JP MORGAN PAYS US FEDERAL AUTHORITIES OVER $1 BILLION USD IN FINES & NO PRISON TERM FOR BANK EXECUTIVES FOR FRAUD RELATED OFFENCES
In the morning, the bank agreed to pay $920 million to four regulatory bodies to settle charges that arose out of the infamous “London whale” trade of 2012, which had already cost the country’s biggest bank some $6 billion in losses.
Then, in the afternoon, the Office of the Controller of the Currency — the primary regulator of federally chartered banks — and the Consumer Financial Protection Bureau — a relatively new regulator — announced that JPMorgan would pay fines of $80 million, plus $309 million in restitution, for selling credit card customers bogus services.
That’s $1.3 billion in fines and restitution in a one day, not to mention strongly worded statements by regulators, an admission of wrongdoing by JPMorgan, and promises by a humbled Dimon to do better.
How in the world did we get from there to here? “There” was five years ago, when financial cataclysm threatened — and JPMorgan was the one institution that avoided the missteps that brought low so many others. It was heralded as the best-managed bank, with Dimon the best chief executive.
Now, that same bank, run by that same man, has become a piñata for government regulators; even with Thursday’s settlements, there are still a half-dozen investigations under way. Let me suggest a few possible reasons:
The bank was never as well-managed at it appeared. On one level, JPMorgan raises the broad question of whether any of the big, sprawling, systemically important banks can truly be managed. But there are also issues that are particular to JPMorgan.
The fact that the London whale trades were being marked differently by two areas of the bank suggests that something was seriously awry. Ditto the investigation regulators opened last September, resulting in a cease-and-desist order a few months later, into whether JPMorgan had appropriate safeguards against money laundering.
That kind of compliance is part of the blocking and tackling of the banking business. Only now is the bank hiring thousands of compliance officers who should have been in place years ago.
Unlucky timing. American Banker asked an interesting question the other day: what would have happened if the London Whale trades had taken place in 2009, rather than 2012?
Almost certainly, the government’s response wouldn’t have been nearly as severe. “The reason is simple,” said the newspaper. “The government then was more worried about harming the system and did not want to potentially upset markets by assessing large fines.” Another reason, though, is that JPMorgan, for all its troubles, remains immensely profitable, and huge, with well over $2 trillion in assets. The government can make an example out of it without jeopardizing it.
The regulators are finally getting serious. Yes, it’s true, despite pointing out numerous lapses by senior management at JPMorgan, the government, once again, named no names of senior executives, and indicted two relatively small fry for their actions in the London whale trade. The regulators still have a ways to go — though, they were unusually candid in describing the lapses by the top executives of JPMorgan.
But look how far they’ve come! What one hears is that there was very little negotiating about the size of the whopping fine. And the Securities and Exchange Commission required an admission of guilt as part of the settlement, which is a very big deal. (Let’s pause and doff our cap to Jed Rakoff, the federal judge who first started complaining about settlements that did not acknowledge guilt — and whose reasoning appears to have persuaded the S.E.C.)
“The passage of time has allowed the regulators to get their acts together,” says my friend Dan Alpert, managing partner at Westwood Capital, and the author of the coming book, “The Age of Oversupply.” It’s encouraging, for instance, to see the Office of the Comptroller of the Currency shed its former reputation as the banks’ best friend in Washington, and get tough on the institutions it oversees.
It’s important to remember why banks are regulated so closely. It’s not about punishment, or satisfaction. It’s about ensuring that the banks are being run soundly. Banks are not like other companies; a big bank failure can have enormous economic consequences, as we saw in 2008.
“I think the key to safe and sound banking is to hold the boards and senior management accountable,” says Karen Petrou, the managing partner of Federal Financial Analytics. “This is first time of which I’m aware it’s been done.”
She added, “Largely because so much else went unpunished, JPMorgan ended up holding the bag.”
“But better late than never,” Petrou said.
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