Wednesday, March 13, 2013

JPMorgan Chase: Out of Control | The Big Picture -- The WaMu Story

Josh Rosner (@JoshRosner) is co-author of the New York Times Bestseller “Reckless Endangerment” and Managing Director at independent research consultancy Graham Fisher & Co. He advises regulators, policy-makers and institutional investors on banking and financial services (a more complete bio appears at the end of this column).

This is part Intro, the first part of 5; We will be releasing a different part each evening and morning culminating in the release of Rosner’s complete report on Friday morning. On that date, the Senate Permanent Subcommittee on Investigations will release their final report on JPM’s CIO Group (aka the London Whale).


On Friday, the Senate Permanent Subcommittee on Investigations will release the final report on the losses associated with failures of internal controls in JPM’s CIO group. We expect that the findings will demonstrate significant failures of senior management and conclude that the Company’s own investigation was incomplete. It is important to remember that those losses, while the largest and most notable, are only one example of many such failures in recent years.

In this report we will focus on the risk management and internal control environment at JPMorgan Chase, a bank whose balance sheet is almost one-ninth the size of the United States economy. JPMorgan’s financial filings, its “Task Force” investigation of losses in the CIO’s office and its recent history of significant regulatory failures demonstrate that shareholders of are continuing to be called upon to pay for the firm’s inability to ensure an acceptable control environment.

We have intentionally chosen not to detail all of the many private or public actions settled or outstanding (which have driven almost $16 billion in litigation expenses since 2009) or, other than the multistate settlement and foreclosure review settlement, the agreed to or unresolved costs of actions related to mortgage putback demands, including those of institutional investors, insurers, the GSEs, FHA, or the costs of foreclosure-related actions. Moreover, the impunity with which the firm is seeking to transfer billions of dollars of Washington Mutual (WaMu) related losses to the FDIC demonstrates their unwillingness to accept the responsibilities for their own management failures.

Even without the inclusion of these items, since 2009, the Company has paid more than $8.5 billion in settlements for the various regulatory and legal problems discussed in this report. These settlement costs, which include a small number of recent settlements of older issues, represent almost 12% of the net income generated between 2009-2012. Banking regulations and laws are intended to protect stakeholders and the public but some portion of these costs may be tax deductible to the company allowing management to transfer to the public the costs of and future risks of these violations.

In addition, JPM’s ability to retain its reputation, its political power and support of investors in the face of financials that lack the details necessary for a proper analysis are reminiscent of another too-big-to-fail institution: Fannie Mae.

We are not suggesting that JPM will meet the fate that Fannie did. But there are notable similarities in the actions taken by these institutions. JPM appears to have taken a page out of the Fannie Mae playbook in which the company perfected the art of cozying up to elected officials, dominating trade associations, employing political heavyweights and their former staffers and creating the image of American Flag-waving, apple-pie-eating, good corporate-citizen, all of which supported an “implied government guarantee” and seemingly lowered their cost of funding. Additionally, rather than being driven by the strength of its operations and management, many of the JPM’s returns appear to be supported by an implied guarantee it receives as a too-big-to-fail institution.

JPM has a reputation of being the best managed of the biggest banks. In our reviews we could not find another “systemically important” domestic bank that has recently been subject to as many public, non-mortgage related, regulatory actions or consent orders. The firm’s pride in a disputable “fortress balance sheet” – which underestimates their off-balance sheet risks appears to have given investors false comfort, after all poor risk management and control failures are almost always the major drivers of capital destruction.


JPMorgan Chase: Out of Control | The Big Picture

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