slowed down the process of enacting the law.

The outgoing Fed Chair Ben S. Bernanke stated that “getting to this vote has taken longer than we would have liked, but five agencies have had to work together to grapple with a large number of difficult issues and respond to extensive public comments.”

Consumer advocacy groups praised the spirit of the rule as much needed reform of the greed and corruption that have become synonymous with Wall Street’s practices in the last decade, which led to the catastrophic consequences of the Great Recession including trillions of dollars and millions of jobs lost.

Dennis Kelleher, the head of Better Markets, said:  “The rule recognizes that compliance must be robust, that C.E.O.’s are responsible for ensuring a compliance program that works, that compensation must be limited, and that banned proprietary trading cannot legally be disguised, as market making, risk mitigating hedging or otherwise…Those requirements will not end all gambling activities on Wall Street, but should limit them and reduce the risk to Main Street.”

For a good summary of the Volcker Rule watch this video.

 

Update: SEC fines JPMorgan Chase $920 million for trading loss cover up

From today’s NYT DealBook Blog:

More than a year after a group of traders at JPMorgan Chase caused a multibillion-dollar loss, government authorities on Thursday imposed a $920 million fine on the bank and shifted scrutiny to its senior management.

Extracting the fines and a rare admission of wrongdoing from JPMorgan Chase, the nation’s largest bank, regulators in Washington and London took aim at a pervasive breakdown in controls and leadership at the bank. The deal resolves investigations from four regulators: the Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Federal Reserve and the Financial Conduct Authority in London.

But the bank has struggled to settle with another regulator, the Commodity Futures Trading Commission, which is investigating whether the bank’s trading manipulated the market for financial contracts known as derivatives. JPMorgan Chase disclosed on Thursday that the agency’s enforcement staff had recommended the filing of an enforcement action.

The regulators who did settle with JPMorgan cited the bank for “deficiencies” in “oversight of the risks,” assessment of controls and development of “internal financial reporting.” The group at JPMorgan tasked with double-checking the traders’ estimated profit and losses was so “under resourced” and “unequipped,” authorities said, that it consisted of a single employee.

The regulatory orders attributed much of the blame to JPMorgan’s senior management, who failed to elevate concerns about the losses to the bank’s board.

Read the entire article here.

 

DOJ stands up to corporate greed

In back to back announcements the Department of Justice signaled it was standing up to unrestricted corporate business practices on Wall Street.

Yesterday, the DOJ said it would bring criminal charges against two former JPMorgan Chase employees who are said to be responsible for a $6 billion trading loss last year that they tried to cover up. Javier Martin-Artajo and Julien Grout are charged with wire fraud, falsifying bank records, and contributing to false regulatory records. Federal authorities are also charging them with conspiracy to commit those crimes after an investigation concluded that the traders “artificially increased” the value of their bets “in order to hide the true extent of hundreds of millions of dollars of losses.” The Securities and Exchange Commission is also planning to take action against JPMorgan for allowing the misconduct. It filed civil charges on Wednesday against the two traders.

In a separate announcement the DOJ also said it would file an injunction seeking to block the merger of American Airlines and U.S. Airways. The merger, which was announced last year, would create nation’s largest air carrier, but federal officials claimed in court papers that the merger would have monopolistic results leading to less choices for consumers and higher ticket prices. Both airlines contend the deal would lead to lower prices and better choices for consumers, and they vowed to fight the Justice Department’s claims in court.

When it comes to smart investing, the lesson is bankers gamble big

The CEO of JPMorgan Chase continued his testimony before Congress today concerning the multi-billion trading loss that bank announced last month. Jamie Dimon testified before the House Committee on Financial Services yesterday, and in a humorous exchange with Rep. Gary Ackerman (D-NY) revealed just how deep self-deceit goes for those holding the cards of America’s financial future.

Ackerman: What is the difference between gambling and investing?

Dimon: I think when you gamble you usually lose to the house.

Ackerman: That’s been my general experience with investing.

Dimon: I’d be happy to get you a better financial advisor.

The idea that the house is fixed but investing is not is increasingly falsified by our experience with the financial collapse. The joke would be funny if Dimon could deliver better financial advise, but as it is JP Morgan does not have a great track record when it comes to making winning bets on acceptable risks.

Andrew Rosenthal of the NYT said this:  “There are many obvious differences between gambling and investing, but let’s just stick to the one that Mr. Dimon offered – there is no fix for the house (the bank) when you invest.”

Rosenthal reports that Chase regularly engages in questionable gambles with apparent fixes. According to an article from last year on JPMorgan and Sigma, a troubled pre-crash investment vehicle. “In the summer of 2007, as the first tremors of the coming financial crisis were being felt on Wall Street, top executives of JPMorgan Chase were raising red flags about … Sigma…But the bank chose not to move out $500 million in client assets that it had put into Sigma two months earlier.”

As a result Sigma collapsed and all of the bank’s clients lost nearly all their money, while JP Morgan collected nearly $1.9 billion. That’s one more example of gamblers losing to the house. I’ll take 10 to 1 odds that its clients wish they had a better financial advisor!

JP Morgan’s Dimon lies to Congress

Today marks the second day of testimony before Congress from JP Morgan’s CEO and chief financial officer Jamie Dimon regarding a multi-billion trading loss the bank recently disclosed to investors.

Despite an increasingly heated debate about financial regulation and banking reform Dimon and other CEOs from the nation’s largest banks have insisted all along that oversight is not necessary, that financial institutions are capable of policing themselves. His testimony before the Senate Banking Committee today included the same naïve assessment—or is it “bad faith”?—despite the fact that risky investments with massive social and economic consequences has become standard operating procedure in the unchecked derivatives markets.

Dimon claimed the loss was an “isolated incident” and spent much of his time defending a pipe-dream vision of the economy called the “free market.” When Sen. Jeff Merkeley (D-OR) asserted that the government had already bailed out Chase Bank in 2008 from similar risky ventures, Dimon (falsely) asserted, “You’re factually wrong.”

Maybe Dimon’s wealth has insulated him from reality and the truth because he is dead wrong, and someone should put his impromptu lying in its context.

  • Fact:  JP Morgan/Chase was on the verge of bankruptcy in 2008 after it colluded with other banks, insurers, and credit agencies in packaging toxic assets and selling them on the derivatives market, all the while betting against its own toxic assets as a form of insurance fraud.
  • Fact:  The U.S. taxpayer bailout of its risky and unethical behavior amounted to $25 billion.
  • Fact:  The recent disclosure of a trading loss on he same derivatives market is likely to reach $5 billion, proving beyond a reasonable doubt that JP Morgan continues its pattern of risky and unethical behavior.
  • Fact:  The U.S. needs serious financial regulation and banking reform. Without such efforts financial institutions like JP Morgan and their lying-for-a-living CEOs will continue to erode the economy, our trust in one another, and the social fabric as well.