The invincible JP Morgan

By Felix Salmon
January 8, 2014

When JP Morgan paid its record $13 billion fine for problems with its mortgage securitizations, the bank came out of the experience surprisingly unscathed, in large part because Wall Street reckoned that the real guilt lay mainly in the actions of companies that JP Morgan had bought (Bear Stearns and WaMu) rather than in any actions undertaken on its own watch. There was a feeling that the bank was being unfairly singled out for punishment — a feeling which, at least in part, was justified.

The latest $2 billion fine, however, which also comes with a deferred prosecution agreement, is entirely on JP Morgan’s shoulders — and still, as Peter Eavis reports, it’s being “taken in stride” by the giant bank. It really seems that CNBC is right, and that profits really do cleanse all sins. How is it that a $450 million fine sufficed to defenestrate the CEO of Barclays, but that Jamie Dimon, overseeing some $20 billion of fines plus a deferred prosecution agreement just in the space of one year, seems to be made of teflon?

To answer that question it’s worth looking at the details of what exactly JP Morgan did wrong in this case. The key part of the Deferred Prosecution Packet is Exhibit C, the Statement of Facts, all of which have been “admitted and stipulated” by JP Morgan itself. And it certainly lays out some jaw-dropping behavior on the part of the bank, which oversaw Madoff’s main bank account for more than 20 years: between 1986 and 2008, account #140-081703 received a jaw-dropping $150 billion in total deposits and transfers, and showed a balance of $5.6 billion in August 2008. Even when you’re as big as JP Morgan, that’s a bank account you notice.

Except, maybe, not so much:

With respect to JPMC’s requirement that a client relationship manager certify that the client relationship complied with all “legal and regulatory-based policies, a JPMC banker (“Madoff Banker 1”) signed the periodic certifications beginning in or about the mid-1990s through his retirement in early 2008…

During his tenure at JPMC, Madoff Banker 1 periodically visited Madoff’s offices… Madoff Banker 1 believed that the 703 account was primarily a Madoff Securities broker-dealer operating account, used to pay for rent and other routine expenses. Madoff Banker 1 also believed that the average balance in Madoff Securities’ demand deposit account was “probably [in the] tens of millions.”

This is sheer unmitigated — and, yes, probably criminal — incompetence. It takes a very special kind of banker to not notice that an account has more than a billion dollars in it, for a period of roughly four years, from 2005 through most of 2008. As Matt Levine says, “Madoff Banker 1 is like the one banker on earth who underestimated his client’s business by a factor of 100 or so. ‘Boss, I’ve made the firm thousands of dollars this year,’ he probably said, ‘and I deserve a bonus of at least $200.’”

The incompetence doesn’t stop there. At the beginning of January 2007, the account — which, remember, JP Morgan officially considered to be used “for rent and other routine expenses” — saw inflows of $757.2 million in one day. This tripped all manner of automated red flags, but the investigation into those red flags consisted of — get this — visiting the Madoff website. That’s it.

Was there other suspicious activity in this account? Of course there was: lots of it. As far back as December 2001, a client of JP Morgan’s private bank, who also held a huge amount of money with Madoff, moved an astonishing $6.8 billion in and out of that 703 account. In one month. You just can’t do that without generating all manner of suspicious activity reports from JP Morgan to bank regulators. And yet, somehow, impossibly, no such report was generated.

Similarly, in 2007, JP Morgan’s private bank conducted due diligence on Madoff — after all, many of its clients wanted in on Madoff’s amazing funds — and concluded that the numbers “didn’t add up”. And still no hint of running any problems up the chain to either JP Morgan’s regulators or Madoff’s. The same thing happened again in 2008, at an entity called Chase Alternative Asset Management.

And then in late 2008, shortly before the whole Madoff enterprise imploded, JP Morgan bankers in London became so suspicious of the whole enterprise that they sent two different reports to the UK’s Serious Organized Crime Agency. Yet none of this information made it to US regulators.

Levine has a relatively benign explanation for all this: he says that JP Morgan comprises “more or less independent” businesses, which naturally don’t speak to each other, or inform each others’ regulators when they smell something suspicious.

But sometimes the different bits of JP Morgan did talk: for instance, in June 2007 there was a meeting about Madoff in Manhattan, which included the investment bank’s chief risk officer; the Hedge Fund Underwriting Committee (which included “executives from various of JPMC’s lines of business”); the London Equity Exotics Desk (which later examined Madoff in detail and concluded he was probably a fraud); the investment banks’s Global Head of Equities; executives from the broker-dealer; and other people who had direct credit relationships with Madoff. The meeting concluded that JP Morgan wasn’t going to do a big deal with Madoff based simply on Madoff saying “trust me”, and not allowing any direct due diligence. But while JP Morgan was careful with its own investments, and ultimately took out most of the money it had with Madoff before the firm collapsed, once again it saw no reason to tell regulators about its suspicions.

And specifically, there’s one individual within JP Morgan, identified as the “Senior IB Compliance Officer”, who had all of the information from London, who was responsible for passing suspicions on to US regulators, and who ended up doing nothing beyond having “an impromptu conversation in a hallway” with a few colleagues.

The government doesn’t show — it doesn’t need to show — that if JP Morgan had done what it was supposed to do, then US regulators would have cracked down on Madoff before the Ponzi scheme collapsed under its own weight. The point is that regulators can only do their job if they’re given the information they’re required by law to receive — and JP Morgan (not Bear Stearns, not Washington Mutual, but JP Morgan itself) utterly failed, over many years, to provide them with that information.

And yet, to Eavis’s point, JP Morgan is now effectively untouchable by the government. Sure, it can be fined billions of dollars; it can even be slapped with a deferred prosecution agreement. But the fines just come out of the pot of money devoted to paying such things — it’s known as “legal reserves” — and so long as the bank can show that it makes good profits after reserving for fines, Wall Street seems happy for the bank to make few if any major changes. Jamie Dimon remains as CEO, answering to a board chaired by himself; the bank remains one of the biggest in the world; and while prosecutors are winning countless battles against the bank, it’s abundantly clear that the bank is going to win the war.

When did JP Morgan effectively become too big to regulate? How is it that Jamie Dimon and his starry-eyed shareholders have been able to see off forces which toppled many other banks and CEOs? That’s an article I’d love to read — the story of how, with some combination of luck and aggression, Dimon held on to his position as the most powerful bank CEO in the world — even as other banks, and other CEOs, fell steadily by the wayside.

In the face of a determined regulatory onslaught over the past 18 months, from mortgage-related prosecutions to the Volcker Rule, JP Morgan’s share price has gone steadily up and to the right, almost doubling over that period. In the view of Wall Street, that share price is Dimon’s vindication, and his ultimate shield. The lesson of yesterday’s news cycle is that no one can pierce it. Not even the Justice Department.


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