Ho Hum, the SEC settles a securities fraud case against JP Morgan for $153.6 million. The civil case against JP Morgan was based on the sale of collateralized debt obligations (CDOs) composed of securitized mortgages, the same debt instruments that created the housing crisis that led to the collapse of the global economy in 2008:
(Reuters) – JPMorgan Chase & Co agreed to pay $153.6 million to settle U.S. Securities and Exchange Commission charges that it defrauded investors who bought mortgage securities sold just before the nation’s housing market collapsed.
The regulator’s complaint against the banking giant was larded with excerpts from internal JPMorgan communications that indicated bankers sold a collateralized mortgage obligation in 2007 to ensure that it could get credit-scarred mortgage securities off its books.
You might think that’s a lot of money, but not really, when you consider JP Morgan earned profits of $17.37 BILLION in 2010 and $11.73 Billion in 2009. In fact, JP Morgan’s stock price actually rose $.43 per share after the announcement of the settlement yesterday, or a rise in value of 1.1% in a single day. That tells you that the market knows JP Morgan dodged a bullet.
By the way, what exactly did JP Morgan do to justify the SEC’s action for fraud? Here’ I’ll let Investigative journalist Jesse Eisinger of Propublica explain the crime for which JP Morgan is getting a slap on the wrist:
JUDY WOODRUFF: So, tell us, what is it that the SEC is saying exactly that JPMorgan Chase did? What — what was illegal about it?
JESSE EISINGER: Well, these were a collection of deals that were designed to fail.
And in this specific deal, what happened was a hedge fund bought a little piece of the deal to enable JPMorgan to go out and sell a $1.1 billion mortgage-backed security deal called a CDO, which stands for collateralized debt obligations. And they went around the world and sold this, but they didn’t tell the customers that they were selling these securities to that in fact this hedge fund had a much bigger bet against the CDO, and, in fact, helped select assets, put stuff into the deal that would otherwise — that would go bad, that made the deal kind of rotten.
And JPMorgan didn’t tell anybody this when they were selling it.
The hedge fund involved was Magnetar Capital LLC (Magnetar) and it had placed a $600 Million bet that these securities would fail. In other words, JP Morgan allowed Magnetar to select the mortgages that backed these securities knowing that they were rotten to the core, then shorted (i.e., placed a bet that the value of the securities being sold would fall in price), the very CDO deal JP Morgan was marketing as a great investment to institutional clients such as pension funds, etc., without ever telling them of the Magnetar’s involvement in the deal or the fact that it was betting the deal would lose money. Indeed, as Jesse Eisinger notes, this was a common practice for Magnetar, which did a number of very similar fraudulent deals with other Banksters:
Jake Bernstein and I found that they had done about 28 deals in 2006 and 2007, with multiple investment banks worth at least $40 billion, all similarly structured. And they worked with all the investment banks, Merrill Lynch, Citibank, to structure these deals.
And many of them had exactly the same type of scenario, where they would buy a little bit of the deal in order to allow the investment bank to create this much larger deal and go out and sell it around the world to investors, but Magnetar secretly, and undisclosed to anybody, was actually betting against the deal.
And many of the investment bankers and other people involved in the deal, in managing the deal, knew about Magnetar’s secret bets, but the investors did not.
You see, friends, the Hedge Funds and the Banksters knew this mortgage backed derivatives bubble was going to burst, but they continued to prop up the bubble as long as they could to milk as much money as they could before it popped. And we all know what happened after it popped: a collapse of the global economy, millions of foreclosures and the loss of value in homes owned by “the little people” like you and I who saw our homes devalued even in markets where there was very little CDO activity going on. Not to mention the collapse of the construction industry, a credit crunch, untold bankruptcies and business failures, massive unemployment and the loss of health care for millions of people. All this was done to engineer fraudulent profits for hedge funds like Magnetar, fraudulent profits and bailouts for investment banks and huge and unwarranted bonuses for the senior executives at these banks.
And what is the punishment? Magnetar can’t be sued by the SEC because, as Eisinger explains, they didn’t omit disclosure of the material facts that Magnetar created these deals with the help of their good buddies at JP Morgan, Merill Lynch, Citibank, and so forth. It was the banks’ ‘obligation to disclose those material facts. Technically, Magnetar and other hedge funds like it got a free pass even though they were the organizations that primarily created this massive con game.
Meanwhile the SEC is settling these cases for amounts that represent a pittance considering the profits these firms have made after the bailout and the damage that was done to, not just the investors in these rancid, rotten to the core deals, but to millions of Americans. What’s more to date few if any cases have been brough against the individuals at the banks who actively perpetrated these frauds or knew abouth them and did nothing to stop them. The SEC just continues to make excuses as to why so few individuals are being held accountable for these crimes:
No individual bankers were charged in the JPMorgan case, but SEC enforcement chief Robert Khuzami told reporters the agency continues to pursue individuals and has charged roughly 50 people in cases related to the credit crisis of 2008.
Earlier in the day, SEC Chairman Mary Schapiro also addressed criticism that about the lack of charges against individuals.
“It is not for lack of will and desire that we are not seeing as many senior people being named in these cases,” Schapiro said. “If we could, we would be naming them.”
I’ll let Jesse Eisiniger speak again about how truly egregious was this behavior by our Masters of the Universe:
You know, so, this is chump change for Wall Street. And, in fact, Wall Street top executives have not been held accountable to any significant degree for any of their actions or their banks’ actions in the lead-up to the financial crisis, when often they misled their own clients. […]
[T]he reality, which our project showed, was that the crisis hit Wall Street in early 2007, a year-and-a-half before Main Street knew that there was a financial crisis, and bankers on Wall Street knew about the problems and did things that were questionable to keep it going, keep their own bonuses going, and stave off the crisis, and made it worse.
They made it worse. They made it worse so they could keep making their obscene bonuses. And now they want to cripple any hope that the financial reforms passed by Congres last year, inadequate as we know them to be, are never enforced.
Why? So they can continue to make it worse for us, and better for them. Need I say more?
