September 23rd, 2013
in Op Ed
by Janet Tavakoli, Tavakoli Structured Finance
This commentary was originally published at The Financial Report by Janet Tavakoli, and is reprinted with permission from Tavakoli Structured Finance.
The SEC filed a cease-and-desist order on September 19, 2013 in the matter of JPMorgan Chase & Co.’s “London Whale” credit derivatives trading incident and misstatement of earnings. JPMorgan admitted it violated securities laws and agreed to pay a $920 million settlement.
The release mentioned that JPMorgan filed inaccurate reports with the SEC: Form 8-K filed April 13, 2012 and Form 10-Q filed May 10, 2012. The SEC also listed several failures by senior management defined as the JPMorgan Chief Executive Officer, the JPMorgan Chief financial Officer, the JPMorgan Chief Risk Officer, the JPMorgan controller, and the JPMorgan General Auditor. But the report doesn’t mention them by name, and in particular, it doesn’t mention Jamie Dimon by name, even though he is both the Chief Executive Officer and the Chairman of the Board.
Dimon’s widely reported earnings call on April 13, 2013 not only misinformed the public, Dimon was dismissive of credible news reports about huge credit derivatives positions and mounting losses in JPMorgan Chase’s Chief Investment Office unit that reported to Dimon. Not only did he dismiss the reports, he didn’t disclose the size of the losses he already knew about, and the numbers were whopping. Reported losses eventually mounted to $6.2 billion.
Senate Investigation Showed JPMorgan Executives Misinformed the Public
The SEC is still investigating this case, but Senator Carl Levin (D-MI) and Senator Charles Grassley (R-IA) both criticized the SEC for not sanctioning individual managers. Both are keen for enforcement on the way the bank communicated with investors.
Senator Levin observed that a Senate investigation showed:
“senior bank executives made a series of inaccurate statements that misinformed investors and the public as the London Whale disaster unfolded.”
Dimon’s Damaged Credibility
On April 6, 2012, a week before JPMorgan filed its inaccurate 8-K, and a week before Jamie Dimon dismissed news reports as a “tempest in a teapot,” Bloomberg News broke the story that trader Bruno Iksil had credit derivatives positions so large, he moved the market. Just after that, the Wall Street Journal printed a page one story about the London Whale trades. It was headline news, and both news outlets engaged in independent reporting. Bloomberg beat the WSJ by a nose, and they both beat Jamie Dimon by more lengths than Secretariat in the Belmont Stakes.
Dimon Misinformed the Public and Withheld Information
It’s a serious matter to demonstrate lack of good faith in statements to investors and to the public. It’s particularly cavalier five years after the United States poured billions in cash and trillions in subsidies, guarantees, and funding to large banks. The U.S. also changed accounting rules in April 2009 to make it easier for banks to cover-up losses on long-term holdings while banks tried to earn their way out of a big hole into which the U.S. shoveled taxpayer dollars. Yet it appears that Dimon made material misstatements about losses and potential losses in his CIO unit.
According to a July 13, 2012 report by Michael J. Moore and Dawn Kopecki at Bloomberg News, although Jamie didn’t disclose loss numbers on his April 13, 2013 earnings call, he already knew losses exceeded $700 million and were climbing:
JPMorgan Chase & Co. (JPM) had already lost more than $700 million on synthetic credit bets and Chief Executive Officer Jamie Dimon was told that number could climb to almost $1 billion when he dismissed press reports about the positions in April as a “tempest in a teapot.”
On May 10, 2012, JPMorgan disclosed losses exceeded $2 billion, and in August 2012, JPMorgan restated first quarter earnings to reflect greater losses than it originally reported. As stated previously, reported losses eventually reached $6.2 billion.
Material is usually defined as ten percent of earnings. By that metric, the losses Dimon already knew about were material for any of the CIO units past six years if you considered either revenue or income.
According to a May 11, 2012 report by David Benoit in the Wall Street Journal, the CIO unit grew from 6.1% of the bank’s assets in 2006 to 15.7% of the bank’s assets in 2011. Dimon implied the CIO unit’s losses were mot material, given the bank made money elsewhere, but that is misdirection. The focus was on the CIO unit itself, and the losses he knew about when he spoke on the April 13, 2012 conference call were material. This particular silo blew up.
In 2006, the CIO unit lost $391 million and had negative revenue of $1.13 billion. In 2008 it made $1.5 billion in income. In 2009, its best year, it made $6.6 billion in revenue and $3.1 billion in income. In 2011, the CIO unit made $3.3 billion in revenue and $411 million in net income. In this context more than $700 million in losses was material for this unit. Moreover losses were climbing, and were not under control ultimately climbing to reported losses of more than $6.2 billion.
See also: “Why POTUS Allowed Bailouts Without Indictments”