For the past four years, the nation’s political leaders and bankers have made enormous—in some cases unprecedented—efforts to save the financial industry, clean up the banks, and reform regulation in order to restore trust and confidence in the American financial system. This hasn’t worked. Banks today are bigger and more opaque than ever, and they continue to behave in many of the same ways they did before the crash.
Consider JPMorgan’s widely scrutinized trading loss last year. Before the episode, investors considered JPMorgan one of the safest and best-managed corporations in America. Jamie Dimon, the firm’s charismatic CEO, had kept his institution upright throughout the financial crisis, and by early 2012, it appeared as stable and healthy as ever.
One reason was that the firm’s huge commercial bank—the unit responsible for the old-line business of lending—looked safe, sound, and solidly profitable. But then, in May, JPMorgan announced the financial equivalent of sudden cardiac arrest: a stunning loss initially estimated at $2 billion and later revised to $6 billion. It may yet grow larger; as of this writing, investigators are still struggling to comprehend the bank’s condition.
The loss emanated from a little-known corner of the bank called the Chief Investment Office. This unit had been considered boring and unremarkable; it was designed to reduce the bank’s risks and manage its spare cash. According to JPMorgan, the division invested in conservative, low-risk securities, such as U.S. government bonds. And the bank reported that in 95 percent of likely scenarios, the maximum amount the Chief Investment Office’s positions would lose in one day was just $67 million. (This widely used statistical measure is known as “value at risk.”) When analysts questioned Dimon in the spring about reports that the group had lost much more than that—before the size of the loss became publicly known—he dismissed the issue as a “tempest in a teapot.”
Six billion dollars is not the kind of sum that can take down JPMorgan, but it’s a lot to lose. The bank’s stock lost a third of its value in two months, as investors processed reports of the trading debacle. On May 11, 2012, alone, the day after JPMorgan first confirmed the losses, its stock plunged roughly 9 percent.
The incident was about much more than money, however. Here was a bank generally considered to have the best risk-management operation in the business, and it had badly managed its risk. As the bank was coming clean, it revealed that it had fiddled with the way it measured its value at risk, without providing a clear reason. Moreover, in acknowledging the losses, JPMorgan had to admit that its reported numbers were false. A major source of its supposedly reliable profits had in fact come from high-risk, poorly disclosed speculation.
It gets worse. Federal prosecutors are now investigating whether traders lied about the value of the Chief Investment Office’s trading positions as they were deteriorating. JPMorgan shareholders have filed numerous lawsuits alleging that the bank misled them in its financial statements; the bank itself is suing one of its former traders over the losses. It appears that Jamie Dimon, once among the most trusted leaders on Wall Street, didn’t understand and couldn’t adequately manage his behemoth. Investors are now left to doubt whether the bank is as stable as it seemed and whether any of its other disclosures are inaccurate.
The JPMorgan scandal isn’t the only one in recent months to call into question whether the big banks are safe and trustworthy. Many of the biggest banks now stand accused of manipulating the world’s most popular benchmark interest rate, the London Interbank Offered Rate (LIBOR), which is used as a baseline to set interest rates for trillions of dollars of loans and investments. Barclays paid a large fine in June to avoid civil and criminal charges that could have been brought by U.S. and U.K. authorities. The Swiss giant UBS was reportedly close to a similar settlement as of this writing. Other major banks, including JPMorgan, Bank of America, and Deutsche Bank, are under civil or criminal investigation (or both), though no charges have yet been filed.
Libor reflects how much banks charge when they lend to each other; it is a measure of their confidence in each other. Now the rate has become synonymous with manipulation and collusion. In other words, one can’t even trust the gauge that is meant to show how much trust exists within the financial system.
by Frank Partnoy and Jesse Eisenger, The Atlantic | Read more:
Photo: Jacqueline Martin/AP
