Inside Financial Services

Why Should J.P. Morgan’s Shareholders Pay?

If someone inside the bank aided the Madoff fraud, find him and punish him

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I’m confused. On the one hand, JPMorgan Chase has agreed to pay out $2.6 billion in civil and criminal penalties related to its involvement in the Madoff fraud. On the other, not a single individual at Morgan is going to be forced to take actual responsibility for the bank’s misdeeds.This makes no sense. If JPMorgan Chase is essentially admitting it did something wrong-and I apologize if I sound like I’m explaining the obvious here-that must mean someone at JPMorgan Chase did something wrong. He made a bad decision, say, or failed to make a required disclosure.Why isn’t this individual being identified and punished? Instead, Morgan will sign a deferred-prosecution agreement and agree to (this being the go-to punishment for naughty banks lately) beef up its controls. Result: shareholders are out $2.6 billion, while whoever the idiot at Morgan is who helped facilitate the Madoff fraud is still on the job. That idiot, by the way, might have helped cause real damage. In a 2010 lawsuit against JPMorgan Chase, Madoff trustee Irving Picard cites e-mails that show Morgan officials knew that Madoff’s returns were suspicious and even filed a Suspicious Activity Report on the matter with UK authorities-but then failed to file a similar report here in the U.S. So perhaps thanks to Morgan, the Madoff scheme might have ended up lasting longer than it needed to.You might think I’m overreacting to what’s essentially just another government shakedown of a big bank. Wrong. Unlike, for instance, the London Whale dustup,where the only real victim was JPMorgan itself and its shareholders, real people lost real money as a result of the Madoff scam. In signing a deferred prosecution agreement and agreeing to write a big check, JPMorgan is essentially admitting it played a non-immaterial role in it. Fine. Who at the bank is responsible? The government should find out, and see that he gets what’s coming to him.What do you think? Let me know!

23 Responses to “Why Should J.P. Morgan’s Shareholders Pay?”

  1. Glen

    Tom,
    It’s not just the 2.6 billion but also the ongoing, never-ending, always increasing cost of the “beefed up controls” that the shareholders get to pay for this.

  2. grover13

    Interesting take, Tom. Not like you to call on the government for more intrusion into the inner workings of a bank.

    Suffice it to say, the government thinks that getting a $2.6 billion check now is better than tieing up resources for years trying to get a conviction.

    But I think the real interesting question isn’t “Why doesn’t the government find out who’s responsible and punish them”….but: “Why is JPMorgan willing to pay $2.6 billion to protect a few individuals?” It has to mean because they are afraid of the ramifications to their business after what is uncovered comes to light. So, what ELSE do they want to hide that is worth paying $2.6 billion for? Hmmmm…..

  3. SW PILGRIM

    Too late, Tom. These fines are now confirmed costs of the business of chasing bonuses and JPM has set the abar with the overt collaboration of federal and state authorities in it’s operating venues. A sad evolution from the Wriston, Rockefeller, Claughton generation of ethical, community banking.

  4. jsc173

    Read all that has happened in the SAC Capital case and it will make you even more angry. I watched a “Frontline” piece on them last night. In their case, traders have gone to jail and the company has been found guilty on criminal charges but the 100% owner, Steven Cohen, pleads complete ignorance of all that happened underneath him and even admitted under oath he didn’t understand the concept of things like disclosure of material non-public information. He claimed to have read the company’s compliance manual but “didn’t understand what it said.” I guess the whole concept of supervision is an alien one in the PE/hedge fund world?

  5. CAW

    Yes, the government should prosecute; I agree wholeheartedly, but what is JP Morgan doing about this person(s)? Is he/she/they still employed there and if so, why. Why does the Executive Board and the CEO allow this person(s) to remain? And while we’re at it, who was supposed to be supervising this person(s)? And why are they still there? Yes, the stockholders are being hurt, but isn’t up to the board and the CEO to protect the stockholders from mismanagement?

  6. anonymous

    yoou’d hope they’d already got rid of the people involved – hard to believe they would still be there but would be interesting to know

  7. Frank

    Mr Brown,
    My son worked in FICC @ JPM and now works @ GS. He’s said, that upon reflection, JPM was incredibly ‘siloed”
    Whereas @ GS there is constant communication between ALL interested parties. The guys in FICC communicate w/ the Equity desk, for example, if they take clients on business trips, they are expected to ‘write up’ the trip, and theirs and their clients impressions, comments. This might help explain what’s going on @ JPM. I agree w/ you, they ( JPM) is being scapgoated.
    Enjoy your work.

  8. ruggyup

    Agree but, individual needs to be plural. Even at JPM it’s tough to solo screw up or cheat in a vacuum. Regulators need to go deep into the audit, internal security and personnel functions. Those fish are more than three days old.

  9. Ex-Banker, Tom

    Dear Tom:

    As a retired banker, I will fully acknowledge that dumb bankers do dumb things regularly. But big banks essentially self-insure by taking on the risk that their employees are both properly trained and properly managed, with sufficient oversight in place. As you know, in certain aspects of bank regulation, the OCC attaches specific personal penalties to violations. These are clearly spelled out to employees in the online training that most or all of the big banks now required their officers to complete. In those cases I have observed first-hand that the employees do pay attention to them. But in the general, vast environment of managing risk, the institution ultimately takes on the risk of its employees’ bad conduct and/or judgment. You talk about Madoff investors losing money. How about the thousands of shareholders and employees at some of these banks who, collectively, lost Billions in stock value in their retirement accounts from the actions of a few people within the bank? Why isn’t Ken Lewis in jail for personally orchestrating the acquisition of Countrywide by Bank of America that contributed to the stock of Bank of America falling from $50 to $3? How many Billions in shareholder value were lost there? Finally, while the media and the politicians can continue to extort money from deep pockets like JPM, why is there no outcry about the abject failure of the SEC to monitor and expose the Madoff debacle over the many years of its oversight? Why is the Madoff Trustee not going after the US Government for gross negligence? Why is there no outcry for current and former SEC employees, some of whom had close, suspicious tied to Madoff, to be scrutinized for personal prosecution. I suggest your next article focus on the SEC in this regard (if you have not already done so). T.

  10. Unrepentant capitalist

    If the executives of JPM were acting on behalf of the owners of the company, they would clearly feel obliged to take action against the wrongdoers within JPM. However, do not hold your breath waiting for JPM to admit that it made mistakes. Most likely, some very senior executives knew of these mistakes or, worse yet, condoned them.

  11. rivvir

    You’ve got to be kidding! When acting as agents of the company? Well then, let’s not find blame for any company for anything one of its individuals does. Then we’ll have all our companies rated equally very high for the services their people provide. The ones that don’t provide services as well as the next one, gee, it’s those individual employees to blame, not the company. Therefore, you have no right rating any company in your pieces Tom. It’s not the company’s fault, it’s only their employee’s fault. Get a bad burger at burger king? Not their fault, it’s the guy who put it in the microwave. Hospital removes your good foot instead of the gangrenous one Tom? Not the hospital’s fault, it’s their employee’s fault. So, no one hospital is any better, or worse, than any other. You should be happy to get your treatment in any publicly funded hospital in the land. If you need a hospital do you go to one of that type yourself? Poor airplane maintenance and you crashed? Sorry Tom, you gave your life to the betterment of the company’s rating. AFter all, it wasn’t their fault, it was their mechanic’s fault.

  12. ruggyup

    rvvr, surely you must be a high level Washington mouthpiece.

  13. George Morriss

    Tom,

    At what point do the shareholders say “Enough is enough! Why is management so willing to reduce my book value, just to reduce the Fed’s pressure?”

    George

  14. Just another doctor

    Whatever happened to individual criminal punishment as a deterrent for future acts? At least the individuals involved should suffer public ridicule and be excluded from continuing in this industry.

  15. Just another doctor

    Whatever happened to individual criminal punishment as a deterrent for future acts? At least the individuals involved should suffer public ridicule and be excluded from continuing in this industry.

  16. Ken Greenberg - Austin & Williams

    I’m with ex-banker, Tom. The SEC was warned for years and did nothing. Anybody THERE lose a job? Pay a fine? Why just Chase? Probably for the same reason our government gets away with building a website, healthcare.gov, that started at $634,000,000 and will wind up near $1,000.000.000. It’s money flushed, has security holes that bankers would be arrested for, and no back end. Did anybody at HHS lose a job? What exactly does it mean when politicians, and maybe even bankers, say “we going to hold the people responsible for this accountable.” Accountable?

    I’m sick of the lies in politics. And lately, the mission of our politicians – with the help of a lapdog press that abandoned its job of keeping government honest – is simply to blame anybody else but them for the mistakes THEY made. UGH!

  17. John Tschohl

    Tom you are right on. I agree 100% with you.

  18. rivvir

    Ruggy, you go take a listen to christie’s press conference going on right now. He’s got it right. The responsibility goes to the top. The ownership. Shareholders are ownership. Don’t like it, don’t be an owner.

  19. Gweedoh

    JPM seems to be involved in some form or fashion in every nefarious deal/scheme/scandal that comes along. Don’t like it? Do what I did. Sell the stock. There are many companies out there (not necessarily banks) that are still run ethically and worthy of your investment, but they are getting harder and harder to find. And “upon further review” (as they say in the NFL) I’m not sure why I bought JPM stock in the first place. I’m sure not proud of it.

  20. Morgan's Mom

    Makes me wonder if some of the politicians would get hurt if the person/people involved were identified. Everyone goes on and on about Jamie Diamond, well if he’s so stellar, why doesn’t he do something?

  21. Blindspot

    For once you have not defended banks, bank executive management and compliant bank boards, and desire to see blame, responsibility and accountability right where it belongs. However, the same as you espouse here should hold true for the extremely high executives, and in some cases the CEO’s (yes, and even Board members) that were possessed detailed knowledge of and were complicit and compliant in the MBS fiasco that resulted in the financial collapse. What senior executives and CEO’s were directly hold accountable there? (Yes, Fannie and Freddie were involved, but anyone who knows the industry knows they were late to the game and not the primary conspirators. All protestations to the contrary fall on fallow ears.).

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