Too big to regulate

January 8, 2014

JPMorgan has agreed to pay $2.6 billion to the Department of Justice and various victims of Bernie Madoff’s $18 billion ponzi scheme, Reuters writes. That amount includes a $1.7 billion fine for violating money laundering rules and is “the largest forfeiture a bank has ever had to pay to resolve anti-money laundering violations.” It also includes a $350 million payment to the Office of the Comptroller of Currency. The bank is also paying $218 million to settle a private class action lawsuit over Madoff, and $325 million to settle a case with the Madoff bankruptcy trustee.

The remarkable part of this agreement, Sheelah Kolhatkar says, is that it’s a deferred prosecution agreement, which is reserved for “cases in which the facts underlying the case are severe but a criminal indictment might destroy the company.”

The settlement documents, Felix writes, show that JPMorgan, Madoff’s primary banker for more than 20 years, was guilty of “sheer unmitigated — and, yes, probably criminal — incompetence.” A Madoff account which JPMorgan’s banker thought was only being used for rent and expenses saw $752 million in inflows in one day, yet a JPMorgan investigation into the account went nowhere. Tom Braithwaite writes that in 1998 and 2007 JPMorgan’s asset management division decided not to invest in Madoff funds because their returns were “possibly too good to be true”.

JPMorgan never passed those red flags on to authorities, Michael Hiltzik writes. Banks, he argues, are the first line of defense in preventing fraud, and JPMorgan’s lawyers appear to have blocked warnings to regulators.

Matt Levine suggests the failure of the bank’s various divisions to share these red flags internally could be a function of its complexity. There’s no reason JPMorgan’s London investment bank, he writes, should be reporting its misgivings to US regulators. He adds:

In that sense, JPMorgan’s $1.7 billion forfeiture here looks a bit like a tax on bigness and integration: You can grow huge, offer a loosely integrated set of every conceivable financial product, and bask in the cross-selling opportunities, but every now and then it’ll cost you a couple of billion dollars.

Still, JPMorgan, and Jamie Dimon, are doing just fine, despite some $20 billion in penalties over the last year. A CNBC headline put it this way: “More trouble for JPMorgan, more love from analysts.” Felix writes that “while prosecutors are winning countless battles against the bank, it’s abundantly clear that the bank is going to win the war.” — Ben Walsh and Ryan McCarthy

On to today’s links:

Ouch
The quest to improve America’s financial literacy is both a failure and a sham – Helaine Olen

Charts
What happened to US life expectancy? – Incidental Economist

Right On
The extremely sound economic case for extending unemployment benefits – Cardiff Garcia
Heroes of blogging - Noah Smith

Your Daily Outrage
The student-athlete achievement gap: from bad grades to illiteracy – CNN

Probably Not
Can Mathew Martoma accept money from Steve Cohen? – Ben Walsh

Visual Silence
“There can never be enough white space”: on the NYT redesign – Adrian Chen

FWIW
What Alan Greenspan says he’s learned since 2008 – HBR

Vintage Bess
“You Know It’s Cold When: Charlie Gasparino Has To Psych Himself Up To Punish His Pecs” – DealBreaker

Primary Sources
Full minutes for the Fed’s 11/17-11/18 meeting – Federal Reserve

Oxpeckers
Is Vanity Fair a better business magazine than Fortune? – Eric Starkman

Strangely Existential
“It seems, in my case, there is no escaping Henry Blodget” – Charlie Warzel

Takedown of a Takedown
“Dylan Byers knows nothing of your work, and therefore your work must not exist” – Ta-Nehisi Coates

Leaders
Roger Goodell is in denial about the inherent dangers of football – TNR

Pivots
“It doesn’t appear that the world of waffles worked out for [former SAC analyst] Jandovitz” – DealBook

We Told You So
Open offices are terrible, end of story – New Yorker

Great Headlines
“Unemployed can now feed their families with symbolic legislative victory” – HuffPo

Lede of the Day
“A tweet from Lily Allen raises some interesting economic issues” – Chris Dillow

Awesome
Some free advice for the coach unlucky enough to work for Dan Snyder – Jason Linkins

EU Mess
Italian unemployment hits 37-year high and youth unemployment is over 40% – Joe Weisenthal

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