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.

 

Moody’s to downgrade large banks

FROM THE NYT DEAL BOOK BLOG:  If true, this is an important step by the market to correct for false advertising. One question is whether it will make a difference cleaning up corporate malfeasance and fraud.

Believing that the government is now more likely to let large banks fail in a crisis, Moody’s Investors Service threatened on Thursday to downgrade the credit ratings of several big financial firms.

If it follows through, Moody’s could reduce the ratings of Wall Street giants like Goldman SachsMorgan Stanley and JPMorgan Chase as much as two grades.

Such a move might weigh most heavily on Morgan Stanley because a two-notch downgrade would leave the company just above a junk credit rating. But the effects on the bank may also be muted. Confidence in large banks, judging by their stock prices and other financial indicators, appears to have risen since Moody’s cut their ratings last year.

Banks, more than other types of corporations, borrow huge sums of money to finance their activities. As a result, a lower credit rating can make it harder for them to find buyers for their debt, pushing up their borrowing costs. A lower rating can also deter trading partners from entering certain types of lucrative transactions with a bank.

Financial companies’ reliance on borrowed money is what made them so unstable in the 2008 financial crisis. The government has introduced measures, many of which are contained in the 2010 Dodd-Frank financial overhaul law, that are intended to put banks on a firmer financial footing.

Dodd-Frank also tries to set up a process for an orderly winding down of failing banks. Lawmakers wanted to avoid a repetition of the 2008 situation, where taxpayers were effectively forced to bail out banks to prevent their failure from hurting the wider economy.

The orderly wind-downs envisioned in Dodd-Frank could lead to big losses for creditors to banks. In recent months, regulators have started to flesh out how they might liquidate a collapsing bank. This progress prompted Moody’s to consider the downgrades now to reflect the lower possibility of government support.

“The conviction on this subject is clear, even growing,” David Fanger, a bank analyst at Moody’s, said. “This could lead to a one- or two-notch downgrade for some of these firms.”

Goldman, whose rating is A3, and JPMorgan Chase, whose rating is one notch higher at A2, declined to comment.

Many critics of the Dodd-Frank liquidation provisions doubt that the government would have the stomach to inflict losses on bank creditors in times of systemic stress. In April, Paul Volcker, a former chairman of the Federal Reserve, expressed skepticism about Dodd-Frank’s wind-down approach. “No one in the market believes it,” he said.

Still, Moody’s thinks the efforts have credibility, in part because regulators have started to describe the exact steps they might take in a liquidation. Under the plans, the government would seize the parent company of a bank and turn its debt into equity capital to make it stronger financially. In the process, regulators would most likely not seize the affected bank’s subsidiaries. That is why Moody’s on Thursday threatened to downgrade parent company ratings but not always those of bank subsidiaries.

Moody’s decision to review the ratings will reinforce the beliefs of those who say Dodd-Frank’s measures are sufficient to deal with the “too big to fail” issue. But the actions of lawmakers who do not feel the act is adequate may have also contributed to Moody’s actions. In recent months, lawmakers have introduced two bills that aim to do more to rein in large banks.

“They simply indicate the conviction within the United States government to solve the ‘too big to fail’ problem,” Mr. Fanger said. “They clearly put pressure on regulators to make the current law work.”

Mr. Fanger added that the Dodd-Frank liquidation process might lead to lower losses for creditors than a potentially less orderly approach. To reflect that possibility, any downgrades may be less severe, he said.

Citigroup and Bank of America, large banks that have relatively low ratings, may not have to worry about Moody’s latest action. The agency said their ratings had been placed on review “direction uncertain.” Moody’s perceives improved financial health at the two banks’ subsidiaries. That could offset the downward pressure on ratings from the Dodd-Frank liquidation process, Moody’s said.

SEC takes harder line against fraud

The Securities and Exchange Commission signaled it was taking a harder line on Wall Street’s rampant problem with fraud by extracting its first admission of wrongdoing from Philip Falcone, CEO of Harbinger Capital Partners.

Falcone admitted to market manipulation and as part of a settlement will pay $18 million in fines in addition to being banned from trading for five years. He was accused in June 2012 of manipulating the market by improperly using $113 million in fund assets to pay his own taxes and to favor some customer redemption requests secretly over others.

The deal comes a month after the SEC overruled its own enforcement staff to reject an earlier settlement last month. The original agreement called for a two-year ban from raising new capital and no admission of wrongdoing and did not include an injunction against committing fraud in the future. According to reports the SEC’s new chairwoman Mary Jo White said people were increasingly frustrated with the agency because of its lax oversight and punishments.

The new agreement reflects a wider policy change in the Obama Administration, which has been criticized for failing to go after market manipulators and to tackle the problem of fraud on Wall Street. The DOJ announced last week it was filing criminal charges against two JPMorgan Chase traders who lost $6 billion last year from risky derivatives trading. Monday’s agreement between Falcone and the SEC sets a precedent for future cases including those involving JPMorgan Chase and the hedge fund SAC Capital Advisors.

Despite huge losses banks continue subprime mortgage securities fraud

There is an interesting article in today’s New York Times business blog about the reverberation of subprime mortgage securities that are still being peddled by banks and financial institutions. Below is an excerpt of the article, which tracks GSAMP Trust 2007 NC1, a subprime mortgage securities bond that has enriched various Goldman Sachs executives despite the fact that 3/4 of mortgages that bond covers are in default.

A subprime deal came back to haunt Fabrice Tourre, a former Goldman Sachs trader, when a federal jury in Manhattan found him liable for civil securities fraud.

He is not the only one feeling the pain of a subprime transaction six years on.

Hundreds of thousands of subprime borrowers are still struggling. Some of their mortgages ended up in another Goldman deal that was done at the same time as Mr. Tourre was working on his own financial alchemy.

In February 2007, just before everything fell apart, Goldman Sachs bundled thousands of subprime mortgages from across the country and sold them to investors. This bond became toxic as soon as it was completed. The mortgages slid into default at a speed that was staggering even for that era.

Despite those losses, that bond still lives. It has undoubtedly left its mark on ordinary borrowers. But the impact of the deal spread ever further. It touched the bankers who sold the deal. It even landed on taxpayers, who ended up owning a large slice of the Goldman bond.

Much has changed over the last six years. Big banks like Goldman are reporting strong profits and regulators are wrapping up cases stemming from Wall Street’s recklessness. House prices are on the rise, providing relief and encouragement for many homeowners. Indeed, subprime securities like the Goldman bond can now even be found in some mom-and-pop mutual funds — which bought them at a discount of as much as half of their original face value.

Yet the financial crisis still reverberates for many others, in large part because of the insidious reach of the financial products that Wall Street created. Subprime securities still pose a significant legal risk to the firms that packaged them, and they use up capital that could be deployed elsewhere in the economy.

This is the story of one of those bonds, GSAMP Trust 2007 NC1.

Read the entire story here.