Naked Capitalism: Banksters at It Again

JP Morgan Under Criminal Investigation for Foreign Exchange Trading Abuses

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Posted on November 4, 2014 by

Regulators look to be getting more serious about financial firm misconduct, as witness their new-found willingness to file criminal charges against banks. Not that has happened yet as regards JP Morgan, the US bank with far and away the biggest rap sheet of all US financial firms. But as we’ll discuss, while it is good to see regulators getting tougher with banks, this move still falls in the category of “too little, too late,” particularly since it looks to a last-ditch effort to improve departing attorney general Eric Holder’s file of media clips.

Here is an overview of the JP Morgan investigation from the Wall Street Journal:

J.P. Morgan Chase & Co. said the Justice Department is conducting a criminal investigation of its foreign-exchange-related matters and bumped up a figure measuring the bank’s potential legal costs by $1.3 billion, according to a regulatory filing that the bank released Monday.

The Justice Department is working alongside other regulators focusing on civil enforcement, as talks on foreign-exchange settlements heat up with several banks and regulators across the U.S. and Europe, people familiar with the matter said.

J.P. Morgan, the largest U.S. bank by assets, said the investigations focus on its foreign-exchange trading activities and controls related to those activities.

JP Morgan isn’t the only bank under the hot lights. That’s not news per se. As we wrote last week, on a New York Times story about how regulators were getting peeved with bank recidivists:

The second groups of cases, in which foreign banks are most prominent, is foreign exchange manipulation, which would violate previous settlement related to Libor manipulation. The miscreants flagged in the current New York Times account are Barclays and UBS; the other players under investigation are Deutsche, JP Morgan, and Citigroup. This is a straight-up Department of Justice deal, an apparent last-ditch effort to help burnish Holder’s legacy.

Intriguingly, the various regulators involved in the investigations don’t seem to be on the same page. Again from the Journal:

The Wall Street Journal reported Thursday that large banks in the U.S. and Europe appeared more optimistic of reaching a global foreign-exchange-related settlement than U.S. regulators, but the situation remained fluid, several people familiar with the discussions said…

Among the U.S. agencies, there are varying degrees of enthusiasm for one big deal. The Justice Department, in large part because it is handling criminal probes of the conduct, expects resolutions of its probes to take months more, some of these people said. As recently as last week, the department was more aggressive in negotiations with the banks, some of these people said.

Another unmentioned wild card is Benjamin Lawsky, the New York superintendent of financial services. On the Standard Chartered money laundering probe, which kicked off this round of willingness to hit banks, (of course, primarily foreign banks) with much large fines than had ever been doled out for this type of violation, Lawsky reached his own, impressively large settlement relative to that collected by supposedly more senior regulators in Washington, DC. Similarly, we’ve also seen cases where a Federal banking regulator has tried to pre-empt the others, as the OCC did with its consent orders in April 2011, in an effort to undermine other Federal investigations into servicing abuses. So there is plenty of precedent for regulators deciding to go their own way in cutting deals related to bank abuses.

What is distressing, though, is the fact that at least at this stage, this appears to be a criminal investigation of the bank. The JP Morgan regulatory filing announced that it was increasing its legal provisions, and that presumably is in part, if not entirely, due to expected settlement costs for this investigation. We see nary a mention of individuals being investigated. This is particularly disappointing given that the investigation includes looking into controls, as in the lack thereof.

As we’ve written repeatedly, deficiencies in controls offer a clean path to fines and even criminal indictments of executives under Sarbanes Oxley. Sarbenes Oxley was designed to end the “I’m the CEO and I know nothing” defense. At a minimum, the CEO and CFO are required to certify the adequacy of internal controls. We wrote repeatedly that the London Whale affair demonstrated that the Morgan bank had shockingly lax oversight of its Chief Investment Office unit, including the unheard practice of letting the CIO run its own risk controls. At any well-run trading operation, risk controls are located at the corporate level, outside of any profit center, to keep the traders and producers from bullying the bean-counter risk managers into compliance. Jamie Dimon should already have been charged for Sarbanes Oxley violations. Now we have a case of misconduct with may rise to the criminal level, due to these abuses amounting to a violation of the earlier settlement on Libor price manipulation.

But it is a safe bet that the Department of Justice lacks the nerve to go after Obama’s favorite banker or even one of his senior lieutenants. And that is why well-warranted public cynicism about these bank probes will continue. Citizens understand that unless individuals are held accountable, nothing much will change. But despite the louder saber-rattling from regulators and larger fines as supposed evidence of greater resolve to root out misconduct, bank executives and even senior manager remain a protected class. Until that changes, bankers have no reason to stop looting and abusing customers.

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