Journalism in the Public Interest

What Did JPMorgan Execs Know and When Did They Know It?

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The Securities and Exchange Commission and the Federal Bureau of Investigation are looking into JPMorgan Chase’s trading debacle — and if you think anything is going to come of that, well, I’m pretty sure that JPMorgan has some derivatives it would love to sell you.

A serious investigation is still necessary. The first lesson of the financial crisis is not that the capital markets were poorly regulated or that the banks were too leveraged or that the government needed better processes for taking over failing institutions.

The first lesson 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.

So before we move on to other vital discussions — about tightening the Volcker Rule, preventing the rollback of Dodd-Frank’s derivatives provisions, whether these banks are Too Big to Manage and more — we need to go back to the basics:

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?

Perhaps JPMorgan was a model of probity, but so far these questions have been given only glancing treatment. The news coverage has largely focused on how the bank took the losses, what went wrong with its risk management and what it’s doing now. The commentary has mostly gone straight to discussing the implications for banking reform.

That’s already a victory for bankers — including Mr. Dimon. The first question on everyone’s mind should be whether any existing laws were broken.

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.

Granted, it’s also because Mr. Dimon is charming. Last week, in his extraordinary conference call, he was refreshingly straightforward and made a big show of contrition. He repeatedly said things chief executives don’t say, calling his bank “stupid” and its conduct “egregious.”

And there has been a measure of internal accountability: JPMorgan cashiered the three top executives responsible for the trading loss.

But we still don’t know enough about the timing of these losses.

The broader public became aware of the trades when Bloomberg News and The Wall Street Journal wrote about the “London Whale” in early April. JPMorgan dismissed concerns then.

Now the bank says that the big losses happened after the first quarter, in late April and early May.

JPMorgan reported its first-quarter earnings on April 13. That’s when Mr. Dimon and Mr. Braunstein played down the problem, including with Mr. Dimon’s now-infamous remark that reports about the trades were a “complete tempest in a teapot.”

JPMorgan was clearly executing a strategy. The bank didn’t want its trader to become a wounded zebra on the savanna, attracting predators. Had the bank owned up to the problem right away, the losses could have ballooned as other investors piled in on the other side to force JPMorgan to let go of its positions at fire-sale prices.

JPMorgan executives spread the word, whispering in the ears of reporters and analysts, that hedge funds on the opposite side of the trade were in trouble. JPMorgan signaled that it wasn’t going anywhere. It had a big balance sheet behind these trades and could hold for a very long time. Its message: Hedge funds, you’re in trouble. Sell now.

“As they started to get some scrutiny, the last thing that they wanted was to admit that the journalists had been right,” said David Murphy, a risk management specialist at Rivast Consulting.

Now we realize the bank was bluffing. And it didn’t work.

Of course, bluffing isn’t illegal. From traders’ and bloggers’ efforts to figure out what JPMorgan’s positions were, it appears that the credit default swap indexes that the London Whale, Bruno Iksil, was speculating in started to have big moves recently. That argues in favor of the idea that the first-quarter earnings were not misstated, the most egregious potential transgression.

But there are some odd aspects. Even on Wall Street, losing $2 billion typically takes a while. 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 around $50 billion or $70 billion, and likely accounts for perhaps $600 million to $1 billion at most of the more than $2 billion loss, I’m told.

So there were other trades involved, which have also taken losses. From the losses that have been reported so far, the underlying value of the derivatives contracts was likely to be $250 billion to $300 billion. What were the other trades and when did those losses take place? And were positions being marked correctly?

JPMorgan changed a crucial measure of risk during the quarter. Why? And was that adequately disclosed?

At best, this was a huge management failure. The trades had been initiated months ago and were widely known. Earlier in the year, people inside the bank spoke of Mr. Iksil as “defending his positions.” That carries the implication 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.

It’s only human to have trouble owning up to mistakes. As Mr. Murphy, the risk management specialist, put it: “There’s always management pressure when it’s a big number and it’s material. ‘Are we sure?’ The last thing managers want is a big loss in quarter that then comes back right afterwards. Then they look like total idiots.”

But given the outstanding questions, looking like an idiot is the best-case scenario.

“Of course, bluffing isn’t illegal.”

Eh?  Uneducated as I am in finance or law, it didn’t take me a full minute with a web search to turn up a gem in the Federal Trade Commission Act, 15 USC s45(a)(1):  “Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful.”  Surely, “deceptive acts…in or affecting commerce” would include (or be) bluffing.

Granted, the following paragraph explicitly prevents the FTC from punishing banks (most financial institutions) in particular for it, but that doesn’t change its legal status so much as limit jurisdiction, as I read it.

Brett Sherman

May 16, 2012, 3:03 p.m.

There are myriad ways in which J.P. Morgan’s “hedge” could be fraudulent.  At the most basic level, the fact that J.P. Morgan made (giving the bank the benefit of the doubt) such a massive risk management error may, in and of itself, be proof of fraud. Why? Because courts have held that companies are liable under the securities laws for misrepresenting “qualities” like risk management commitment/capability.  Certainly, J.P. Morgan has gotten a lot of mileage from touting its superior approach to risk management.  If, in fact, it is shown that J.P. Morgan turned a blind eye to the risks or otherwise acted inconsistently with its stated approach to risk management, then that is fraud.

Sen. Bernie Sanders mentioned that the 6 largest banks control $9.3 trillion in assets on this very day. Our total gross national product is around $14.5 trillion. These banksters are driven by one thing: Bonus payments. Lest they sink the national boat, let’s bust them up or lay a strong Glass-Stegal statute on them again. They cannot be managed by any measure of understanding of the word.

Achille Tendon

May 16, 2012, 4:10 p.m.

All these new “products” engender enormous notional amounts which have nothing at all to see with any reality -> they must be forbidden in the sense that they are not a real part of any economy.

On top of that they are uncontrollable !!!

They are the toys of these crazy banksters: a cash machine for their huge and insane bonuses !!!

More important.  Where did the money go?  It didn’t just evaporate.  If you think that the people that profited had no hand in the actions, then I have derivatives to sell YOU!

Blame Obama [ not Bush } he does business there.

Why isn’t Glass Steagall reintroduced and reinstated as law?

According to an AP article, shareholders approved a better than $2 Million bonus for Mr. Dimond.  It also mentioned that a lot of shareholder votes were in before the news of the $2 billion loss was announced.

My question is, did Mr. Dimond wait until he had a certain number of shareholder votes in, before he announced the loss.  If so, is that kosher?....or legal?

I would say the fact that Dimon himself and JPMorgan’s lobbyists were making strenuous efforts to weaken the Volcker rule specifically and the Dodd–Frank Wall Street Reform and Consumer Protection Act in general strongly suggests that Dimon knew quite well what his bank was doing.

If you’re not doing something and don’t intend to do something, then you don’t care if it is made illegal…it doesn’t affect you.

Do you realize that in almost any field and job except the CEO position - the most highly-paid position in America - you couldn’t keep your job if you were continuously caught acting like a modern American CEO?

Consider the way American CEOs act now, throw in the fact that these guys are setting the example for at least another generation of Americans who are in the leadership pipeline, add the fact that there is an entire political party that is owned by these guys, and then answer this question:

Would you buy stock in America if she were listed on the NYSE?  Seriously?

When something is a hedge (intention is important) there should be some offset in the neighborhood of this loss; in other words, a gain on the underlying position being hedged.  You can’t hedge a position without having a position first.  Like a see saw.  One end goes up, other end goes down.

Bluffing is tantamont to speculation, which of course was what this turned out to be.  And which is what banks are not supposed to do with taxpayer backed and guaranteed money.

The only plausible out is an error in knowing the positions, but that suggests inadequate management controls.  Better than other reasons, but still not good.

So without a position to hedge, someone was naked.  And now the emperor (empire) is looking for clothes.

And empires are too big too fail. So instead of MORE regulation, how about LESS taxpayer protection the bigger a bank gets?  Depositors and investors would then have some skin in the game on where to put their liquidity, and banks would not be able to get to big to fail with other people’s money.

@Mac, who emoted: “So instead of MORE regulation, how about LESS taxpayer protection the bigger a bank gets?  Depositors and investors would then have some skin in the game on where to put their liquidity…”

Except that requires that depositors and investors be kept current on all of the institution’s positions….which, given the way trading works these days, means updating depositors and investors at intervals of a millisecond or less.

In fact, the investors and depositors would have to know about that institution’s anticipated moves before they were taken in order to give those depositors and investors the opportunity to exercise their right to bail if they believed that institution were about to do something…Wall Street-ish.

Crooks and kids gambling with taxpayer backed money and the country’s stability.

Shut them down!!

Me, I think that the Republicans and neoliberal Democrats used “flood-up/trickle-down” economics and deregulation to destroy the veneer (it was really a case of “I’ll be good, ‘cuz I’ll get in trouble if I’m not.”) of ethics and morality in American Business-with-a-capital-B…that is, when they made the penalty for unrestrained greed only more wealth. 

The philosophy of the right/Corporate America/Wall Street/etc. consequently and immediately devolved; they have become (Ayn) Randian in that their only remaining operative ethical guideline is no moral, ethical, religious, patriotic, or even humanistic precept is to be permitted to interfere with their quest for self-gratification.

Rephrased, the few and those entities which are controlled by and thus are reflections of the few (Wall Street, Big Banking, Big Oil, Big Insurance…wherever the large money floweth) now have the ethos of two-year old children:  They are incapable of evaluating moral or ethical concepts and independently and consequently shaping their behavior to ensure that they do not harm others when pursuing something that they desire.  Just like with two-year olds who can watch a peer reach for a hot dog on the barbeque and then scream in pain after getting burned only to turn right around and do the same thing themselves, you will perpetually see Wall Street and Big [whatever] repeat their bad behavior whenever they see something that they want and there are no rules and punishments in place to deter them.

That should already be evident to anybody who doesn’t have a vested interest in behaving like a two-year old:  Did we not already have a Great Depression?  Was that fact or the drivers behind that Depression kept secret from anybody?  No, and no.  Yet what happened when the Republicans engineered and Clinton signed off on deregulation - that is, when the Republicans and neoliberal Democrats colluded to remove the rule set that restrained America’s two-year olds?

Wall Street and Big Banking immediately stuck America - indeed, the entire world - in the barbeque.

To quote Alan Greenspan (who himself nursed at Ayn Rand’s knee, and so has subsequently all but disavowed these words as his memory of getting his bottom spanked faded):

“I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in firms.”

(Itself either a two-year old’s “It broke!” vs. “I broke it.” defense - the organization failed, not the individuals who placed the organization and America at risk - or an admission that the individuals who make up Wall Street and Big Banking simply cannot be relied upon to behave as adults but instead must be forced to behave responsibly with rules laid down by some larger organization.  Or both.)

Clearly some education is needed and the incessant cheer-leading for prop trading does make a buy side investor wonder how some talking heads get paid. Tacit lobbyist for the banks, or just someone who fails to understand traded risk, markets, and products? Bascially, “delete” is the key I will start reaching for….

While trading books are funded by repo markets, in a systemic crisis - which this was NOT - JPM’s risky trading bets are indeed backstopped by the US taxpayer. The question should be decoupled from FDIC insurance and should be about systemic risk and contagion. Peter Wallison’s comments on Kudlow were almost funny in their error, and an example of how the industry misleads and misinforms.

You are NOT hedging when you are SELLING insurance. You are collecting premium. Can Wallison explain to a real expert, not talking heads, how short-selling optionality is “hedging”? If the whale was attempting to “square a book” for hedging purposes, where is the offsetting gain? This was CLEARLY a prop trade and was conducted in London in order to create legal distance from the Volcker Rule. While the Volcker Rule may be unworkable, Glass-Steagall is not unworkable.

The loss of $2 billion is inconsequential from a JPM safety and soundness perspective. At $200 billion in capital, it hurts but is a blip. This is only about 40% of quarterly earnings. What I would hate to find out is that these really are premium collection trades and poor hedge offsets. The hedge being poor seems clear, else there would’ve been an offset gain.

These appear to be short positions without a cap on losses unless they can disclose how they “reinsured” the loss past a threshold of $x. Like selling a put and buying one back deep out of the money.

Given what has happened in France, Spain and Greece the last few days, and Draghi’s comments today, I sure hope JPM risk management and the examiners are asking the right questions. Would think that some transparency could help minimize some concern too (i.e., that the risk is capped/stopped out). All evidence suggests that JPM was selling protection. We will find out. If so, these deals are STILL ON THE BOOKS and if Greece has more trouble on June 15th, and Spain bond yields keep marching the wrong way and go above the magic 7%, Katie bar the door…...the losses could be far more than $2 billion and become a REAL issue for JPM.

I would really like to know the counterparties to the whale trades and the ISDA collateral annex requirements, and how this relates to the bank and the BHC’s available unencumbered liquidity pool.

The most fundamental question should be: should we revert back to a pre-GLBA world? As long as the BHC/FHCs are going to be bailed out in a systemic stress, the answer should be a clear “yes”. Revisit the Brown-Kaufman Amendment, make it far more punitive.

I actually think Dimon knowing he had a disclosable loss (disclosable due to magnitude relative to Quarterly Net Income).  He/they elected not to disclose the position since traders want to bluff through while they scramble to “get flat.” This deliberate election not to disclose while proper from a commercial trading strategy is illegal under SEC disclosure guidelines.

I think the guys well intended (for an investment banker) but its exactly these type of moments that Graham/Dodd was written to address.  If the Board was prudent they would sacrifice Dimon and negotiate a fine with the SEC.  But they are an American Board so there’s little chance of that….

North-Americans shouldn’t worry over this JP Morgan type of pre-planned gambling events.
Such things are happening regularly in countries like Bangladesh, India etc. where billionaire gamblers are funded by Swiss Banks with tons of illegal money and their gain is guaranteed. Only losers are inexperienced small local gamblers.

You may, a few months later like to visit
But for now by reading a personal e-mail attached below, you can note something:
when it comes to monetary greed of human leaders in politics, how little difference is now there between the East and the West!
We need “not too much greedy guys like Barack Obama” in World power atleast for one decade.

My E-mail:
Dear Brothers and Sisters of ‘we the great 14 Siblings’,

I am shocked to learn about how money can make a modern day’s Court issue a legal notice which have no basis but human greed only

Should we say Kudos to Shirumia’s daring seeds but they definitely deserve to get a good lesson that may include incarceration for falsification and wrong doings?? No personal antagonism of-course, because that’s how God plans and works through humans. We have to face it, you will probably do it for your personal interests and I know, I am doing it for both: personal gain and otherwise -totally unselfish reasons.

I exactly know what is happening in Bangladesh, because by the kindness of Cosmic Creator or GOD. in Canada, I have discovered conditioned Government heads, Judges in the Canadian too Old Judicial system and operators of several Corporations or pure Government departments that are comparable with ‘half alive Fishes in aquariums” and they, just like conditioned slaves or oriental styled Academy certificated public servants, not knowing the cause of their fears about invisible boss(es) or the reason of feeling terror internally, very obediently operate under commands of a few, mostly foreign, wealthy unionized businessmen of mainly Oil. Gas Pump, Insurance, Banking, Healthcare products etc. There has been happening a non-stop Crown document alterations, manipulations, thievery of Canadian wealth and resources and I had notified several Canadian authorities with living evidences of wrong doings but to no avail. The proofs, now in this new digital era, are indestructible because they are caught and saved electronically. As long as growing numbers of honest and good minds keep generating awareness in Great humanitarian places such as North-America, Old styled hereditary style leaderships will begin easily to vanish from places like Bangladesh, Thailand, South Korea etc. and eventually from the face of this Earth. CC can tell and confirm any human of this truth!

It is through the awareness that will cause the positive change and awareness now spreads faster in the East than the West. Therefore, no nation is smarter than the other ones! Above all, it’s only one human race of all colors - the race of mankind.   

The days of secretly manipulating and openly terrorising Kings are gone forever and the dumb Prime Ministers of non-existent kings are now acting as slaves of wealth-greedy thugs.

Our Nationally recognized Writer Daddy’s legally purchased Bangladeshi home for almost a half of a century is now targeted by some thugs backed by some unscrupulous businessmen /women of properties, ugly politicians or their associates. The sky-rocketed soaring house value, price-wise is now like a big piece of a diamond of 5 to 7 crores of Takas.

Don’t worry my Brothers about greedy eyes; instead, just stand up and contact Media and ask for help and eventually end up helping the Public - yourselves and everyone!

Our Cousin Noman without any personal gain has selflessly spent a lot of his personal times for the endless benefits of local public and his ‘Father in law’ is a very honest Justice in the Highest Court of Justice in Bangladesh. While visiting Bangladesh three months ago, I have watched him at arms length, donating more than his one month’s salary (of a High-Court Judge) for a local charity. That man and I have mutual respect and understanding for each-other. If it is necessary, never hesitate to ask for help and support while standing up against thievery, criminal acts of wealthy businessmen who because of only money up until now, are capable of buying the services of Old styled Judicial systems anywhere in the World. Thanks to CC for placing very less-greedy persons like Mr. Barack Obama in the World Power of US politics. His party under his advice -staying in power for a decade only will positive change the World forever, unless CC whimsically changes the direction.     

The land piracy acts of thugs that are taking place today in B.Baria, Bangladesh involving our father’s clean and clear titled property, are not only personal but our national and to some extent, International problems too. Even the US President Barack, who has recently become one of my close friends, is aware of and against those kinds of money-fed fake power exercises in Corporations, dishonest claims of land ownership, unscrupulous acts of all kinds etc. You read the comments of wise folks in the Internet, Social Networks, Tweeters etc. and you’ll notice what I am talking about. 

The truly Great humans, Free of insatiable personal monetary greed, such as Current US President: Mr. Barack Obama may soon begin and someone he knows has already taken the first step to begin reform of globally dominated one old model of ancient Judicial Systems all over the World and Bangladesh won’t be left alone. Today’s truly Wise People of North-America is capable of offering absolutely honest help not only to Bangladeshis but to any of the populations of countries of hard-working people that has capacity to join the ensuing new Global trade predicament under One ‘absolutely honest global power’ for administering true Justice and serving humanity regardless of races and territories. We’ll be witnessing more of how easily virtual Royal-paper-lions or terrors of the Middle East and other places such as Saddam, Gaddafi, Mubarak, Arafat, Laden, Assad, Yahoos etc. become powerless and by the Grace of CC same will be the future of ‘Failing to make sense in this century’- Prime Ministers of the Non-existent Kings of the Old. Without bloodshed of-course!

Bangladeshi Prime Minister, if our native house ever comes into International focus as an example of bad rulership and need be, might be contacted in due course by some truly humanitarian global authorities to examplingly help rescue some members of public of a good nation from the filthy grips of monetary greed-blind heinous criminals in the disguise of businessmen -domestic and foreign (Non-tax payers of-course).

CC bless us and we must Feel proud of our Dad and stay together real strong.


Bro: Shahzakirulislam/Shahislam

Unfortunately, at the highest levels, the government is not going to pursue its owners.

so JPM will lose $800 million after-tax on this trade , and still make $20B this year on profits

why should I care ???

@JJ:  Well, the numbers aren’t quite so quote

“An initial $2 billion trading loss has likely resulted in a total loss of more than $30 billion, when you include a 19 percent drop in the bank’s stock price. By itself, the trading loss alone might balloon to more than $6 billion, according to one estimate.”

End quote.  Of course, that probably doesn’t matter to the large money players who are “the right” and to whom the Republicans and neoliberal Democrats cater…they can “ride it out”.

But those Americans in the middle class who were forced into the stock market by Wall Street’s and Big Banking’s admittedly clever purchase of the requisite tax laws and legislation from Congress coupled with Wall Street’s pressure upon Corporate America to eliminate the “cost” of pensions?

One must pity those who are retired or will retire after taking the hit to their 401Ks courtesy of those fund managers who collude with or were fooled by such as Dimon.

Wall Street and Big Banking…had we spared the taxpayer the expense of hunting down the Mafia and instead focused upon the den of inequity that is “high finance” in America, the entire world - to include the American people - would have been far better off both economically and as societies.

There is no regulator or rule that can ever control these types of actions.  Individuals in these institutions will ALWAYS be faster and smarter at finding ways around the government than can ever be imagined in advance by bureaucrats.  If the federal government backstops publicly owned institutions, individuals within these institutions and their supervisors have no incentive not to “bet the bank” to become personally wealthy.  Federally insured banks should lend, nothing more.  The type of trading that caused JP Morgans loss is fine and can be useful, but ONLY by partnerships.  Screw up and you are personally bust.  Keeps the owners and traders focused and limits the urge to go all in.

@Mark Bauer:  We did OK up until the Republicans and neoliberal Democrats started undoing the lessons learned from the last time.  I.e., from 1940 until the 1970s, America was roaring along on all burners…and Wall Street and the bankers more or less behaved (sadly, hindsight doesn’t really tell us whether those individuals were more moral and patriotic or just more frightened of the then-existing laws).

The thing is you have to treat Wall Street and the bankers like children - or like convicts - by creating boundaries for them:  You can do this, and no more

As soon as you let the yard they’re allowed to play in get a little too big, they lose all control over their greed…like crack addicts looking for their next high. 

We need to do something; I’m a little leery of waiting around for “The third time is the charm!” rule to kick in…the problem with a “global economy” is when America’s Wall Street and bankers let their corruption run amok, nowadays they hammer the entire world.

Where I come from, you don’t antagonize 7 billion people if you can avoid it.

William Clopton

May 22, 2012, 5:25 p.m.

JP Morgan are a bunch of crooks.  They continue to hold the largest short positions in silver and gold and blatantly manipulate prices down early in the day and then buy to cover later in the day.  By doing this, they can make money by cheating the investors on the other side of Morgan’s “trades”.  They can even make money doing this in bull markets.  It’s criminal, the CFTC is aware of it and does little to nothing, and ultimately, when the physical market for the precious metals overwhelms the paper metals markets, JP Morgan will lose hundreds of billions of dollars and once again come crying to the taxpayers, hands outstretched, asking for money.

I’d be very interested, given the time lines involved, in knowing what, if any relationships exist between the Mortgage Settlement and the loss of $2 Billion by Mr. Dimon’s firm.

After all, they WERE settling for $1.1 Billion, with funds due for distribution in April/May.

“Of course, bluffing isn’t illegal.”

It does not matter. Bluff with your OWN money!  These bankster would not do the same with thier money.

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)