The U.S. Senate’s Permanent Subcommittee of Investigations today released a report excoriating JPMorgan Chase, America’s largest bank, for accounting and trading abuses leading to a $6 billion loss last year. But if that’s the bomb—and it’s a big one—dropped in CEO Jamie Dimon’s lap, then the Graham-Fisher report from Joshua Rosner, also released March 15, is the fuel-air explosive.
While much of the media appears to be focusing on the issue of internal controls and the big trading losses the bank suffered last year, Rosner’s report suggests those should only be one among many worries. The laundry list of alleged offenses include money laundering for drug cartels, illegal trading with Iran and failure to segregate client funds. (Rosner is also co-author, along with Gretchen Morgenson, of Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon.)
It’s not even clear that investors are getting the good deal they think they’re getting by investing in the bank that is routinely described as Wall Street’s best-managed. As Rosner points out, JPM has incurred almost $16 billion in litigation expenses since 2009; between 2009-12, settlement costs of $8.5 billion represent almost 12% of net income.
And its claims, made again at the hearing by Michael Cavanagh (co-chief executive of JPM’s Corporate & Investment Bank), to have reformed itself just don’t jibe with the historical record. Says Rosner, “In 2009 they got clipped for co-mingling about $725 million of their own money in about a $9.6 billion client account. And part of the settlement was that they promised they would take care of their segregation systems. And yet in 2010, in 2012 and potentially in both MF Global and Madoff, we have found that there are still those ongoing issues. So we’ve got a company that continuously claims to have fixed problems or that continuously promises to fix problems and yet with impunity continues to flaunt those fixes.”
Famously straight-talking forensic accountant Al Rosen of Toronto’s Rosen & Associates says that when managers don’t like the numbers, the crooked among them simply “create their own.” It’s a practice that seems to have been borne out by JPM’s number fudging with its Value-At-Risk modeling, which is documented in the senate report and was thrown into sharp relief in an exchange between former JPM executive Ina Drew and senator Carl Levin during the March 15th hearing.
And yet despite 300 pages of damning evidence including proof that Dimon withheld information from investigators and signed off on changes to risk protocols he apparently knew to be wrong, it was reported in the New York Times that “authorities do not suspect the chief executive of wrongdoing.”
Between this and Attorney General Eric Holder’s remarks last week the U.S. government has effectively telegraphed its likely response. On at least two major occasions prior to this one (see here and here), senate committees have essentially gift-wrapped prosecutions of banks for the Department of Justice, but there has been no action. Don’t expect any now.
But let’s say someone in power wanted to fix things. How would they do it? Rosner suggests separating deposit-taking activities from investment banking and “moving of the derivatives book, other than for hedging, outside of the bank.” Rosen says better oversight, controls and a change in management attitude are critical.
That said, is it coincidence that both the senate and Rosner reports were released on or around the Ides of March? If JPMorgan is Caesar he’s not meeting his end today, but history may one day mark it as the beginning.