By Pam Martens: September 10, 2012 

Last week the business media was buzzing about a newly ramped up investigation into the $5.8 billion in losses thus far reported by JPMorgan’s Chief Investment Office in what is now dubbed the London Whale trade.  The Senate’s Permanent Subcommittee on Investigations, Chaired by Carl Levin, is reportedly interviewing former personnel who worked in that division, based in London as well as New York. 

Levin’s powerful subcommittee has jurisdiction to conduct investigations into a wide array of issues, including fraud and abuse, and corporate crime. 

The real breaking news on this matter, however, occurred on May 13 of this year when Levin appeared on Meet the Press.  Host David Gregory asked Levin what should be the price for what occurred at JPMorgan.  Levin has this to say: 

“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.” 

The operative words in the above statement are “past activities” and “criminal.”   That strongly suggested that improprieties in the Chief Investment Office had been going on for quite some time – not the few months that the public had been led to believe.  That view was buttressed when JPMorgan later reported that there may have previously been mismarking of values in the Chief Investment Office. 

Three days later, on May 16, the Senate Judiciary Committee was taking testimony from FBI Director Robert Mueller, on unrelated matters, when 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. 

This was the exchange: 

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.” 

A Wall Street firm taking a bath in a wrong-way bet is not typically a matter of inquiry for the FBI.  The FBI only gets involved if there is potentially criminal activity.  If personnel knowingly hid losses, lied to the public, inflated revenues and profits and/or lied to investigators – those are all matters worthy of inquiry. 

Another potential avenue for the investigation is the nature of the product in which the losses occurred.  Bruno Iksil, the former JPMorgan trader known as the London Whale for his outsized bets, was using an off the run, illiquid index called the CDX IG Series 9.  The index began as 125 investment grade corporate bonds and is now down to 121 as a result of defaults or restructurings.  You can view a list of the positions in the index here.  Wall Street traders have reported that Iksil’s trades were so huge in this illiquid product that JPMorgan may have become the market.  That’s known as cornering the market and that may well be an avenue of investigation that the FBI is exploring. 

Yet another area worthy of investigation is the actual owners of Markit, the firm trading a host of credit default swaps.  As we reported way back on January 21, 2008, Markit is a creation of the big Wall Street firms, including JPMorgan: 

The private company that would become Wall Street’s ticker tape for pricing exotic credit instruments (derivatives on subprime mortgages and credit default swaps) started out as Mark-it Partners in 2001, the brain child of  Lance Uggla while he was working for a division of Toronto Dominion Bank, TD Securities. 

The official story goes like this: Mark-it Partners needed big broker dealers to submit daily price data. As an incentive, it offered 13 large security dealers options to buy shares in the company providing they would be regular providers of pricing data: ABN AMRO, Bank of America, Citigroup, Credit Suisse, Deutsche Bank, Dresdner Kleinwort Wasserstein, Goldman Sachs, JPMorgan, Lehman Brothers, Merrill Lynch, Morgan Stanley, TD Securities, UBS. 

By 2004, according to an archived company press release, all of the companies had kicked in capital. The Financial Times would later report that these banks and brokerage firms held a majority interest of approximately 67%, hedge funds owned 13%, and employees 20%. The firm’s web site currently says it has 16 banks as shareholders, without naming the banks. 

Deutsche Bank, Goldman Sachs and JPMorgan were reportedly the first three firms to take an equity stake in Mark-it on or around August 29, 2003 when the three firms sold a proprietary database of credit derivative information to Mark-it. Since Mark-it is a private firm, financial terms have not been disclosed. 

The high stakes gambles made by the London Whale and his colleagues were in the commercial bank side of JPMorgan.  According to CEO Jamie Dimon, the traders were using “surplus deposits.”  That means FDIC insured deposits, backed ultimately by the taxpayer, were involved in this failed bet.  That Levin’s Senate Subcommittee is once again involved in the matter suggests strongly that it has lost confidence in the speed or credibility of criminal or regulatory probes.