Friday, May 3, 2013 13:30 EDT
JP Morgan Chase faces regulatory action over energy price manipulation in California, Michigan
By Agence France-Presse
JP Morgan Chase faces federal regulatory action over a scheme which manipulated energy prices in two US states, the New York Times reported Friday.The Times said it had seen a 70-page government document which indicated staff from the Federal Energy Regulatory Commission intended to recommend action over the bank’s dealings in California and Michigan.According to the Times, the case arose after JP Morgan’s takeover of Bear Stearns in 2008, which gave the bank the right to sell electricity from power plants in the two states.Investigators said initiatives instigated by the bank transformed loss-making power plants into “powerful profit centers.”Eight schemes launched by traders in Houston between September 2010 and June 2011 saw energy offered at prices “calculated to falsely appear attractive” to state energy firms.Authorities in California and Michigan released $83 million in “excessive” payments as a result of the scheme, the Times report said.JP Morgan has denied wrongdoing, insisting the trading in question was legal and “in full compliance with the applicable rules.”The Times report said JP Morgan was also coming under pressure from other regulators.The Office of the Comptroller of the Currency was studying enforcement actions against the bank over the way it collected credit card debt as well as its possible failure to alert authorities about suspicions surrounding fraudster Bernard Madoff. | HERE
In the first major investigation into the so-called "London Whale" scandal, executives at the bank are accused of omitting key data from reports to its US regulator as losses mounted last year. Jamie Dimon, the bank's chief executive, described the losses as a "tempest in a teapot" in early April, even though he knew that losses from a complex series of wagers on credit derivatives – known as a synthetic credit portfolio (SCP) – had escalated during March, the report says.
JP Morgan executives will on Friday be grilled by the Senate committee on the losses that were racked up in London and helped reignite the debate in America over whether the reform since the financial crisis has done enough to make the banking system safer.
The bets taken by the London arm of JP Morgan's chief investment office (CIO), a division tasked with investing the bank's surplus deposits, were so large that one of the traders involved, Bruno Iksil, was quickly dubbed the "London Whale". His lawyers have denied any wrongdoing by him.
The trades "created a runaway train that barrelled through every risk barrier," said Carl Levin, the head of the Senate Permanent Subcommittee on Investigations that produced the report. "Values [on trading books] were manipulated to hide losses; risk limits were ignored; the public was misinformed and oversight was dodged."
"While we have repeatedly acknowledged mistakes, our senior management acted in good faith and never had any intent to mislead anyone," a spokesman for JP Morgan said.
According to the 307-page report, in January last year executives from the CIO misformed its regulator, the Office of the Comptroller of the Currency, by telling officials that they intended to reduce the size of the trades. Instead, the dealers embarked on a "trading spree".
"By minimising the CIO data it provided to the OCC about the CIO and the SCP, the bank left the OCC misinformed about the SCP's risky holdings and growing losses," the report says.
Although JP Morgan shares have recovered from their plunge after Mr Dimon disclosed the scale of the losses in May last year, the bank still faces a wave of lawsuits from investors who allege they were misled.
The Senate report said that "public statements and SEC filings made by JP Morgan in April and May 2010 raise questions about the timeliness, the completeness and accuracy of information presented about the CIO whale trades."
The investigation did not have the power to subpeona key traders who live in London, including Mr Iksil, and requests to conduct interviews in the UK capital were turned down, said Mr Levin. Senate report hits out at JP Morgan over 'runaway train' of trading loss - 3/15/2013
Ina Drew, who ran the bank’s chief investment office (CIO) until July, told a Senate hearing that some traders in London did not record the risks of bets they were taking in “good faith” as losses ballooned early last year.
The accusations from Ms Drew, a 30-year veteran of JP Morgan who was paid almost $30m in 2010 and 2011, are her first since a trading scandal that has stained the bank’s reputation for managing risk and led to fresh scrutiny of dealings by Wall Street institutions.
In a tense and sometimes explosive hearing, Ms Drew blamed both employees at the CIO’s London division and the bank’s risk management committees. The Senate’s hearing came less than 24 hours after its report accused JP Morgan of misleading regulators and shareholders over the losses suffered when the credit derivatives market soured.
Without making specific accusations, Ms Drew said she relied on the expertise of Achilles Macris, who ran the CIO’s European and Asian arms, and Javier Martin-Artajo, an executive who managed trades known as a “synthetic credit position”. As losses on the trades hit $1bn, Ms Drew told the hearing that she had asked the two about the positions and “their responses were seemingly thorough and consistently reassuring”.
The hearing did not have the power to force the men to attend and they declined to testify. Ms Drew was joined by four current JP Morgan executives at the hearing in which Carl Levin, the head of the committee, questioned them over a scandal in which one of the traders in the UK was dubbed the “London Whale” because of the size of the trades.
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In the most heated exchange, Mr Levin repeatedly challenged Doug Braunstein, the bank’s former chief financial officer, over remarks he made on a call with analysts on April 13, just days after reports about a potential loss had emerged.
Asked on the call about the reports, Mr Braunstein said regulators were briefed on the positions and that they were part of the bank’s long-term strategy.
Mr Levin said: “I have a lot of trouble, believing that those statements were anything other than an effort to calm the seas.”
A spokesman for JP Morgan said that none of its executives tried to mislead investors over the losses.
18 March 2013Although the bad trades were first dislosed 10 months ago, the Senate’s investigation and Friday’s hearing captured public attention because JP Morgan is the US’s biggest bank and its customer deposits are insured by the taxpayer.“The onus of proof is on us now to demonstrate how this can’t happen in other places,” Ashley Bacon, a Briton who is JP Morgan’ acting chief risk officer, told the hearing. “How we can make the entire firm a safer place to the satisfaction of you, everybody else and our regulators.” Lawyers for Mr Macris and Mr Martin-Artajo have denied any wrongdoing.
JPMorgan and the criminalization of the US ruling classBarely a week after Attorney General Eric Holder admitted to a Senate committee that the Obama administration considered the major Wall Street banks too powerful to prosecute, i.e., that they were above the law, the Senate Permanent Subcommittee on Investigations released a 300-page report documenting rampant fraud and law-breaking by JPMorgan Chase, the largest bank in the US and the world’s biggest dealer in derivatives.
The report, issued last Thursday, documents systematic deception in connection with over $6.2 billion in losses from high-risk trades in financial derivatives in 2012.
It states: “The Subcommittee’s investigation has determined that, over the course of the first quarter of 2012, JPMorgan Chase’s Chief Investment Office used its Synthetic Credit Portfolio (SCP) to engage in high risk derivatives trading; mismarked the SCP book to hide hundreds of millions of dollars of losses; disregarded multiple internal indicators of increasing risk; manipulated models; dodged OCC [Office of the Comptroller of the Currency] oversight; and misinformed investors, regulators, and the public about the nature of its risky derivatives trading.”
The report notes that in April of last year, when CEO Jamie Dimon was telling investors that concern over credit default swap bets by the bank’s London-based Chief Investment Office was a “complete tempest in a teapot,” Dimon “was already in possession of information about the…complex and sizeable portfolio, its sustained losses for three straight months, the exponential increase in those losses during March, and the difficulty of exiting the…positions.”
This lie came during a conference call on the day JP Morgan submitted its first-quarter earnings report to the Securities and Exchange Commission (SEC). In that report, the bank utilized fraudulent accounting methods to avoid reporting what it knew at the time to be at least $1 billion in losses from bad gambling bets suffered by its Synthetic Credit Portfolio.
One month later, Dimon suddenly announced that his bank had lost some $2 billion on its so-called “London whale” derivatives trades. That loss has since ballooned to $6.2 billion. The money JPMorgan used to speculate on the credit status of various entities included the federally insured deposits of tens of thousands of customers.
Submitting false reports to federal regulators, deceiving investors and the public, and concealing losses are crimes punishable by fines and jail time. Yet there have been no indictments of the bank, Dimon or any other top JPMorgan executives, let alone convictions or punishment.
This comes as no surprise to anyone who is familiar with the incestuous relationship between the banks and their nominal federal regulators, and the record of the Obama administration in shielding the Wall Street mafia from being held accountable for its crimes.
Despite its own devastating findings, the Senate committee, headed by Michigan Democrat Carl Levin, is an integral part of the institutional collusion and cover-up that allow the financial elite to continue expanding its already obscene wealth by plundering society. Last Friday, the day after the committee issued its report, it held a hearing on the “London whale” scandal at which it took testimony from former and current JPMorgan executives and OCC officials.
Noticeably absent was Dimon, whom the committee did not call to testify—an unmistakable signal that the multimillionaire banker has nothing to fear. He has, after all, friends in high places.Known as Obama’s “favorite banker,” he was repeatedly invited to the White House during Obama’s first term. Only days after Dimon’s May 10, 2012 announcement of previously concealed trading losses, Obama rushed to personally vouch for Dimon and his bank. He publicly declared that Dimon was “one of the smartest bankers we’ve got” and that JPMorgan was “one of the best managed banks there is.”
JPMorgan is not the exception, however, it is the rule. Two years ago, Levin’s committee issued a 630-page report documenting the illegal activities of major Wall Street banks in the run-up to the financial meltdown of September 2008. The report spelled out as well the complicity of federal regulatory agencies and the credit rating firms.
Levin said at the time that his investigation had found “a financial snake pit rife with greed, conflicts of interest and wrongdoing.” In the interim, one bank scandal has unfolded after another, from the subprime racket, to the home foreclosure fraud, to the Libor rate-rigging conspiracy, to the banks’ money laundering for the Mexican drug cartels. The same types of speculation that turned the world economy into a giant gambling casino for the financial elite continue unabated.
Yet not a single bank or top banker has been indicted, let alone tried, convicted and sent to jail. On the contrary, the financial malefactors have been rewarded with ever greater public funds to subsidize record profits, executive bonuses and stock prices. Over and above the trillions handed out to JPMorgan and the other big banks in bailout cash, cheap loans and asset guarantees—with no strings attached—the Federal Reserve is pumping $85 billion every month in virtually free money into the financial system.
This bank bonanza by itself is greater than the annual federal deficit of the United States. Meanwhile, the Obama administration and state and local governments demand ever more savage cuts in social programs, jobs, wages, health care and pensions.
The criminality on Wall Street and in Washington is not some excrescence or aberration. It is integral to the functioning of the capitalist profit system.
The types of activities exposed in the report on JPMorgan are representative of the daily operations of the major banks and hedge funds. This is the face of American capitalism in its decline and dotage, marked by the decay of industry and the productive forces, and the ever-greater role played by parasitic and socially destructive forms of financial manipulation. The political corollary of this process is the pauperization of the working class and dismantling of its democratic rights.
Decades of industrial decay and political reaction have given rise to the unbridled rule of a financial aristocracy, which, like the aristocracies of old, is a law unto itself. It controls, in part through direct bribery, both parties and the entire political system. It is not subject to the rules that bind mere mortals.
This system cannot be reformed. It must be overthrown by the collective and politically conscious action of the working class.
The World Socialist Web Site and the Socialist Equality Party propose:
• The expropriation of the wealth of the financial aristocracy and the utilization of the trillions thus obtained to address pressing social needs for decent-paying jobs, education, health care, housing and pensions.• The criminal prosecution of the bankers and financiers whose illegal activities have caused incalculable social misery and suffering.• The taxation of all incomes over $1 million at a rate of 90 percent.• The nationalization of the banks and major corporations, with compensation for small shareholders, and their transformation into public utilities run democratically to meet social needs, not private profit.
March 19, 2013To implement this socialist and revolutionary program, a new leadership must be built to arm the coming mass struggles of the working class with a thoroughly worked-out program and strategy for workers’ power. We urge all those who agree with these demands to contact and join the Socialist EqualityParty.Barry GreyThe author also recommends:
TheOther Thing JPMorgan Was Doing in Its Chief Investment Office: Profiting On theDeath of EmployeesBy Pam Martens: March 19, 2013
Ina Drew, Former Head of the Chief Investment Office at JPMorgan, Testifying at the March 15, 2013 Senate Hearing on the London Whale Trading Losses
Gambling on high-risk synthetic credit derivatives is not the only area of interest at JPMorgan’s Chief Investment Office (CIO) – the division that has thus far admitted to losing $6.2 billion in the London Whale debacle. According to Exhibit 81 released by the U.S. Senate’s Permanent Subcommittee on Investigations, Ina Drew, the head of the CIO, was also overseeing the investment of funds in the firm’s Bank Owned Life Insurance (BOLI) and Corporate Owned Life Insurance (COLI) plans – a scheme enshrined by the U.S. Congress in 2006 that allows too-big-to-fail banks as well as many other corporations to reap huge tax benefits by taking out life insurance policies on workers – even low wage workers – and naming the corporation the beneficiary of the death benefit.
According to the exhibit, Drew was tasked with “Maximization of tax-advantaged investments of life insurance premiums” for the BOLI/COLI plans. According to a report in the Wall Street Journal in 2009, JPMorgan had $12 billion in BOLI, noting that a JPMorgan spokesperson had confirmed the figure. Other insurance industry experts put the total for both BOLI and COLI at JP Morgan significantly higher.
Most Americans are unaware that for at least 25 years big business and banks have been secretly taking out millions of life insurance policies on their workers and naming the corporation the beneficiary of the death benefit without the knowledge of the employee. The individual policies are frequently in the hundreds of thousands of dollars and sometimes millions. To keep track of employees who have left the company, deaths are routinely tracked through the Social Security Administration. The policies became known as “dead peasant” or “janitor” policies because corporations took out life insurance on millions of low-wage workers, including janitors, without their knowledge or consent.
The insurance can give a nice boost to bottom-line corporate profits because it provides multiple tax breaks, including: the cash buildup in the policy is reported as income but is tax-exempt because it resides in a tax-sheltered life insurance policy; the cash payment the company receives when the employee dies is also tax-free under existing tax law.
In 2003, the General Accountability Office (GAO) released a study which found that multiple companies held policies on the same individual and that 3,209 banks and thrifts had current cash values in these policies totaling $56.3 billion.
In 2006, Congress passed the Pension Protection Act. Instead of outlawing this dubious practice, Congress grandfathered all of the millions of previously issued policies while imposing a few tax and reporting rules.
A study by Susan Lorde Martin, Professor of Business Law at Hofstra University in Uniondale, New York found that Portland General, at the time a subsidiary of Enron, had created a COLI arrangement where the death of low-wage workers was funding lavish compensation plans for top executives.
Martin writes: “About seventy-five percent of an estimated $80 million in benefits from the policies pays for a long-term compensation plan for managers, directors, and other top officers; the other twenty-five percent contributes to a supplemental executive retirement plan. Workers who have had their entire retirement funds of hundreds of thousands of dollars wiped out by Enron’s collapse were shocked to discover that their deaths will support benefit plans for top Enron executives.”
In a presentation made by JPMorgan Asset Management, apparently to sell its own investment services for managing monies in other firms’ COLI or BOLI plans, JPMorgan explains how companies can smooth earnings volatility with these plans:
Under a heading of “GAAP Accounting Treatment,” JPMorgan notes:
“Income Statement: ‘Other Income,’ ‘above the line treatment due for income is recurring in nature.’ Please note that BOLI is accounted for under FASB 85-4 which states that the asset is booked at ‘net realizable value.’ Therefore, all realized and unrealized gains and losses of the contract are booked through the income statement which is similar to how a trading security is treated under FASB 115. Because of this treatment, many financial institutions have found it advantageous to ‘wrap’ their BOLI assets with Stable Value Protection to achieve a book value accounting treatment whereby gains and losses are amortized over a period of time to minimize period to period volatility.”
Last week, on March 15, Senator Carl Levin convened a Senate hearing to take further testimony on the CIO losses at JPMorgan. In his opening remarks, the Senator confirmed that the speculative trades had been made with insured deposits held at the bank – not the firm’s own capital – and that JPMorgan had the lowest ratio of any bank in terms of lending out those insured deposits rather than using them for risky derivative gambles.
Senator Levin stated:“JPMorgan’s Chief Investment Office rapidly amassed a huge portfolio of synthetic credit derivatives, in part using federally insured depositor funds, in a series of risky, short-term trades, disclosing the extent of the portfolio only after intense media exposure…
“It was recently reported that the eight biggest U.S. banks have hit a five-year low in the percentage of deposits used to make loans. Their collective average loan-to-deposit ratio has fallen to 84 percent in 2012, down from 87 percent a year earlier, and 101 percent in 2007. JPMorgan has the lowest loan-to-deposit ratio of the big banks, lending just 61 percent of its deposits out in loans. Apparently, it was too busy betting on derivatives to issue the loans needed to speed economic recovery.”
The primary reason banks exist is to make sound business loans that will create jobs and new industries to help the U.S. remain competitive and to enhance the standard of living for all Americans. What we see at JPMorgan is something radically different.
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© 2013 Wall Street On Parade. Wall Street On Parade ® is registered in the U.S. Patent and Trademark Office.WallStreetOnParade.com is a public interest web site operated by Russ and Pam Martens to help the investing public better understand systemic corruption on Wall Street. Ms. Martens is a former Wall Street veteran with a background in journalism. Mr. Martens' career spanned four decades in printing and publishing management.v JP Morgan Profiting On Death Of Employees - 3/24/2013