“You are seeing the regulators ratchet up the heat on the banks,” Portales Partners analyst Charles Peabody told Reuters after JPMorgan Chase’s (NYSE:JPM) most recent regulatory settlement was made public. “If you are too big to manage, they are going to make you pay.”
Financial regulators are slowly amending how they prosecute institutions involved in financial crisis-era misdeeds. In the five years since Lehman Brothers went bankrupt and the federal government began handing out bailouts, lawmakers and the public have criticized regulatory agencies for not bringing more cases to court or sending Wall Street executives to jail for the roles they played in the meltdown.
As a result of this pressure, the Securities and Exchange Commission decided to allow fewer financial firms to settle allegations without admitting or denying the facts of cases. In August, the first test of this new rule was the settlement the SEC made with hedge fund manager Philip Falcone. JPMorgan’s London Whale settlement with authorities in the United States and the United Kingdom would have been a close second had the bank’s chairman and CEO, Jamie Dimon, not already acknowledged that the bank had made mistakes related to the trading loss.
While Dimon originally referred to the fallout that followed the $6.2 billion trading loss as a “tempest in a teapot,” he later said in a statement that the bank had “accepted responsibility and acknowledged our mistakes from the start, and we have learned from them and worked to fix them.” He also apologized for the “teapot” remark and testified before Congress that the bank was “stupid” in handling the trades at its Chief Investment Office.
“The ‘London Whale’ episode not only cost us money,” Dimon told shareholders in an April letter, “it was extremely embarrassing, opened us up to severe criticism, damaged our reputation and resulted in litigation and investigations that are still ongoing.”
Even after agreeing to a $1 billion settlement with five regulatory agencies, a move that ended four civil investigations into the trading scandal and two into the wrongful billing of credit-card customers, the bank still faces additional criminal probes into the London Whale loss as well as its behavior during an energy trading investigation, sales of mortgage securities in the United States, possible bribery in China, and its role in manipulating the benchmark interest rates known as Libor in the U.K.
Of the total settlement, which was made public Thursday, $920 million was related to the trading loss and $80 million was tied to improperly billing credit-card customers for identity-theft protection services that the customers did not receive. Despite earlier reports, the deal also required the bank to make a formal admission of wrongdoing.
In January, the U.S. Office of the Comptroller of the Currency and the Federal Reserve ordered the bank to improve its risk control system and increase its anti-money laundering safeguards.
JPMorgan’s settlement may be a milestone in the bank’s efforts to clean up its legal docket, but further criminal charges may result from the ongoing investigation into the investment banking strategy that ultimately led to the London Whale trading fiasco. Around a month ago, the SEC issued a litigation release formally alleging that Javier Martin-Artajo and Julien Grout, two former traders at the bank, fraudulently overvalued investments in order to hide losses in their portfolio.
“When the portfolio began experiencing mounting losses in early 2012, Martin-Artajo and Grout schemed to deliberately mismark hundreds of positions by maximizing their value instead of marking them at the mid-market prices that would reveal the losses,” the SEC document said. “Their mismarking scheme caused JPMorgan’s reported first quarter income before income tax expense to be overstated by $660 million.”
Dimon has insisted that no bank executives intentionally misled investors.
Bank executives called the Whale settlements “a major step in the firm’s ongoing efforts to put these issues behind it” in a press release announcing the agreement with regulators. “Our Company has learned from its mistakes, and our Board is confident that our management team is fully committed to ensuring they don’t recur,” added JPMorgan director Lee R. Raymond.
However, regulators want to ensure that “they don’t recur,” as well, which is why the bank is still embroiled in numerous probes. The fact that so many investigations are open means that JPMorgan spends about $5 billion annually on legal costs alone.
High legal expenditures for a bank that emerged from the late 2000s financial crisis much less battered than its peers may seem unexpected, but the post-crisis regulatory crackdown has exposed numerous weaknesses in the firm’s internal security controls, and government investigators have since then identified several areas where the bank may have broken the law or committed fraud.
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