By Pam Martens and Russ Martens: October 22, 2014
Yesterday the Inspector General of the Federal Reserve System released a highly abbreviated report on the New York Fed’s supervision of JPMorgan’s Chief Investment Office (CIO) that spawned the $6.2 billion in exotic derivative losses in 2012 – using hundreds of billions of dollars in FDIC insured deposits to make those wild bets. The debacle became known as the London Whale since the outsized trades were conducted in London.
The four page summary report that was sanitized for the public includes two bombshells for those who took the time to read the report carefully. First, the Inspector General specifically notes that “we selected July 2004 through April 2012 as the time period for our evaluation. July 2004 marked JPMC’s merger with Bank One Corporation (Bank One), and JPMC created the CIO in 2005.”
What is the relevance of that nugget? We learn for the first time that no Chief Investment Office existed at JPMorgan until after the Bank One merger which brought Jamie Dimon on board JPMorgan for the first time. Dimon was CEO of Bank One at the time of the merger in 2004. The deal included the terms that Dimon would immediately become President and Chief Operating Officer of the combined firms and step into the role as CEO in 2006.
Next we are told by the Inspector General that New York Fed staff recommended no less than three examinations of the Chief Investment Office – in 2008, 2009 and 2010. But the examinations just never came to fruition.
The report offers three extremely wussy explanations for why there was no comprehensive review of what was going on in the Chief Investment Office by the New York Fed: “FRB New York did not conduct the planned or recommended examinations because (1) the Reserve Bank reassessed the prioritization of the initially planned activities related to the CIO due to many supervisory demands and a lack of supervisory resources, (2) weaknesses existed in controls surrounding the supervisory planning process, and (3) the 2011 reorganization of the supervisory team at JPMC resulted in a significant loss of institutional knowledge regarding the CIO.”
Pure poppycock. We can think of a far more realistic explanation for why no meddling into high risk trading at JPMorgan using depositors’ savings was ever conducted in 2008 through 2010: Jamie Dimon sat on the Board of Directors of the New York Fed – his bank’s regulator – from 2007 through 2012.
And while all of this was happening, William Dudley was serving as the President and CEO of the New York Fed while his wife, Ann Darby, a former Vice President at JPMorgan, was receiving approximately $190,000 per year in deferred compensation from JPMorgan – an amount she is slated to receive until 2021 according to financial disclosure forms.
Senator Carl Levin has previously hinted that skullduggery went back a number of years in the Chief Investment Office at JPMorgan. When Senator Levin appeared on May 13, 2012 on Meet the Press, host David Gregory asked Levin what should be the price for what occurred at JPMorgan. Levin said:
“In terms of past activities, that’s in the hands of people who are assessing whether there was any criminal wrongdoing. That’s still in the hands, as far as I know, of the Justice Department and the New York prosecutors.”
Those “past activities” were apparently enough to trigger a criminal investigation by the FBI. Three days after Senator Levin appeared on Meet the Press, the Senate Judiciary Committee took testimony from FBI Director Robert Mueller on unrelated matters. Senator Richard Blumenthal decided to inquire into the JPMorgan investigation. (Blumenthal was previously Connecticut’s Attorney General for five terms as well as a former U.S. Attorney for the Justice Department.)
The exchange went as follows:
Senator Blumenthal: “I would like to ask first about the JPMorgan Chase investigation. Can you tell us what potential crimes could be under investigation, without asking you to conclude anything or talk about the evidence. Would it be false statements to the Federal government or what area of criminal activity?”
FBI Director Mueller: “I’m hesitant to say anything other than what is available under Title 18 or available to the SEC would be the focus of any ongoing investigation.”
Senator Blumenthal: “Can you talk at all about the timing of that investigation?”
FBI Director Mueller: “All I can say is we’ve opened a preliminary investigation and, as you would well know, having been in this business for a long time, it depends on a number of factors.”
Senator Blumenthal: “And, I’m not going to press you further but I would just encourage you – without your needing any encouragement I’m sure – to press forward as promptly and aggressively and expeditiously as possible because I think that the American public really has lost faith in many other enforcement agencies partly because of the delay and lack of results and I think that the FBI’s involvement is a very constructive and important presence in this area.”
Other than bringing criminal charges against two traders for lying about losses on the London Whale trades – traders whom the Justice Department cannot seem to extradite to this country for trial – none of the higher ups at JPMorgan involved in approving these trades or using insured deposits to make them have been charged.
Now, coming on the heels of the recent exposure of the Carmen Segarra tapes showing how the New York Fed tiptoes around its Wall Street charges, the Inspector General’s revelation that three recommended examinations of JPMorgan’s high risk Chief Investment Office were never conducted, simply adds to the public disgust and assessment that Wall Street operates outside the law with a wink and a nod from its regulators.