By Pam Martens: January 15, 2013
Yesterday, two of JPMorgan Chase’s regulators, the Office of the Comptroller of the Currency (OCC) and the Federal Reserve, released the details of their cease and desist consent orders with the mega bank over its lack of proper risk controls in its Chief Investment Office (CIO). The lapses have led to $6.2 billion in losses thus far. JPMorgan, for its part, made sure its golden parachutes – outsized payments to departing executives –would not be limited by the consent agreement.
The debacle, known on Wall Street as the London Whale trades, stem from traders in London, particularly Bruno Iksil who is no longer at the bank, engaging in high risk derivatives trading in a thinly traded corporate bond derivatives index. The nickname, “Whale,” derives from the bank making trades so large that it effectively became the market in that index and could not quickly exit the positions.
Congress held hearings on the matter in 2012 and investigations by the U.S. Justice Department, the Securities and Exchange Commission and U.K. authorities remain ongoing. The seriousness of the losses stem from the fact that the London traders were gambling with the insured deposits of the commercial banking unit of JPMorgan Chase – not using the bank’s own capital or engaging in proprietary trading at the investment bank. According to media reports, the Senate’s Permanent Subcommittee on Investigations, chaired by Carl Levin, is also investigating the matter. The subcommittee has jurisdiction to conduct investigations into areas that include fraud and corporate crime.
The OCC’s consent orders stridently criticized a long list of failings on the part of JPMorgan and its management. The OCC said its findings “establish that the Bank has deficiencies in its internal controls and has engaged in unsafe or unsound banking practices and violations of 12 C.F.R. Part 3, Appendix B (Market Risk Management Amendment) with respect to the credit derivatives trading strategies, activities and positions employed by the CIO on behalf of the Bank.”
The reference to 12 C.F.R., Part 3, Appendix B is especially noteworthy since the law is to “ensure that banks with significant exposure to market risk maintain adequate capital to support that exposure.” The OCC’s reference to JPMorgan violating that statute is a serious matter for the public and Congress.
The OCC detailed the following failings by the bank and its generously compensated management:
(a) The Bank’s oversight and governance of the credit derivatives trading conducted by the CIO were inadequate to protect the Bank from material risks in those trading strategies, activities and positions;
(b) The Bank’s risk management processes and procedures for the credit derivatives trading conducted by the CIO did not provide an adequate foundation to identify, understand, measure, monitor and control risk;
(c) The Bank’s valuation control processes and procedures for the credit derivatives trading conducted by the CIO were insufficient to provide a rigorous and effective assessment of valuation;
(d) The Bank’s internal audit processes and procedures related to the credit derivatives trading conducted by the CIO were not effective; and
(e) The Bank’s model risk management practices and procedures were inadequate to provide adequate controls over certain of the Bank’s market risk and price risk models.
The OCC’s consent order (see link below) established multiple monitoring and reporting requirements for JPMorgan’s Board, with copies of the reports to be directed on an ongoing basis to the OCC. While no monetary fines were imposed with this order, the OCC left open its ability to do so in the future.
Of particular note in the document signed by JPMorgan officials consenting to the terms of the consent order, was this enlightening paragraph:
“The Bank is not subject to the limitation on golden parachute and indemnification payments provided by 12 C.F.R. § 359.1(f)(1)(ii)(C) and 12 C.F.R. § 5.51(c)(6)(ii), unless otherwise informed in writing by the OCC.”
If all you can think of is your golden parachutes after being charged with unsafe and unsound banking practices, maybe it’s time for a new Board and new management at JPMorgan Chase.
Both the OCC and Federal Reserve also issued separate cease and desist consent orders for money laundering lapses at the bank.
The Board of Directors of JPMorgan Chase is expected to release details of its own internal review tomorrow when the company reports its fourth quarter earnings. Jamie Dimon, CEO of the firm, who received compensation and bonuses of $23 million in 2011, is expected to be penalized by the Board. The Board is expected to move from obscene compensation in 2011 to merely mildly obscene compensation for 2012 — despite their CEO overseeing unsafe or unsound banking practices and allowing gambling with insured deposits.