Sunday, March 24, 2013

US Senators take JP Morgan Execs to task

On March 15th 2013 a US Senate Committee held a hearing on JPMorgan credit derivatives where executives and former executives of the bank testified.  Here's a link to the almost 4 hour long video on C-Span.

Former and current JPMorgan Chase executives testified about the practices that led to the firm’s $6.2-billion “London Whale” trading losses during a hearing of the Senate Homeland Permanent Subcommittee on Investigations. 
The hearing attempts to uncover how much top JPMorgan officials knew about the huge risks its traders were taking on complex derivative instruments.
The senators, Carl Levin, John McCain, and Ron Johnson do a nice job of identifying and summarizing JPMorgan's many legal violations, misleading statements, lack of financial controls that led to a surprise $6.2B loss on trading.  

The JPMorgan executives and former executives (presumably some were fired because of this trading loss) clearly had no regard for abiding by reporting rules and regulations.  JPMorgan submitted 'required' information to regulators when JPMorgan wanted.  If the information was bad they simply didn't report it.  JPMorgan and these executives felt no consequence for avoiding reporting requirements.  

JPMorgan created financial models and analyses that yielded results they wanted and disregarded contradictory analyses.  They implemented new analyses quickly and without testing because the new analyses (e.g. VaR) gave more favorable results.  Figures lie and liars figure.

The trading loses were on investments that are supposed to hedge or reduce the risk of the whole bank.  So in theory if JPMorgan lost $6.2B on these investments they should have gained $6.2B on other investments.  But JPMorgan had to write-off these investments as a one time charge, so they were clearly not hedging anything.  These investments were speculation.  And, certainly we only hear about speculation when it goes horribly wrong.  In the meantime the bank profits and executives get big bonuses while they speculate with government money.  Money that they currently borrow from the Fed at zero percent interest.  Speculation by banks that are critical to the banking system and therefore too big to fail should be illegal. 

At one point Senator Levin says that laws may have been broken and if not laws should be put in place to prevent this type of situation.  The Senators go to lengths to clarify that the government does not need to regulate all financial institutions.  They explain that JPMorgan is being investigated because they received bail out money, are significant to the global financial system, and lied to their shareholders and bank regulators.  

All of this is old news.  JPMorgan incurred the "London Whale" trading losses about a year ago.  Good for the senators to investigate and keep the issues alive.  Now what are we going to do about it?  Fine JPMorgan for flaunting the rules or at least the intent of the rules.  Prosecute several executives for not complying with reporting rules.  Take away some of JPMorgans government business in the bond market for example.  These would be nice steps.  But let's finally implement a real solution instead of band aids.  The global financial system needs to separate commercial banking and investment banking with a  Glass-Steagall type law.  That way investment banks can speculate all they want without concern for impacting the commercial banking system and the economy.

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