Richard E. Farley is a partner in the leveraged finance group of the law firm of Paul Hastings. He is writing a book titled “The Crisis Not Wasted: The Creation of Modern Financial Regulation During F.D.R.’s First Five Hundred Days,†a book on the creation of modern financial regulation during President Franklin Roosevelt’s first term of office.
The myriad news reports about rumors of investigations by various regulatory agencies stands in stark contrast to shareholder sentiment at the nation’s largest, most successful bank, JPMorgan Chase.
Last week, only 32 percent of shares voted in favor of splitting the roles of chairman and chief executive officer at the bank, down from 40 percent at last year’s shareholders meeting.
It was an overwhelming vote of confidence in Jamie Dimon (and make no mistake, this vote was a referendum on Jamie Dimon’s leadership). Yet, in stark contrast, investigations seem to be piling up at the doorstep of that very same bank. The details of the investigations and inquiries are being fed piecemeal through the news media, behind a veil of anonymous sources and leaks - and the parties behind the leaks are not being held accountable for disseminating potentially damaging information.
Let’s briefly review the three most high-profile investigations: the Securities Exchange Commission is said to be looking at disclosures related to the “London Whale†losses; the Office of the Comptroller of the Currency is reportedly examining the bank over its failure to uncover the Bernie Madoff fraud; and the Federal Energy Regulatory Commission is said to be investigating the bank’s energy trading in California and Michigan.
According to unnamed sources, the S.E.C. is investigating whether this statement made in relation to the “London Whale†trading losses violated the securities laws: “senior management acted in good faith and never had any intent to mislead anyone.â€
Regulators aren’t delving into whether the bank fudged financial statements or gave rosy estimates of its business prospects - the types of things that usually prompt an S.E.C. investigation. Rather, the agency wants to investigate the subjective state of mind of senior executives. This is all in relation to losses no one can even claim were material to the financial condition of JPMorgan, with its $2 trillion balance sheet. The S.E.C., mind you, is nearly two years past the legal deadline to finalize the Volcker Rule.
“According to a person familiar with the matter†(read: a leaker), the Office of the Comptroller of the Currency is expected to issue a cease-and-desist order against JPMorgan because the bank’s anti-money-laundering protections did not uncover the Bernie Madoff fraud.
There is a very long and unhappy list of investors, lenders, employees, counterparties like JPMorgan and, of course, regulators who were misled by Bernie Madoff. Yet, to my knowledge, the O.C.C. has not threatened any similar action against any other bank in the Madoff mess. The irony is not lost on JPMorgan, given that the bank filed a suspicious activity report against Madoff two months before he was arrested, describing his investment performance as “too good to be true.†Here again, the S.E.C. itself has been roundly criticized for failing to spot his 20-year Ponzi scheme, despite warnings from whistle-blowers.
Another recent investigation involves the Federal Energy Regulatory Commission. Anonymous sources say that a preliminary F.E.R.C. staff memorandum recommends that the agency take action against JPMorgan because traders at the bank are said to have offered energy at prices “calculated to falsely appear attractive†to state energy officials, resulting in “excessive†payments to JPMorgan of about $83 million.
What makes this seemingly ordinary trading dispute anything but ordinary is the involvement, even if tangential, of Blythe Masters, JPMorgan’s head of global commodities. (In reality, it appears that her involvement wasn’t much more than being copied on e-mails and reviewing a PowerPoint trading overview.) What Ms. Masters did do, however, was invent the credit default swap in 1994, a financial innovation that allowed lenders and others to hedge the risk of loans they made, strongly enhancing liquidity in capital markets and literally saving companies who would have been unable to obtain loans without them and thereby saving untold thousands of jobs.
But instead of being honored for her remarkable innovation, she has been demonized as “the woman who invented financial weapons of mass destruction.†The truth is that Ms. Masters had about as much to do with the subprime C.D.S. trades as Michael Dell, who made the computers that processed trades, or Michael Bloomberg, whose terminals quoted the subprime index prices.
But remember, as the JPMorgan shareholders did this month, that despite the leaks, JPMorgan has yet to be formally charged in any of these investigations, not to mention finally adjudicated to have done anything wrong.
What don’t lie are the numbers: net income up 12 percent for 2012 and 32 percent for first quarter 2013; and the stock price up over 50 percent from a year ago, and 20 percent higher even than five years ago, before the financial crisis.
It’s fair at this point for JPMorgan to say enough is enough. Perhaps it’s time to call for an investigation of how sensitive preliminary confidential regulatory information is being leaked, repeatedly, to the detriment of the bank and its employees and shareholders.
