http://www.zerohedge.com/news/criminal-inquiry-shifts-jpmorgans-mispricing-hundreds-billions-cds-dimon-next-diamond
Submitted by Tyler Durden on 07/16/2012 20:09 -0400
http://www.bloomberg.com/news/2012-07-16/jpmorgan-blaming-marks-on-traders-baffles-ex-employees.html
and....
Criminal Inquiry Shifts To JPMorgan's Mispricing Of Hundreds Of Billions In CDS: Is Dimon The Next Diamond?
On the last day of May, when we first learned via Bloomberg that there was even the scantest likelihood that JPM may have been massaging its CDS marks within the (London-based of course) CIO organization - the backbone of hundreds of billions in notional exposure, and thus a huge counterfeited benefit to trader bonuses and corporate earnings - we wrote, "The Second Act Of The JPM CIO Fiasco Has Arrived - Mismarking Hundreds Of Billions In Credit Default Swaps" in which we explained preciselyhow this activity would and did take place,precisely why other traders caught doing the same are on the verge of being thrown in jail, precisely why everyone else does it, and precisely why the biggest CDS self-reporting and client/banker owned-organization (this is where images of Libor should appear), MarkIt, may well be implicated in everything - very much in the same way that the BBA is the heart of Lie-borgate. Because unlike all other allegations of impropriety, most of which rely on Level 2 and Level 3 assets whose valuations are in the eye of the oh so very sophisticated beholder (in this case JPM) who has complex DCFs and speaks confidently when explaining marks to naive, stupid outsiders (in other words baffles with bullshit), when it comes to one of the last places where Mark to Market is still applicable and used: the OTC CDS market, and where daily P&L records are kept, it will take any regulator, enforcer, or criminal investigator precisely 1 minute to find out if there was fraud, or gambling, going on here.
Then lo and behold, none other than JPM admitted minutes before releasing its Q2 earnings that it had been doing preciselywhat Zero Hedge accused it of doing nearly 2 months earlier (but of course Jamie Dimon had no idea, no idea, what the media accused his firm of doing), and in doing so exposed itself to just as much litigation risk as Barclays in the Lie-borgate scandal, while further throwing a monkey wrench into the CDS market, where all the other banks (who had been doing just the same), will no longer be able to pick off the bid/ask spread in the process crushing CDS trader bonuses, and resulting in billions in foregone imaginary profits.
Most importantly, it opened up the firm to a criminal investigation. Which asReuters reports, is precisely what has now happened.
From Reuters' Matt Goldstein and Jennifer Ablan:
Before last week's disclosure, the criminal probe largely had focused on the personal trading of some CIO traders, two of those sources said. The authorities were looking for evidence that some in London may have sold shares of JPMorgan in advance of the firm's May 10 disclosure that it could lose a minimum of $2 billion on the derivatives trades gone awry.Now the investigation is focused on whether three JPMorgan employees in London committed fraud in reporting on their transactions. The bank is cooperating with authorities.
Obviously, nobody at the top had any idea of anything that was going on...
and JP Morgan call bs on Jamie Dimon's excuses ........JPMorgan's chief executive, Jamie Dimon, and some of his top lieutenants did not learn about the potential misconduct by some CIO employees until early last week, said these sources, who were not authorized to speak publicly on the matterMaybe he should have been reading Zero Hedge? Because said otherwise, as JPM is allegedly to its CIO traders, so Goldman Sachs is to Fabrice Tourre. Remember him - he was the only person who in 2006-2008 was singlehandedly masterminding Goldman's CDO fraud, which the firm settled for a then record sum. Nobody else: it was just him. Well, if the glove fits, JPM will do the same, and is about to throw some of its heretofore most profitable traders under the bus.In fact, some of these traders who will have been "discovered" to be mismarking their books will most likely be the same people who have already lost their jobs and are in the process of clawing back pay:So far, the trading loss has cost a number of people their jobs, including Ina Drew, the former head of the CIO, who resigned in May. Also gone from the bank are three traders in London, Bruno Iksil -- who gained fame as the "London Whale" for his large trades -- Achilles Macris and Javier Martin-Artajo.Lawyers in London for Iksil and Martin-Artajo did not return phone calls or email seeking comment. A lawyer in New York for Macris declined to comment.A lawyer in New York for Drew did not return request for comment. A family member who answered the phone at Drew's home said she was not available for comment.Here's the problem: nobody will be stupid enough to believe for one second that the marks on hundreds of billions in securities passed from the front office straight to JPM's 10-Q without vetting by middle office, back office, Treasury office, and even in some cases, counterparties. In other words, if JPM is indeed stupid enough to attempt to pull a "Fabrice Tourre" on CIO, it won't work.Actually scratch that: it may work, but it will involve a "fine", i.e., a bribe of about Actually scratch that: it may work, but it will involve a "fine", i.e., a bribe of about $1 billion to the SEC, and countless promises of perpetual campaign donations to all the other corrupt members of congress and the senate. Which if this fraud flies by unscathed will mean all of them.Ironically, if only JPM had indeed been honest, and told the public that not only did it have a loss, but it had discovered "material lapses in internal control" back on May 10 when the story hit, it would be a non-event by now. Instead, with the phased in revelations of events that even the most inexperienced trader knows full well all took place at the same time, it is becoming very obvious that Jamie Dimon and crew are merely hiding more and more revelations in some dark corner.And what is scariest is that all thisexcludes the liability that the bank will with absolute certainty have as a result of Liborgate, and that it is one of the only three US members of the USD Libor fixing committee at the British Banksters Association.We will leave the final words to our good friend from Bloomberg Jonathan Weil, who said that "It was once inconceivable that Dimon might someday wind up like Barclays CEO Bob Diamond, who resigned last week after that company's Libor scandal broke wide open. It's not anymore."It certainly is not.
http://www.bloomberg.com/news/2012-07-16/jpmorgan-blaming-marks-on-traders-baffles-ex-employees.html
JPMorgan Blaming Marks On Traders Baffles Ex-Employees
By Dawn Kopecki - Jul 16, 2012 5:01 PM ET
Play
JPMorgan Trade Blame Puzzles Former Executives
JPMorgan Chase & Co. (JPM)’s assertion that traders at its London chief investment office may have intentionally mismarked trades, masking losses that total at least $5.8 billion, makes little sense, according to former executives with direct knowledge of the unit’s operation.
JPMorgan Chase & Co. signage is displayed at a bank branch in New York. Photographer: Scott Eells/Bloomberg
JPMorgan Chase & Co. bank branch in New York. Photographer: Robert Caplin/Bloomberg
July 13 (Bloomberg) -- Thomas Brown, chief executive officer of Second Curve Capital LLC in New York and a Bloomberg contributing editor, and Todd Hagerman, an analyst at Sterne Agee & Leach Inc., talk about the outlook for the U.S. financial industry. They speak with Pimm Fox on Bloomberg Television's "Taking Stock." (Source: Bloomberg)
July 13 (Bloomberg) -- Kenneth Langone, co-founder of Home Depot Inc., talks about the outlook for JPMorgan Chase & Co. after the company reported its second-quarter earnings. Langone speaks with Bloomberg's Dominic Chu outside JPMorgan's headquarters in New York. (Source: Bloomberg)
July 13 (Bloomberg) -- Gerard Cassidy, managing director at RBC Capital Markets, talks about JPMorgan Chase Co.'s second-quarter earnings and trading loss. Cassidy speaks with Dominic Chu and Stephanie Ruhle on Bloomberg Television's "Market Makers." (Source: Bloomberg)
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The bank restated first-quarter results, paring profit by $459 million, in part because an internal review revealed that U.K. traders had priced their books “aggressively,” Mike Cavanagh, head of Treasury & Securities Services, said in a July 13 meeting with analysts. The mispricing made losses on a portfolio of credit derivatives look smaller than they were, and executives concluded that traders may have sought to hide the “full amount of losses,” JPMorgan said in a presentation.
JPMorgan requires traders to mark their positions daily so the firm can track their profits, losses and risk. An internal control group double-checks the marks against market prices monthly and at the end of each quarter, said three former executives from the CIO and a senior executive in market risk. The firm uses the control group’s prices, not what individual traders submit, to calculate earnings, making it difficult for one trader or trading desk to rig prices, the people said.
“We just have questions about whether the traders were doing what they need to do for accounting, which is put a mark on their positions where they think they can exit,” Cavanagh, who led the internal review, said on a conference call with reporters. “Instead, it felt more like they were pricing their marks a little bit more aggressively, but generally inside the bid-ask spread.”
London Whale
The spread is the difference between what an investor would pay to buy a security and the price at which someone is willing to sell the same asset.
Bruno Iksil, known as the London Whale because his positions became so large, ran the credit derivatives book that generated the losses. He personally apologized in recent weeks to almost everyone in the London unit for causing turbulence within the group, according to one of the former CIO executives who had been told about it by two people in the unit.
Iksil and Raymond Silverstein, his attorney, didn’t return phone and e-mail messages seeking comment. The New York Times quoted Silverstein saying that Iksil is innocent of wrongdoing.
Deciding to Restate
The decision to restate results for the first three months of 2012 was made one day before New York-based JPMorgan reported second-quarter net income of $4.96 billion, and after executives and lawyers interviewed employees, and reviewed thousands of hours of calls and about 1 million e-mails, said Cavanagh, 46.
The firm didn’t elaborate on the content of those e-mails and Joe Evangelisti, a spokesman for the bank, declined to comment on the doubts expressed by the former executives.
JPMorgan’s shares fell 2.7 percent to $35.09 in New York. The KBW Bank Index of 24 U.S. lenders dropped 0.1 percent.
JPMorgan, led by Chief Executive Officer Jamie Dimon, has seen its market value plunge $36 billion since April 5, when Bloomberg News first reported the London unit’s illiquid bets on credit derivatives were big enough to move markets. The trade, a wrong-way bet on credit derivatives, cost the bank $5.8 billion in the first six months of this year and the tab could climb by $1.7 billion, the bank said.
Price Verification
Chief Investment Officer Ina Drew, 55, who retired four days after the initial losses were disclosed on May 10, voluntarily forfeited as much as two years of compensation. JPMorgan said it ousted the three London executives responsible for the loss and that it will claw back as much as two years of their bonuses, without naming the individuals.
Iksil’s boss, Javier Martin-Artajo, and former Europe CIO head Achilles Macris were among executives who also oversaw the trades.
Some securities, such as interest-rate derivatives or foreign-exchange contracts, are easier to price because they’re generally traded on exchanges, making them more transparent to investors. Credit derivatives and other securities traded by Iksil were more difficult to price because they traded less frequently, and not on open exchanges.
Even then, traders have to submit documentation verifying their pricing and the internal control group generally would solicit prices from about two dozen outside firms to verify the marks, the people said. Executives including Dimon had said previously that Iksil’s positions were “marked-to-market,” indicating that they were available market prices that confirmed his valuations.
The CIO also valued some trades at prices that differed from those of JPMorgan’s investment bank, people familiar with the matter said in May.
Short Position
JPMorgan, the largest U.S. lender by assets, shut down all synthetic trading at the chief investment office and transferred the rest of the position to the investment bank. The CIO has retained an $11 billion short position in “basically liquid indexes” to hedge other credit assets, Dimon, 56, said during the meeting with analysts. Positions in Series 9 of the Markit CDX North America Investment Grade Index, a credit-swaps benchmark known as IG9 that’s at the heart of much of the loss, were cut by 70 percent, he said.
The investment bank has the expertise to manage it, Dimon said. The bank transferred about $30 billion of risk-weighted assets to the investment bank, an amount that is “down substantially” from an earlier peak and back to levels at the end of 2011, he said.
Federal Investigations
The stock jumped 6 percent on July 13 as investors expressed “relief that it wasn’t worse,” said Gary Townsend, head of Hill-Townsend Capital LLC, said of the trading loss. It was “substantially better than many of the estimates that I was hearing,” he said.
Agencies scrutinizing the bank’s handling of the loss include the Securities and Exchange Commission, U.S. Justice Department and Federal Bureau of Investigation.
Ohio Attorney General Mike DeWine said July 14 that he is seeking to lead a proposed class-action lawsuit against JPMorgan after state pension funds lost more than $27.5 million due to the “alleged fraud.” Two funds for state employees held about 10.2 million JPMorgan shares as of March 31, data compiled by Bloomberg show.
“Pension-fund managers acting on behalf of Ohio retirees were given false and misleading information by JPMorgan Chase that hid the true nature of the bank’s risky trades, causing Ohio teachers, school employees and public employees to lose tens of millions of hard-earned retirement dollars,” DeWine said in a statement.
Dimon transformed the unit in recent years to boost profit by buying higher-yielding assets such as structured credit, equities and derivatives, Bloomberg News reported on April 13, citing former employees.
Dimon dismissed initial news reports about the London operation as a “tempest in a teapot” when the bank reported first-quarter earnings April 13. He reversed course less than four weeks later, disclosing a $2 billion loss that he said could grow to $3 billion or more during the quarter.
and....
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