December 5, 2023

DealBook: JPMorgan Ignored Warnings in Loss, Inquiry Finds

A Senate panel report says that Jamie Dimon, chief of JPMorgan Chase, withheld details about the bank's daily losses.Jim Lo Scalzo/European Pressphoto AgencyA Senate panel report says that Jamie Dimon, the chief executive of JPMorgan Chase, withheld details about the bank’s daily losses.

JPMorgan Chase, the nation’s biggest bank, ignored internal controls and manipulated documents as it racked up trading losses last year, while its influential chief executive, Jamie Dimon, briefly withheld some information from regulators, a new Senate report says.

The findings by the Congressional investigators shed new light on the multibillion-dollar trading blunder, which has claimed the jobs of several top executives and prompted an inquiry by the Federal Bureau of Investigation. The 300-page report, released a day before a Senate subcommittee plans to question bank executives and regulators at a hearing, will escalate the debate over how to police complex risk-taking on Wall Street. It may also foreshadow a criminal case against employees at the heart of the troubled wager.

A spokeswoman for the bank said on Thursday, “While we have repeatedly acknowledged significant mistakes, our senior management acted in good faith and never had any intent to mislead anyone.”

Mr. Dimon, whose reputation as an astute manager of risk has been undercut by the trading losses, comes under the harshest criticism yet from the Senate investigators. The chief executive signed off on changes to an internal alarm system that underestimated losses, seemingly contradicting his earlier statements to lawmakers, according to the report.

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He is also accused of withholding from regulators details about the investment bank’s daily losses — and then raising “his voice in anger” at a deputy who later turned over the information.

While people close to the matter dispute whether the outburst actually happened, it illustrates a broader problem at JPMorgan: after emerging from the financial crisis in far better shape than rivals, the bank saw itself as being above its regulators. The bank was so filled with hubris, Senate investigators said, that an executive once screamed at examiners and called them “stupid.”

The bipartisan report, citing some of the same private documents that F.B.I. agents are now poring over, also highlighted how JPMorgan managers “pressured” traders to lowball losses by $660 million, a previously undisclosed figure, and then played down the problems to authorities.

The bank’s trader who became known as the London Whale — because of the outsize derivatives trades at the center of the bank’s losses, which now total more than $6 billion — told a colleague last year that the bank’s estimated losses were “getting idiotic,” according to a transcript of their phone conversation cited by the subcommittee. The trader, Bruno Iksil, added that “I can’t keep this going” and that he didn’t know where his boss in London “wants to stop.”

Federal investigators, seeking Mr. Iksil’s side of the story, now plan to interview the trader overseas, according to people briefed on the investigation.

Timeline: JPMorgan Trading Loss

After examining hundreds of e-mails and hours of taped phone calls, the people said, federal investigators also plan to interview top JPMorgan executives in the coming weeks, including Mr. Dimon. While authorities do not suspect the chief executive of wrongdoing, the meetings signal that the case is at an advanced stage.

The breakdowns at both the bank and at its regulators, in particular the Office of the Comptroller of the Currency, could galvanize support for new curbs on Wall Street trading.

Calling the bank’s trading strategy a “runaway train that barreled through every risk warning,” Senator Carl Levin, the Michigan Democrat who runs the Permanent Subcommittee on Investigations, said that the bank “exposed daunting vulnerabilities” in the financial system.

Demands from regulators for more information were met with resistance at JPMorgan, the subcommittee said. The pushback extended to the highest levels of the bank, the report found, and was not limited to requests about the bank’s chief investment office, where the losses took place.

For a brief period in 2012, the subcommittee said, JPMorgan stopped providing profit and loss reports for the investment bank to the comptroller’s office. Mr. Dimon, the subcommittee said, had choked off delivery of the reports because he thought “it was too much information to provide.”

Some people briefed on the matter dispute that characterization, noting that the reports were briefly halted because of security concerns.

Yet at other times, the bank was not fully forthcoming, Senate investigators said. During a meeting in January 2012 with the comptroller’s office, JPMorgan said it intended to reduce the size of the complex trading bet. Instead, the bank increased the positions.

Ina Drew, who headed the chief investment office, balked at the regulator’s demands for more information, resisting them as “unnecessary and intrusive,” the subcommittee said in its report.

Bryan Hubbard, a spokesman for the currency office, said the agency acknowledged there “were shortcomings in the O.C.C. supervision leading up to and responding to the unfolding events” with JPMorgan’s chief investment office.

He added that “as the bank revealed the true nature of the C.I.O. operation and the level of loss exposure, the comptroller escalated the agency’s response and ordered a two-pronged review into the bank’s actions as well as the O.C.C.’s.”

JPMorgan faces the most scrutiny over its lowball estimates of losses, the topic of the F.B.I.’s investigation. While traders have leeway to value their losses, the bank in 2012 moved from marking them in a “middle range” to some of the most generous possible figures.

One junior trader in London, Julien Grout, told Mr. Iksil in a recorded phone conversation: “I am not marking at mids as per a previous conversation.” For five days in March, Mr. Grout also kept a spreadsheet that tracked the difference between his valuations and the midpoint. The documents, according to the subcommittee, showed that his valuations underestimated the losses by $432 million.

The bank’s controller, alerted to potential problems, issued an internal report in May 2012 that essentially cleared the traders of wrongdoing. The marks, according to the report, were “consistent with industry practices.”

But JPMorgan, the subcommittee noted, later had to restate its earnings to reflect the overly rosy estimates.

“The bank said the markings complied with the standards of the industry,” Mr. Levin said. “We don’t think that’s true.”

Mr. Levin called for new rules that would force banks to strengthen their methods for valuing their trades. He also urged regulators to finalize the so-called Volcker Rule, which would prevent banks from making such bets with their own money.

JPMorgan, the subcommittee noted, “mischaracterized high risk trading as hedging,” or mitigating risk, which is allowed under the Volcker Rule. Douglas Braunstein, the bank’s chief financial officer, told analysts in April that the position “is consistent” with a proposed version of the Volcker Rule, a conclusion that the subcommittee dismissed as false.

One regulator wrote in a May 2012 e-mail that the position was a “make believe voodoo magic ‘composite hedge.’ ”

As the traders in London assembled increasingly complex bets, JPMorgan ignored its own risk alarms, according to investigators. In the first four months of 2012 alone, the report found, the chief investment office breached five of its critical risk controls more than 330 times.

Instead of scaling back the risk, though, JPMorgan changed how it measured it, in a metric known as value at risk, or VaR, in January 2012, enabling the traders to continue building the big bets, the subcommittee found.

The report provides further detail about what Mr. Dimon knew about the changed alarm system. Mr. Dimon told the subcommittee that he couldn’t “recall any details in connection with approving the VaR limit increase.”

But Mr. Dimon personally authorized JPMorgan to temporarily increase the measure, writing in a January 2012 e-mail, “I approve.”

A version of this article appeared in print on 03/15/2013, on page A1 of the NewYork edition with the headline: Senate Inquiry Faults JPMorgan on Trading Loss.

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DealBook: At Davos, Financial Leaders Debate Reform and Monetary Policy

World Economic Forum in Davos
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DAVOS, Switzerland — Jamie Dimon, the chief executive of JPMorgan Chase, apologized again for the bank’s $6 billion trading loss, this time in front of an audience that included the elite of the financial world. But in character for the confident chief executive, it was a diet portion of humble pie.

“If you’re a shareholder of mine, I apologize,” Mr. Dimon said at the World Economic Forum annual meeting here. But he quickly added, “We did have record profits. Life goes on.”

During an often contentious panel discussion in Davos that included several other bank executives, Mr. Dimon clashed with a top official of the International Monetary Fund about whether the banking system was still too dangerous.

Zhu Min, deputy director of the I.M.F., said the financial industry was too large in proportion to the economy. More than four years after the financial crisis, Mr. Min noted that banks still operated on too much borrowed money and still traded in overly complicated derivatives that were impossible for outsiders to understand.

“The whole financial sector is too big,” Mr. Min said.

Mr. Dimon responded that JPMorgan was fulfilling its duty to lend to businesses and governments. He said JPMorgan and other banks no longer dealt with subprime mortgages and some of the other complex financial concoctions that led to the crisis. He also said JPMorgan had not abandoned Spain or Italy despite the risks in those highly indebted countries.

“Everyone I know is trying to do a good job for their clients,” Mr. Dimon said during a debate moderated by Maria Bartiromo of the cable channel CNBC on the opening day of the meeting.

During the same discussion, Axel Weber, the chairman of UBS and former president of the Bundesbank, harshly criticized the European Central Bank and other central banks for keeping interest rates at record lows.

Mr. Weber said it was wrong to combat a crisis caused by excessive borrowing by encouraging even more borrowing. Record low official interest rates and other extraordinary measures to pump cash into the economy would eventually backfire, he said.

“We are trying to solve the crisis with more leveraging,” he said. “We are having a better life at the expense of future generations.”

Mr. Weber was once the front-runner to become president of the European Central Bank. But he resigned as head of the German central bank in 2011 after clashing with other members of the E.C.B. governing council over its purchases of euro zone government bonds.

Mario Draghi, who became president of the European Central Bank instead, has since calmed financial markets with a promise to buy government bonds in whatever amounts needed to contain borrowing costs for countries like Spain.

“I haven’t changed my views too much” on bond purchases, said Mr. Weber, who did not mention Mr. Draghi by name.

Mr. Weber has since presided over attempts by UBS to deal with the aftermath of the financial crisis and wrongdoing by some bank employees. UBS, based in Zurich, agreed to pay a $1.5 billion fine as part of a settlement last month over the manipulation of crucial benchmarks used to set mortgage and other interest rates.

“There have been excesses,” Mr. Weber said on Wednesday. “We need to fix them and move forward.”

Participants in the panel agreed that new bank regulations had fallen far short of what was needed to prevent problems at individual lenders from causing wider economic and financial crises, though they disagreed on what could be done better.

“We just experienced the worst financial crisis since the 1930s,” Mr. Min of the I.M.F. said. “We’re not safer yet.”

Mr. Dimon said conditions for economic growth were good “if we do all the right things.”

“If not,” he added, “we could be experiencing crises for another 10 years.”

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DealBook: Standard Chartered Signs Pact With New York Regulator

Benjamin M. Lawsky, head of the state's Department of Financial Services, at his office in Manhattan in January.Michael Appleton for The New York TimesBenjamin M. Lawsky, head of the state’s Department of Financial Services, at his office in Manhattan in January.

2:46 p.m. | Updated

Standard Chartered, the British bank accused of illegally funneling money for Iranian banks and corporations, signed a settlement on Friday with New York State’s top banking regulator.

Bank executives agreed last month to pay $340 million to settle claims that it moved hundreds of billions of dollars in tainted money and lied to regulators. Until Friday, though, the final details were not hashed out.

The finalized agreement allows the 150-year-old bank to move beyond its clash with Benjamin M. Lawsky and the agency he heads, the 10-month-old New York Department of Financial Services. The state regulator accused Standard Chartered in August of scheming for nearly a decade with Iran to hide from regulators 60,000 transactions worth $250 billion.

Federal authorities, including the Manhattan district attorney and the Justice Department, have their own investigations into Standard Chartered’s activities. The bank is expected to resolve any criminal allegations with the Manhattan district attorney’s office by next week, according to law enforcement officials.

Standard Chartered had maintained that only $14 million of the $250 billion in transactions violated federal regulations. In a regulatory filing shortly after the settlement was announced, the bank said that “a formal agreement containing the detailed terms of the settlement is expected to be concluded shortly.” In the agreement, the bank acknowledged the transactions under scrutiny were roughly $250 billion, but did not admit or deny wrongdoing.

The settlement that was concluded on Friday will be the final act in an international drama that pitted Mr. Lawsky against federal authorities who believed he was overreaching and British authorities who accused the regulator of hurting the reputation of their banks.

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DealBook: In UBS Convictions, Parallels to the Libor Investigation

Above, a branch of UBS in Zurich. Three former bank executives were found guilty last week of rigging bids to invest municipal bond proceeds.Arnd Wiegmann/ReutersAbove, a branch of UBS in Zurich. Three former bank executives were found guilty last week of rigging bids to invest municipal bond proceeds.

The conviction on Friday of three former UBS executives on conspiracy and wire fraud charges for rigging bids in the municipal bond market may serve as a template for how prosecutors can pursue cases in the manipulation of the London interbank offered rate, or Libor.

In the UBS case, federal prosecutors were able to obtain the convictions involving an arcane area of the financial markets. The accusations involve various bankers colluding in setting interest rates at the expense of investors and borrowers.

That certainly has parallels to the Libor inquiry as more banks are investigated in the submission of false information for the benchmark rate used in trillions of dollars of loans and bonds worldwide.

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In the UBS case, three of the bank’s former executives were accused of working with brokers at other firms to rig bids submitted to local governments and agencies to invest the proceeds of their bond offerings. By lowering the interest rate paid on the investment contracts, the firms were able to generate higher returns.

The defendants were also charged with accepting kickbacks from firms in exchange for steering business their way. The government relied on recordings and e-mails to establish its case, along with cooperating witnesses who had entered guilty pleas.

In the recent UBS case, United States Judge Kimba M. Wood took a broad view of what affects a financial institution.In the recent UBS case, United States Judge Kimba M. Wood took a broad view of wire fraud violations that affect financial institutions.

Although this type of collusion can violate the antitrust laws, federal prosecutors centered their case on the wire fraud statute because it provides a longer prison term and has a longer statute of limitations to pursue charges. A defendant convicted of an antitrust violation can receive a sentence of up to 10 years, while wire fraud that affects a financial institution authorizes a maximum 30-year prison term.

The defendants raised the statute of limitations issue in trying to get their case dismissed; the transactions occurred primarily from 2001 to 2004, and the defendants were not charged until late 2010.

Under federal law, most charges must be filed within five years of the conduct. The UBS defendants asked the United States District Court in Manhattan to dismiss some counts on those grounds. A law adopted in 1990 during the savings and loan crisis, however, expanded the statute of limitations to 10 years for banking crimes and any violation of the wire fraud statute that affects a financial institution.

An opinion by Judge Kimba M. Wood, who presided over the case, took a broad view of what affects a financial institution. As a result, she concluded that the longer limitations period applied to the UBS case.

Although the victims were state and local governments — which do not qualify as financial institutions — she found that settlements affected UBS and other banks because they paid fines and civil penalties to resolve their cases. Although it was the defendants’ own conduct that impacted the financial institutions, their violations were enough to extend the limitations period to 10 years.

The case against the three former UBS executives has a number of interesting parallels to the Libor investigation, providing the framework for prosecutions that might emerge.

One of the defendants, Peter Ghavami, a Belgian who had been head of an investment bank in Moscow, was arrested in December 2010 at Kennedy Airport. In the Libor case, a number of banks are outside the United States, so individuals who might be involved should be wary about traveling to this country because of the risk that they could be detained.

The $450 million settlement by Barclays in the Libor investigation means that a financial institution was affected by the submission of false interest rates for setting Libor. The Justice Department and the Commodity Futures Trading Commission are investigating other banks for their role in manipulating Libor, so we can expect additional settlements that are likely to include substantial monetary penalties.

That means federal prosecutors can rely on the 10-year limitations period because manipulation of Libor affected a financial institution, opening a much wider window for charging individuals for violations.

The Barclays settlement details a number of communications in 2005 and 2006 by traders at the bank seeking to have its Libor submissions manipulated to benefit their investment positions. Among the statements was one in which a person responsible for submitting information for Libor told a trader “Always happy to help, leave it with me, Sir,” and another saying “Done . . . for you big boy.”

The settlement outlining the violations notes that the Barclays traders also colluded with counterparts at other banks to manipulate the Libor submissions, and that they “made the requests in person, via e-mail, and through electronic ‘chats’.” As in the UBS case, prosecutors can pursue charges for violating the wire fraud statute at the banks because e-mail and instant messaging almost always involve interstate transmissions via the Internet.

The definition of an interstate wire transmission has also been broadly construed by the federal courts, making wire fraud particularly useful in cases involving manipulation of information. The communication does not have to be important to the execution of the fraud so long as it was a step in the process, which can include a confirmation like telling “big boy” that the false information had been submitted. A defendant need not even be the one sending or receiving the interstate wire for a violation, or have any knowledge that the communication crossed state lines.

The federal sentencing guidelines recommend substantial penalties for fraud convictions based on the amount of the loss suffered by victims. Because Libor is so important to the loan and debt markets, the potential impact of even a small variation in the rate could trigger enormous losses. Federal judges do not have to make precise calculations when assessing the loss, or even a potential loss. A recommended sentence for manipulating Libor could easily reach 20 years or more.

The conviction of the former UBS executives shows that prosecutors can win a case involving complex transactions and sophisticated financial issues under the wire fraud statute. That is likely to encourage the Justice Department to pursue cases from the manipulation of Libor against individuals for conduct that took place in the last 10 years.

US v Ghavami Statute of Limitations Opinion July 2012

Peter J. Henning, who writes White Collar Watch for DealBook, is a professor at Wayne State University Law School.

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Banks Brace for Bad News as Earnings Season Arrives

But when it comes to the nation’s biggest banks, they have a lot more in common than you would think. Both are deeply frustrated with financial institutions in general and have little faith in the message coming from bank executives.

Earnings season is about to upset one of those groups even more. Never popular to begin with, the nation’s biggest banks are rapidly becoming a focus of public dissatisfaction with the economy, uniting opponents including consumers upset about new fees, protesters who blame the banks for the nation’s economic woes, and lately, Wall Street types who have dumped their bank shares en masse.

For banks, the situation is likely to get worse before it gets better. They are due to begin reporting earnings this week, and the numbers are likely to leave investors as frustrated as ever, making the banks even more desperate to impose new charges on consumers’ accounts and rack up bigger trading profits. Over all, revenue is expected to fall 4 percent in the third quarter, slipping back to 2005 levels, according to data from Trepp. The industry’s earnings are expected to be about what they were in late 2002.

The biggest banks are expected to be hit hard by a sharp slowdown in their Wall Street-related businesses because of the chaotic third quarter in the markets. But the growth prospects for traditional banking are not great either. Tough new federal regulations restricting overdraft charges and other penalties are already taking a big bite out of profits. And then there are the government-mandated cuts in once-lucrative debit-card swipe fees, which have prompted banks to try to recoup billions of dollars in lost revenue with increases like Bank of America’s controversial new $5 monthly debit card fee.

Besides leaving consumers infuriated, the debit card fees have also drawn the wrath of the White House, with President Obama warning last week that customers should not be “mistreated” in pursuit of profit, while Vice President Joseph R. Biden Jr. characterized moves to hit consumers with new charges “incredibly tone deaf.” Senator Richard J. Durbin of Illinois, the No. 2 Senate Democrat, took the unusual step of denouncing Bank of America on the Senate floor, urging customers to “vote with your feet, get the heck out of that bank.”

Investors certainly have. Bank stocks are at lows not seen since the wake of the financial crisis, and shares of Bank of America, the nation’s biggest bank, are down more than 50 percent since the start of the year, while Citigroup is down more than 40 percent.

David H. Ellison, a mutual fund manager for FBR who invests in financial companies, likens owning bank stocks these days to holding airline stocks in the months after the Sept. 11 attacks in 2001. “Nobody wants to own the group,” he said. “Everybody thinks it is not the place to be.”

And in a kind of unusual convergence, protesters and bank analysts alike have had it with bank management.

For the protesters, financial institutions, among other things, symbolize growing economic inequality in the United States, with bank executives enjoying huge pay packages even as their companies benefit from government support. Investors distrust them because they have disappointed the Street in quarter after quarter, and seem unable to grow.

“There is a huge skepticism, that goes way beyond normal healthy doubt, about how reliable their numbers and guidance are,” said Chris Kotowski, an analyst with Oppenheimer. “People who were bullish are frustrated and beaten down.”

Michael Mayo, a longtime financial services analyst, has been traveling around the world over the last year, calling attention to what he calls his “Japan lite” thesis — the view that the United States and its banks are in for a prolonged period of very slow growth, not unlike Japan’s so-called lost decade in the 1990s.

A year ago, he said, about four in five clients brushed off his investment thesis. Today, he said, most agree.

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