Financial scandals in the US come and go too frequently for many to be remembered for long. How many recall Michael Milken and Drexel, Burnham, Lambert from the late 1980s? Or even Enron that is now more than a decade old?
Richard Eskow presents a solid listing of how JPMorgan Chase’s misdeeds far exceed those of Enron in Now We Know. JPMorgan Chase is Worse Than Enron.
What isn’t included are JPM’s Enron related “misdeeds.” Therefore, JPM was involved in known financial scandals further back than the last decade. In 2003 the SEC accepted $135 million from JPM for its role in Enron’s market manipulations. But there was more:
In addition, the Manhattan district attorney’s office said the two banking companies [JPM and Citigroup] had agreed to pay a total of $50 million, half to New York State and half to New York City, to settle similar allegations.
The sophisticated JPM bankers got punked by Enron? Or was it that the SEC that got punked by JPM?
“These two cases serve as yet another reminder that you can’t turn a blind eye to the consequences of your actions,” Stephen M. Cutler, director of the S.E.C.’s enforcement division, said in a statement. “If you know or have reason to know that you are helping a company mislead its investors, you are in violation of the federal securities laws.”
The S.E.C. asserted that both banking companies helped Enron set up complex financial transactions through a group of so-called special purpose entities that enabled Enron to mask the true condition of its finances. …
A few months before those fines, JPM booked a $1.3 billion charge on Enron related business. Whatever JPM learned from it’s dealings and a $1.5 billion loss, it wasn’t “not to do it again.” More like “do it again only better.”
What the SEC may have minimized in 2003 was that JPM was engaged in what is called “off balance sheet accounting” right along with Enron. Both were running transactions through special purpose entities (SPEs) that hid the true nature of what was transpiring. In the case of Enron, it was debt masked as an investment. JPM listed investments instead of loans outstanding and it’s loans to capital requirements that regulators and investors focus on.
How the Enron hidden loans were structured illustrates how devious JPM was. The SPE was offshore (iirc, one of the English Channel Islands island) It made numerous advance purchases of a series of gas deliveries. The purchase prices ranged from $100 million to perhaps as much as $300 million. Had the Enron SPE actually delivered gas to the JPM SPE on the specificed due date, the JPM SPE wouldn’t have known what do. Not that it even had a facility that could accept such a delivery.*
There was one seemingly minor stipulation to the purchase/sale of gas deals – if Enron was unable to meet any one of the gas delivery dates, JPM would accept a cash payment in lieu of the gas. As Enron had no capacity to deliver any gas to the JPM SPE and the JPM SPE had no capacity to accept a gas delivery at its island mailbox and there was no provision for alternative delivery points, that part of the deal was bogus. It was never anything other than a loan with scheduled repayment dates. And what if Enron didn’t pay?
JPM and Enron found third party suckers.
One of those was a major national insurance company about which I heard a story. Possibly embellished but the essential facts are close enough.
The Board of Directors of this company were meeting in the period of time when Enron was imploding. One of the directors casually asked if the company had any Enron liability. The CEO didn’t think so but immediately tasked his senior assistant to poll all the department heads. Ten minutes later word came back that one department had some exposure – like a few hundred million.a couple hundred million.
The CEO requested the immediate presence of that department head to explain the situation to the board.
A slight delay followed because that department head wasn’t in the office but on a golf course.When he did arrive, the CEO wasted no time in putting it to him. What had he put the company on the hook for and for how much. He couldn’t answer either question.
Shortly after that he resigned to spend more time with his family.
The “suckers” thought they were guaranteeing performance on a supply contract, generally low risk, by “the best run company in America.” (Discounting the much higher risk inherent in a 100% advance payment supply contract.) For $0.75/per thousand/annum that company had guaranteed the Enron repayment. (That was 0.075% for a pure financial guarantee.) JPM sued the insurers for payment and the insurers sued JPM for misrepresentation. They settled shortly before handing the decision off to a jury.
“The surety bond settlement represents us being on the right side of that deal but recognizes the risk of going all the way in a jury trial,” JP Morgan chief executive William Harrison said during a conference call on Thursday.
No, Mr. Harrison, if you were on the right side, you would have had nothing to fear from a jury verdict. But it might have been a tough call for them to choose between crooked or careless and incompetent.
It’s not that JPMorgan is worse than Enron; it’s that it came out of the twentieth century as a bigger player in banking than Enron was in energy and had much wider and deeper sources of cash to cover its carelessness and crookedness over a much longer period of time. To become even bigger. Oh, and it learned how better to play the confidence game (NYTimes link: Steep Penalities Taken in Stride by JPMorgan Chase)
“The fines have been manageable in the context of the bank’s earnings capacity,” Jason Goldberg, a bank analyst at Barclays, said. “It makes $25 billion in revenue per quarter and has record capital.”
…
As much as such words might sting at first, the bank’s shareholders and clients show every sign of remaining loyal. JPMorgan’s financial success highlights a deep quandary that regulators have to grapple with as they press the largest banks to clean up their acts. The government’s penalties may seem large on paper — JPMorgan’s mortgage settlement with the Justice Department last year cost it a record $13 billion — but the largest banks seem capable of earning their way out of serious legal trouble.
JPM 2013 revenue – $97 billion and after penalties and fines net income $18.2 billion. Back in 2000 when it was doing deals with Enron, its annual revenues were $33 billion and net income $5.7 billion (that’s without the subsequent Enron losses and fines). But is it as good as it seems?
“JPMorgan’s shareholders may believe these billions of dollars don’t count because they see them as extraordinary expenses,” said Erik Gordon, a professor at the University of Michigan Law School. “But they keep popping up one after another — and the bank could have done something about them.”
Why would JPM want to do anything about it when its net income to revenues with fines and penalties is better than when they weren’t playing as fast and loose? And what are the customers of and investors in JPM if not enablers of crooks?
Not seeing an end to all this anytime soon. And it won’t be pretty when we do get there.
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*(Reminds me of a small sale/leaseback arrangement in a South American country that I was involved with. When the attorney for the leasing company questioned what he could do if the lease payment wasn’t received, I said that he could take custody of the leased equipment. He said, “But we don’t want that crap. You take it and give us the money.” It wasn’t only that neither of us wanted the equipment but also that neither of us had the capacity to retrieve equipment in S. America.)
