Journalism in the Public Interest

Lesson of JPMorgan’s Whale Trade: Nothing Was Learned

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People have learned their lesson.

We've been told that so many times since the near-death experiences of the financial crisis. Bankers and regulators have flipped roles: Now it's the bankers who are cautious and their overseers who are aggressive.

Details of JPMorgan Chase's multibillion-dollar trading loss — brought to light by a riveting and devastating report from the Senate Permanent Subcommittee on Investigations — demonstrate what a sham that is. Bankers aren't acting cautious and chastened. Risk managers aren't in the ascendance on Wall Street. Regulators remain their duped and docile selves.

What we now know about the incident is that, as the cliché has it, the cover-up was worse than the crime. The losses out of the London office weren't enough to take down the bank. But as they were building, JPMorgan traders fiddled with risk measures and valuations. The bank's risk managers defended the traders and pooh-poohed the flashing red signals. The bank gave incorrect information to its regulator. Top executives then made misleading statements to shareholders and the public. All the while, the regulator served its typical role of house pet.

As JPMorgan got into trouble, traders and the responsible executives treated the valuation of trading positions, made up of derivatives, as a puppet made to do what they wanted. The traders pulled on this calculation or that to change the way they were valuing the position to reduce the losses.

Ina Drew, the head of the bank's chief investment office, referring to how the positions were calculated, asked an underling if he could "start getting a little bit of that mark back." She then asked if he could "tweak at whatever it is I'm trying to show." She might believe it is exculpatory that she prefaced the comment by saying to do it "if appropriate" and that the tweak should come with "demonstrable data," but any idiot working for her would know exactly what she meant: Create some rationale to manipulate the valuations to make things look better than they really are.

This discussion did not make it into the bank's internal report on the incident from January. Imagine that.

Yes, Ms. Drew was ousted. But her actions show that what financial executives do postcrisis when faced with trouble is no different than what they did precrisis. In testimony on Friday, in a quiet voice, she deflected blame up to Dimon and down to her traders, claiming she was kept in the dark.

The Senate report makes it clear that JPMorgan misled shareholders and the public, particularly on its April 13, 2012 conference call.

That call, which makes up a particularly damning portion of the Senate report, featured a haughty Jamie Dimon famously dismissing the problem as a "tempest in a teapot."

Of course, it was no such squall. On the call, the chief financial officer at the time, Douglas L. Braunstein, made a number of what appear to be misleading statements about the trades. Braunstein said the trading decisions were made on a very long-term basis, when in fact the traders were shuffling positions almost daily in order to make profits and then to disastrously "defend" their positions from further losses. Braunstein reassured investors and analysts on the call that the trades were vetted by the firm's top risk managers, when they were not (though top officials, including Dimon, knew about repeated risk-measure breaches).

This means "there was risk oversight" for the office that made the trades, and the trading "positions needed to comply with limits," a JPMorgan spokesman, Joseph Evangelisti, said. "We were not aware at the time of all the deficiencies in the risk organization" of the trading group.

On the conference call, Braunstein also said that the trades were "fully transparent to the regulators," but, in fact, watchdogs didn't receive any regular reporting of the positions and only received specific information just days before the call.

"What Doug said was accurate," Evangelisti said. "No one in senior management at that time believed there was a larger problem in the context of the firm's size and scale."

In JPMorgan's internal report, the call receives scant attention. In testimony before Sen. Carl Levin, the Michigan Democrat who heads the Senate subcommittee, Braunstein fell back on the explanation that he was saying what he believed at the time.

Braunstein wasn't available for comment, according to the bank.

Maybe regulators will think it notable that the chief financial officer of JPMorgan misled shareholders in his first extensive comments about the trading losses. Don't hold your breath.

I don't even expect much to come out of the evidence that the bank misled regulators. The bank stopped giving its regulator, the Office of the Comptroller of the Currency, important information. At one point, the bank told the agency that it was reducing the size of its positions when it was actually increasing it, according to the Senate report.

Despite JPMorgan's smoke screens, the regulators deserve the public humiliation they have received. They were alerted to risk-measure breaches that should have warned them of problems. By April 30, 2012, just weeks after the trading debacle came to light and before any serious investigation, the Office of the Comptroller of the Currency declared the matter closed, according to internal minutes from a meeting. (At Friday's hearing, officials from the agency disputed that it was, in fact, closed.)

So, yeah, people have learned their lessons, the real lessons of the financial crisis. JPMorgan repeated the same misdeeds that other banks successfully pulled off at the height of the financial crisis: mismarking portfolios of assets and misleading the public. This was condoned by regulators. Regulators and prosecutors have been averting their eyes for years from rotted bank assets and rotted bank morals; why would JPMorgan expect any different reaction in this case?

Dimon and JPMorgan executives have all publicly donned hair shirts to demonstrate their contrition. Dimon and Braunstein even took pay cuts, going from earning many millions to some fewer millions.

JPMorgan argues that Dimon and Braunstein told regulators and the public only what they believed at the time. Dimon and Braunstein made mistakes, but they quickly worked to clean them up, fire those responsible and change their ways. The losses were small relative to the size of the bank and, if anything, demonstrate the strength of JPMorgan's diversified business. After all, the bank made record earnings last year.

But I suspect that if you dosed JPMorgan executives with Pentothal, they would reveal they believed all of this attention was a media creation and political showboating — still a "tempest in a teapot."

"Not true," Evangelisti, the JPMorgan spokesman, said. "We acknowledged from the outset that we made significant mistakes, and we have repeatedly apologized for them. We do not blame the media or regulators for these issues. This was our fault totally. All we can do now is fix the problems and learn from them."

As has happened so often in the wake of the financial crisis, we are left with the spectacle of bankers — here the well-compensated Dimon and Braunstein — insisting that they were clueless and incompetent, which would shield them from any allegations of intent to defraud.

As for many longtime officials at the Office of the Comptroller of the Currency, they may well think that this was merely a nuanced mistake that calls for nothing more than careful suggestions of remedies that don't harm the bank too much. The new head of the agency, Thomas J. Curry, has begun to clean house and re-energize the place, but the overhaul that is needed looks too big for one person.

So let's take a moment to celebrate a handful of American heroes, Sen. Levin and the staff members at the Senate Permanent Subcommittee on Investigations. Because of them, this corruption has come to light. Friday's hearing served to emphasize how lonely Levin's efforts are. Sen. John McCain, Republican of Arizona and the new ranking minority member on the committee, did a yeoman's job of asking a few questions. Sen. Ron Johnson, Republican of Wisconsin, made a few incoherent statements using the au courant phrase "too big to fail," then scuttled out of the hearing. None of the other senators, Democrats and Republicans alike, bothered to show up.

The 78-year-old Levin, peering over those glasses that seem surgically attached to the tip of his nose, soldiered on.

But let's imagine what would happen if this report does what the senator hopes and puts pressure on the regulators to finalize a simplified and loophole-free Volcker Rule, which would prohibit banks from making bets for their own profit using taxpayer-backed money. Why should we have the slightest confidence that big banks could be persuaded to follow it? And why should we feel reassured that, if they didn't, regulators could or would enforce it?

We shouldn't. And we don't.

Margret Braady

March 19, 2013, 2:53 p.m.

Thank you for continuing to keep us informed on this important issue.

Really - you are too kind to these unethical clowns!  Until a few of them see the light thru barred windows, don’t really think much will change.  They will simply be more devious.  They are no better than pickpockets…..

Victor L. Edwards

March 19, 2013, 3:04 p.m.

A few things remain to be done. I suggest only one: have Jamie Dimon stripped to the waist [I suspect that he would actually like that] and caned publicly. We don’t cane folks in America, you say? We should…

unless we as the public DEMANDS that these bankers and all that are involved are jailed… is a green light for them to rape and pillage all they want. And it is partially our fault. Vote the politicians out that are a part of this…. get rid of the Falonious five on the Supreme Court. and JAIL these criminals!!!!!

Richard Schmidt

March 19, 2013, 3:32 p.m.

This report, plus even causal observation of bankiing activities since the criminal crash of 2008, suggests strongly the need to reinvent banking, globally if not in the US. Our entire financial system seems held hostage to an organized crime syndicate called banking.  The accounting system is complicit in these ventures and also needs to be reinvented to create a wall between the accounting firms and their “clients”.  We are the greater fools the longer we let this system go unchecked.

Let them eat their cake behind bars…..pretty outrageous! !@^%(_*&^!!!

And at this very minute there are thousands of similar trades on the books of our publicly-insured banks, and more being executed every day.  It’s completely unproductive finance—not creating a single job, only slicing off for the bankers yet another piece of our hard-earned GDP.  So how soon before the next bad call…?

“We the People” still didn’t learn anything either.  We keep letting them convince us to vote for the lesser of two evil fascist political parties, while expecting different results.

“Given the information that bank executives possessed in advance of the bank’s public communications on April 10, April 13, and May 10, the written and verbal representations made by the bank were incomplete, contained numerous inaccuracies, and misinformed investors, regulators, and the public about the CIO’s Synthetic Credit Portfolio.” from pg. 11 of the report.  If proven true, this would be a violation of securities law, as noted in section B of chapter VII in the report.

From page 20 of the Exhibit PDF: Inaccurate Public Statements on April 13, 2012
Risk Managers: “All of those positions are put on pursuant to the risk management at the firm-wide level.”
Regulators: “[A]ll those positions are fully transparent to the regulators.”
Long-Term Decisions: “All of those decisions are made on a very long-term basis.”
Hedging: “[W]e also need to manage the stress loss associated with that portfolio . .. so we have put on positions to manage for a significant stress event in Credit. We have had that position on for many years .... ” Volcker Rule: “[W]e believe all of this is consistent with what we believe the ultimate outcome will be related to Volcker.”

Section C of chapter VII makes a good case that all of the above were “inaccurate”, and that various communications (emails and presentations) indicate that CFO and CEO likely knew that they were inaccurate at the time that they were made.

The last sentence from the US senate staff report (pg 301):

“The bank’s initial claims that its risk managers and regulators were fully informed and engaged, and that the SCP was invested in long-term, risk-reducing hedges allowed by the Volcker Rule, were fictions irreconcilable with the bank’s obligation to provide material information to its investors in an accurate manner.”

Isn’t “fictions irreconcilable” such beautiful phrasing.

Thanks for continuing the reporting.

I expect that nothing will come of the senate report except a collection of dust. Hope I am wrong. Those trading may have more impact of Jamie boy.

In the most recent Eric Holder, DOJ, a question was ask (paraphrasing) why there had not been prosecutions due to the financial meltdown instead monetary settlements adding or is it to difficult? Holder, again paraphrasing responded no its not to difficult and adding you know we look at possible cases and determine if prosecution would have an adverse affect on the global economy. This tells me they are untouchable and past behavior will surely not change as evidence. Folks brought in to testify before Congress were given the oath, what happened to lying to Congress under oath? Funny thing at least in one appearance by Jamie boy they did not administer the oath.

The banks and JP learned more than Jesse realizes, they’ve learned they can get away with murder.

I’d be very surprised if any regulator was “duped,” myself.  It seems that regulators get chosen from banks and return to banks.  Why would they hurt their future job prospects by standing against their former and future employers?

Or, more to the point, if they’re duped, it’s by their own design.

Regulatory capture in action.

In the early 1990s the big banks were operating in violation of the spirit of Glass-Steagal before it had actually been dismantled.  Responding to questions about that, Walt Shipley, then CEO of Chemical Bank said, “The law’s a little behind on this one, but we think it will catch up.”  (That’s probably not word-for-word, but it’s close enough.)  Plus ca change…

Jesse Eisinger

About The Trade

In this column, co-published with New York Times' DealBook, I monitor the financial markets to hold companies, executives and government officials accountable for their actions. Tips? Praise? Contact me at .(JavaScript must be enabled to view this email address)