I taped an episode of the Keiser Report last week while in New York. The focus was Jamie Dimon with a bit of MF Global thrown in for heat. Max Keiser, the host, asked me, “Why does Jamie Dimon of JPMorgan still have a job?”
Hard to say.
When I predicted in January that Dimon would have his “comeuppance” in 2012, the prognostication was predicated on backlash from the bank’s involvement, as MF Global’s main banker, in the failure of that broker/dealer and FCM.
The broker-dealer’s customers have accused JPMorgan of taking advantage of MF Global’s weak position to hold onto hundreds of millions of their funds, but JPMorgan says it was not the culprit. The MF Global story is one-year old but so far the trustees haven’t directly sued anyone. The backlash to JPMorgan and Dimon has been practically nil. Jon Corzine, CEO of MF Global, and his banker Jamie Dimon, have not suffered the consequences I thought they would.
The customers have finally sued PricewaterhouseCoopers, the MF Global auditor, for its role in the failure. The MF Global Trustee assigned its claims against several parties to the customers, partly, I believe, to avoid the conflicts the Trustee has with PricewaterhouseCoopers, the auditor, and JPMorgan. But JPMorgan was dropped from the suit and is, for now, not a defendant. I suspect the bank is negotiating a settlement so it can scratch this mess off its long list of “litigation to dispose of”.
Because Jamie Dimon is facing a very long list of regulatory and legal challenges.
JPMorgan took advantage of the break from MF Global to make more trouble for itself. The toll for the “London whale” trades is a $5.8 billion loss, making Dimon’s early dismissal of the issue as a “tempest in a teapot” quite embarrassing. Initial estimates of the loss hit first-quarter results but those numbers were wrong. An expedited internal investigation found that traders mismarked trades to minimize the reported loss. The quarterly securities filing had to be formally restated. The “whale” loss has also attracted shareholder suits from six public pension funds.
Dimon did face some music at the annual meeting in May. He admitted the “whale” trades were “poorly constructed, poorly reviewed, poorly executed and poorly monitored.” But he doesn’t seem to be losing any sleep over them and, so far, holds on to his compensation package. Investors, the board and regulators did not become aware of the trade price manipulation until August. The SEC and Department of Justice are still investigating the loss.
Jamie Dimon’s perceived stellar stewardship of the bank’s stock price – I called it a “results reprieve” in the Keiser report interview – has shielded him, and the bank, from serious compliance and controls complaints in the past. But now several media outlets are reporting JPM, like all the big banks, is under investigation for Libor rate manipulation and anti-money laundering violations, too. JPM is reportedly one of many subpoenaed by New York, Connecticut and Florida Attorneys General regarding Libor rate manipulation. JPM is also reportedly the subject of an OCC probe for suspicious money transfers. JPMorgan Chase, along with other big banks, will probably pay big money for its “get out of jail card”, as Barclays did for its Libor scandal and Standard Chartered did for its settlement for suspicious transactions with Iran.
Dimon has been sanguine in the past about the bank’s exposure to mortgage-related losses and liability for transgressions by its crisis-era acquisitions Bear Stearns and Washington Mutual. The Wall Street Journal quoted Dimon in December saying the bank was “facing fewer mortgage problems than competitors.” Dimon’s luck on mortgage liability has changed.
New York Attorney General Eric Schneiderman filed suit against the bank regarding the quality, or lack of thereof, of the mortgages stuffed into securities sold by Bear Stearns prior to its acquisition. If you think JPM isn’t liable for the sins committed by a company it bought “as a favor to the Fed,” take a look at this lawsuit, Assured Guaranty vs. Bear Stearns EMC.
Assured Guaranty’s main target is Bear Stearns, for misrepresenting the risk of mortgages in a securitization that the plaintiff insured. But the suit also alleges JPMorgan refused to buy back defective loans that Bear’s EMC Mortgtage unit had previously agreed to repurchase – yet pursued the same buyback claims against the lenders that originated the loans and sold them to Bear. The bank’s second quarter filing voiced optimism, that losses have reached an “inflection point”, even though the bank was most assuredly aware Schneiderman might sue long before the lawsuit was actually filed.
The new JPMorgan/Bear case is the first filed by the Obama administration Residential Mortgage Backed Securities Working Group. Other banks justifiably fear it will be a model for more. In an interview with Bloomberg Television, Schneiderman described the potential exposure as “tens of billions of dollars, not just [for] one institution, but [for] quite a few.” That’s no empty threat. This week the Department of Justice, which has been coordinating with Schneiderman’s group, filed suit for more than $600 million against Wells Fargo for alleged misrepresentations made to obtain Federal Housing Administration insurance on its mortgages.
According to Alison Frankel at Thomson Reuters on November 9:
JPMorgan Chase filed quite a remarkable quarterly report with the Securities and Exchange Commission on Thursday, crammed with far more details about its exposure to litigation and mortgage repurchase demands than the earnings report the bank issued in mid-October. Among the revelations: JPMorgan has reached an agreement in principle to settle two SEC investigations, one involving a single unidentified JPMorgan securitization, the other involving Bear Stearns’s crafty (alleged) trick of keeping put-back recoveries from mortgage originators for itself instead of passing them on to investors in mortgage-backed securities trusts. The SEC deal has been long rumored, and though we still don’t know any of its terms, the bank’s filing confirms it.
JPMorgan also disclosed that it is now facing put-back claims, in one form or another, on $140 billion in mortgage-backed notes. Yes, you read that right: $140 billion. That doesn’t mean there are $140 billion in claims, but it means that holders of $140 billion in MBS notes have asserted, in litigation or through contractual demands, that the bank must buy back deficient mortgages in their trusts. Given that MBS investors generally claim breach rates in excess of 50 percent, JPMorgan’s exposure to mortgage put-backs is tens of billions of dollars.
The details of the JPMorgan SEC settlement Alison refers to were disclosed this past week. JPM settled with the SEC for $296.9 million for its part in Bear Stearns fraud charges related to the ones Schneiderman’s office is suing for. The SEC alleged JPMorgan misstated information about the delinquency status of mortgage loans that provided collateral for a Bear Stearns RMBS offering in which it was the underwriter.
JPM also faces liability from the ongoing foreclosure review mandated by a federal regulatory consent order from April 2011 and a commitment made to forty-nine Attorneys General for a mortgage settlement signed last April. Liability under the AG settlement is limited but financial exposure from the foreclosure review is still unknown. Given the number of mortgage-related lawsuits citing serious errors and fraud by Bear Stearns and Washington Mutual, the foreclosure review exposure may be unlimited. JPMorgan Chase is paying millions to consultant Deloitte to avoid a worst-case scenario.
I’ve spoken to one person who’s heard Dimon complain vociferously in private about the humongous amount of dollars he’s paying Deloitte to extend and pretend the day will never come that JPM will have to make even greater payments to harmed borrowers.
And, in an unprecedented enforcement action, Reuters reports, “U.S. federal regulators temporarily banned JPMorgan Chase & Co’s energy trading arm from a segment of the domestic power market, the first time such a penalty has been imposed for making factual misrepresentations during an investigation into market manipulation. The move will prevent the U.S. bank from receiving competitive market prices for physical power it sells for six months starting in April 2013, though it will still be able to sell the power at cost.”
JPMorgan was always thought to be better than other banks – the best – because of Jamie Dimon. In my opinion, if specific evidence surfaces that Dimon approved or condoned illegal or unethical transactions or strategies – there are already plenty alleged to choose from – regulators may push the board to fire him.
It doesn’t help his survival chances that Dimon bet on the wrong stallion in the Presidential horse race. Dimon was openly disdainful of President Obama and his bank, and its executives, pulled financial support to the Democratic party.
Dramatic action by regulators against bank CEOs for legal and regulatory failures is more common outside the United States. It didn’t take long after the Libor scandal surfaced for U.K. regulators to tell the Barclays board that CEO Bob Diamond had to go.
Oswald Grübel, the former UBS CEO, found it impossible to run UBS less than two weeks after a “rogue trader” was arrested for a $2.3 billion dollar loss. The bank’s reputation was already damaged by tax shelter scandals and UBS is also under pressure from regulators to shore up capital based on its experience during the 2008 crisis and these repeated risk management lapses. Grübel resigned and did not receive a severance package.
Nomura CEO Kenichi Watanabe resigned under pressure from Japanese regulators investigating a series of insider trading scandals at the bank. The bank faces an investigation by the Japanese version of the SEC for its poor controls over confidential client information.
Dimon must defend JP Morgan Chase against legal and regulatory compliance lapses as serious as those that caused Diamond, Grübel and Watanabe to be forced out and more. Dimon, referring to the “whale” trades, was quoted this week saying, “I should have caught it … I didn’t.”
How many more times can he say he’s sorry?
When I spoke to JPMorgan Chase spokesman Joseph Evangelisti a few weeks ago about Dimon’s fate he had no comment other than to point me to the strength of JPMorgan’s share price throughout the crisis period and now.
The Wall Street Journal reported that JPMorgan CFO Doug Braunstein will move to another position in the bank. A new CFO has not yet been named. JPMorgan Chase has adjusted its board. Tim Flynn, the retired former chairman of KPMG, joined in May and two long-time directors departed. Flynn will probably join the Audit Committee, too. Two sources who know Flynn well tell me that if push came to shove, Flynn is the kind of guy who would encourage the JPM board to do whatever it takes to please regulators.
JPMorgan reported record profits for the third quarter, driven by new mortgages. “We believe the housing market has turned the corner,” Dimon said in a written statement.
I’m sure Dimon hopes he’s right this time.
Here’s the video from the Keiser Report. My part starts at the 13:00 mark. (Si quisiera mirarlo en español, vaya aquí.)
Main page photo courtesy of Max Zeledon.