I put two new columns up at Forbes recently that talk about JPMorgan, PwC, Senator Levin’s “Whale” hearings, and all the other stuff JPMorgan and Jamie Dimon are really worried about. The New York Times had an interesting scoop about JPMorgan and Deloitte and the foreclosure reviews that I followed up on, too, in “JPMorgan Chase Still Haunted By Foreclosure Reviews, And More”.
Update April 4: The GAO has now issued its report on the regulators and their use of the third-party consultants. I wrote about it at Forbes.com.
If you’re wondering when it’s all going to end, it will end with Jamie Dimon leaving JPMorgan. Although I predicted that he’d be ousted in 2012 based on MF Global problems it’s now more possible than ever. It’s no small thing that the New York Times is openly talking about a mutiny by the bank’s directors.
Here’s the second paragraph from a Jessica Silver-Greenberg/Ben Protess March 26 New York Times DealBook piece:
At least two board members are worried about the mounting problems, and some top executives fear that the bank’s relationships in Washington have frayed as JPMorgan becomes a focus of federal investigations.
One of the quisling directors? I think it could be none other than KPMG’s Tim Flynn. From my Forbes column on April 1:
Why is Flynn the director most vulnerable to pressure from regulators and prosecutors? He’s the guy who threw his own partners under the bus and agreed to pay almost $500 million to save KPMG when it risked criminal indictment for tax shelter abuses. Flynn saved his own skin and his own reputation. I think he’ll do what has to be done at JPMorgan when the Feds come looking for scalps.
The rest of my April 1 column talks about a mysterious error that the New York Times reports caused JPMorgan to plan on paying more to foreclosure review eligible borrowers. How could that happen? Well, it’s not what it seems.
Each bank was given a total settlement payment and an “other assistance” number and then tasked to “back into” the amounts due borrowers by assigning them to one or more harm categories. JPMorgan must have put 5,000 more borrowers into the wrong category, probably #3, foreclosed on while in bankruptcy. Why bankruptcy? It’s the category with the highest potential payout for a borrower. Putting too many people in that category would have shortchanged others given a fixed amount to allocate. So JPM agreed to pony up more bucks.
What’s wrong this picture? My sources tell me that at least 50% of JPMorgan’s bankruptcy portfolio was riddled with payment and fee calculation errors at the start of the process. Any estimate of the number of borrowers harmed during the review period for this category by Deloitte, or JPMorgan, is probably still significantly understated. A strategic mistake made by the regulators when the consent decrees were signed exacerbated the problem. Regulators forced all twelve servicers to move bankruptcy processing activities out of specialized units to their general cash management unit. Processing of Chapter 13 payment plans, for example, went haywire when it was transferred to inexperienced groups with no knowledge of the rules that differ across fifty states. No servicer has a data repository with automated processing rules designed to keep files and calculations up to date with the constant changes.
There’s more, a lot more.
But first we should go back to the Levin hearings on the “Whale” trade. Everyone admits, lo and behold, Levin did a great job making the “Whale” trader, Bruno Iksil, out as the only sane, reasonable, risk averse person at JPMorgan. And where was PwC, the JPMorgan auditor? Hanging around, not reading internal auditor reports – or ignoring them – and signing whatever the latest management assessment of internal controls may be, regardless of possible evidence to the contrary.
In spite of several documents included in the Senate report’s exhibits that strongly suggest reasons to doubt the validity of the CIO valuation process, the final Controller’s assessment of the valuation process contained no mention of a shift in valuation methodology or the use of more aggressive trade values towards the end of the first quarter of 2012.
The Subcommittee report states that, “to the contrary, the assessment concluded that “the CIO valuation process is documented and consistently followed period to period” and “market-based information and actual traded prices serve as the basis for the determination of fair value.”
The last page of the memo, according to the report, said JPMorgan Chase’s outside auditor, PricewaterhouseCoopers, had “concur[red] with the conclusions.”
PwC signed a report of their review of the bank’s first quarter 2012 10Q that was included with the bank’s SEC filing on May 10, 2012.
PwC’s signoff provided “negative assurance” that the auditor was “not aware of any material modifications that should be made to the consolidated financial statements” for them to be in conformity with Generally Accepted Accounting Principles (GAAP).
(It’s common for auditors of investment banks like Lehman, Bear Stearns, and Morgan Stanley to provide reports of the quarterly reviews but not auditors of the commercial banks. It’s the reason Ernst & Young is still on the hook in private litigation for their work related to a Lehman 10Q.)
May, 2011 was the first time PwC had ever provided a report of its review for inclusion in a JPMorgan 10Q. Prior to that PwC had never provided an“explicit statement” about its interim reviews. PwC’s report of its quarterly review (not an actual audit opinion) has been provided to JPMorgan to include in its public SEC filing ever since.
On July 13, 2012, JPMorgan management, not PwC the auditors, reported that a material weakness existed in its internal control over financial reporting as of March 31, 2012. The bank had finally acknowledged that the valuation controls for the synthetic credit portfolio managed by CIO were broken. Management also concluded that its disclosure controls and procedures were ineffective at March 31, 2012.
First quarter 2012 results were formally restated, resulting in an additional loss of $459 million.
The Subcommittee report refers to a July 27, 2012 Supervisory Letter the OCC sent to JPMorgan. The OCC downgraded the bank’s CAMELS rating, an acronym for the six bank safety and soundness components. The downgrade occurred because of “lax governance and oversight in the Chief Investment Office,” as well as other “oversight deficiencies.”
In its August 9 10Q, JPMorgan reported:
“Specifically, information that came to management’s attention raised questions about the integrity of the trader marks, suggesting that certain individuals may have been seeking to avoid showing the full amount of the losses being incurred… As a result the Firm was no longer confident that the trader marks used to prepare the Firm’s reported first quarter results reflected good faith estimates of fair value at March 31, 2012.”
And what did PwC’s report of its quarterly review dated August 9, 2012 say about all this?
As far as PwC was concerned, the JPMorgan financial statements were unaudited and its review as of June 30, 2012 again found no “material modifications that should be made to the consolidated financial statements” for them to be in conformity with Generally Accepted Accounting Principles (GAAP). There was no requirement for PwC to acknowledge missing the internal control holes that the whale trades exploited.
There was also no requirement for the auditor to give its opinion on whether the bank had fully corrected the material weakness in internal controls related to the valuation process until 2012 year-end.
There’s more, a lot more, here, too. Read, No Accounting For Auditor PwC At Levin’s Whale Hearing, at Forbes.com.