Econontersect: The congressional investigation of the $6 billion loss in May 2012 produced a 300 page report, JPMORGAN CHASE WHALE TRADES: A CASE HISTORY OF DERIVATIVES RISKS AND ABUSES from the Permanent Subcommitte on Investigations for the U.S. Senate Committee on Homeland Security & Governmental Affairs.
Bartlett Naylor, the financial policy reform advocate for Public Citizen’s Congress Watch division, has made an accusation that the report and supporting exhibits show “a widespread miscarriage of bank management, bank supervision and integrity“.
Naylor said the “cheating” was focused on minimizing the impact of the huge trading loss (called the London Whale trade) on the capital position of the bank. This would improve the stress test results for the bank and increase the ability to gain approval for stock buy-backs. The objective of the manipulation was be to increase the stock share price and increase the personal compensation of senior executives.
From Naylor’s article at Citizen Vox:
In conventional terms, the committee report alleges that JPMorgan sought to manipulate how the whale trade would appear to regulators so that JPMorgan could buy back stock – an action which typically boosts a share price and thus leads to higher executive compensation.
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Shareholders often like buybacks, because at the end of the day they are left with a bigger share of the pie. Senior executives also like them, since executive compensation is often based on earnings per share figures. The same earnings on fewer shares means higher earnings per share, which could mean a higher bonus. The detrimental end result of stock buybacks is that they leave the bank (or other corporation) with less equity capital to protect against downturns.
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One of the proposals in the email (that the firm eventually adopted) produced a new risk model that turned out to be wrong. Instead of revealing the true risk in the London Whale gambles, the new math disguised it. When investors in the stock market later learned that those trades were producing massive losses, JPMorgan’s stock fell 25 percent.
A result of the manipulation was that stress test results appeared slightly more favorable for the bank. The rationale? According to Naylor is was simply to increase executive compensation. Of course the Whale trade losses temporarily damaged that objective (25% price hiy), but eventually the stock moved higher again and the stock today is about 12% higher than just before the Whale debacle started to break into the news.
Even with the positive balance sheet impact of the manipulation, JPMorgan Chase just skimmed by on recent stress test reviews. From GEI News on 15 March 2013:
…the Federal Reserve has released their review of the capital plans for these [16] institutions. Fourteen have received a stamp of approval, two have conditional approval. Two (Goldman Sachs – NYSE:GS – and JP Morgan Chase – NYSE:JPM) have approval only upon submission of acceptable plan updates by the end of the third quarter to address “weaknesses in their capital planning processes.”
Econintersect likes to quote the title of a well-known book by William K. Black: The Best Way to Rob a Bank is to Own One.
Bartlett Naylor adds another note to that theme:
JPMorgan’s “London Whale” episode may boil down to a few senior executives attempting to increase their personal compensation.
Sources:
- JPMorgan cheating on the stress test: Exhibit 46 (Bartlett Naylor, Citizen Vox, 01 May 2013)
- Fed: Not All Large Financial Institutions Capital Plans Okay (GEI News , 15 March 2013)
- Fed Stress Test: Banks Could Lose Nearly $200 Billion (GEI News, 08 March 2013)
