(Note: Pam Martens has provided written authorization to the diarist to republish this post in its entirety for the benefit of the Daily Kos community.)
Senate Censors Part of Report on JPMorgan About Its Stock Trading
By Pam Martens
Wall Street On Parade
A Citizen Guide to Wall Street
March 18, 2013
The 307-page report the Senate released last Thursday on JPMorgan’s cowboy culture was deeply unsettling; the testimony under oath at the related Senate hearing on Friday was equally shocking with eyewitness accounts confirming that CEO Jamie Dimon ordered the withholding of financial data to a regulator while both he and the Chief Financial Officer at the time, Douglas Braunstein, presented an Alice in Wonderland version of facts to the public in April 2012.
But it now appears that the worst of this story may be so unsettling to the markets and the public perception of Wall Street that it must be censored from public viewing. Throughout the Senate Permanent Subcommittee on Investigation’s 98 exhibits of emails and internal memos on the wild trading schemes at JPMorgan, the word “Redacted” appears. In a high number of the areas where the material is censored, it concerns trading in the stock market, not the credit market where Bruno Iksil, the trader known as the London Whale, was causing giant ripples and eventual mega losses for the largest bank in the U.S. To date, there has been no media attention to the issue of stock trading within the Chief Investment Office nor has the issue been raised by investigators.
That the words equity trading (meaning stock trading) appear at all in this investigative report raises more serious red flags for JPMorgan. As Wall Street on Parade has repeatedly reported, the Chief Investment Office at JPMorgan, which oversaw the London Whale trades, was using insured deposits of the bank to place its casino bets. Senator Carl Levin, Chairman of the Senate Permanent Committee on Investigations, confirmed on Friday that JPMorgan used insured deposits as well as funds corporations had placed on deposit. That’s clearly not compatible with the Nation’s safety and soundness rules for banks and likely explains why the FBI is involved in an investigation.
To date, Jamie Dimon has attempted to present the giant bets in the credit markets as a hedging operation to offset risks in the company’s overall balance sheet. The credibility of that stance has lost its luster as Levin revealed that the Chief Investment Office in the first quarter of last year had actually taken on more exposure to credit risk rather than hedging it.
The reason for the existence of banks is to make business loans to help grow new industries, jobs and the economy. If one genuinely wants to hedge that risk, as opposed to gambling for the house with proprietary bets, a credible hedge would be to short corporate loan exposure – not buy more of the same exposure. But that is what the Chief Investment Office did – it purchased billions of additional exposure via an illiquid credit index from which it could not untangle itself.
The $6.2 billion in losses thus far acknowledged by JPMorgan from the trading of credit derivatives within the Chief Investment Office is bad enough. But trading stocks with customers’ savings deposits – that truly has the ring of the excesses of 1929 and inexplicable to explain as a hedge against the corporate loans made by the bank.
Although the “Redacted” stamp has censored much of the relevant information on this stock trading, a few snippets can be pieced together. We learn, for example, that the original budget proposed for stock trading in 2006 was twice that for credit trading. The plan was to trade a maximum of $5 million in credit derivatives and $10 million in stock trading – the specific type of stock transactions have been redacted from the document while those for credit trading have been left in. Since the notionals (face amount) of the credit derivatives eventually grew to hundreds of billions of dollars by early 2012, one has to wonder what the stock-related trading grew to from a proposed $10 million since it was originally slated to be twice as large as credit trading.
Another item that slips through is that “ETFs will also be treated as trading instruments.” ETF is an acronym for “Exchange Traded Fund,” portfolios of stocks that trade on stock exchanges. In a memo dated May 5, 2006 to Jason Hughes at JPMorgan from Roger J. Cole in the Compliance Department, we learn that there is a plan to trade stock market indices. The caveat is given by Cole that: “…compliance approval required before trading in credit/equity indices with less than 20 names as we discussed.”
The American public has already suffered the brunt of being kept in the dark on Wall Street’s nefarious operations leading to the collapse in 2008. The Senate needs to release the redacted material and let some disinfecting sunshine in.
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© 2013 Wall Street On Parade. Wall Street On Parade ® is registered in the U.S. Patent and Trademark Office.
WallStreetOnParade.com is a public interest web site operated by Russ and Pam Martens to help the investing public better understand systemic corruption on Wall Street. Ms. Martens is a former Wall Street veteran with a background in journalism. Mr. Martens' career spanned four decades in printing and publishing management.
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If you take a look at the organizational chart provided by Pam Martens, immediately above, it's topped-off with Javier Martin-Artajo. The reality was that, at the time, Martin-Artajo reported to JPMC CIO head Ina Drew who, in turn, reported to JPMC CEO Jamie Dimon, among others.
I've italicized "others" in the paragraph above this because in-between Ms. Drew and Mr. Dimon was none other than William M. Daley, Vice Chairman of the JPMC Board of Directors, who was, among many other duties including that of chief (unregistered) lobbyist for the bank and Chair of the JPMC Board's Risk Management Committee, also in charge of supervising the bank's corporate governance, up until January 9th, 2011, when President Obama appointed Daley as his chief of staff, replacing current Chicago Mayor Rahm Emanuel in that job.
It was fairly widely reported, in early November 2011, that Bill Daley was tacitly demoted in his position as White House Chief of Staff, when he was required to share duties with Pete Rouse. Interestingly, in January 2012, around the time that the first, industry-circulated reports of JPMC's CIO meltdown appeared in the blogosphere, it was then reported that Daley would be leaving 1600 Pennsylvania Avenue, altogether, later that month.
As I noted last year, in two posts here on May 24th, much/most of what the CIO team was doing involved hedging their taxpayer-backed acquisition of Washington Mutual, the largest bank failure in U.S. history: (See: “Already In Deep Hot Water, JPMorgan Chase May Have Just Reached Its Boiling Point (Part I of II),” and "WhaleMu–JP Morgan’s Next Surprise?" by Michael Olenick (Part II of II).")
While it’s barely being mentioned anywhere in the MSM – and, in large part thanks to the dogged determination of Michael Olenick, as you’ll learn in Part II of this post – the fact of the matter is that JPMC expanded their Chief Investment Office’s asset management functions by some 200-300% back in 2008-2009, primarily to facilitate the hedge plays, and the investment management tasks, associated with their U.S. taxpayer-backed acquisition by JPMC of Washington Mutual, which is now on the record books as the largest bank failure in U.S. history. (Note: last I checked, WaMu was headquartered in the state of Washington, a bit of a geographic stretch from Europe, where the problems mentioned in this story supposedly originated.) And, based upon reported timelines in the MSM over the past couple of weeks, it wasn’t until after that occurred that Bruno Iksil came into the game and started buying up every toxic British and Dutch collateralized debt obligation (CDO) he could get his hands on over on the other side of the pond. (That’s the official JPMC party line these days, in any event.)As Pam Martens (among others) reported in a post last month, current Treasury Secretary Jack Lew succeeded Bill Daley as White House Chief of Staff, on January 27th, 2012. And, much to the chagrin of many Democrats, it was also widely noted that earlier, when Lew became OMB Chief, he contractually qualified for a special, $940,000 bonus from his former employer, Citigroup, due to attaining his new position of influence in Washington.
From Michael Olenick, in Part II of this post, quoting the lead article in the May 11th, 2012 edition of the New York Times…
Nelson D. Schwartz and Jessica Silver-Greenberg of the New York Times verify that the purpose of the Chief Investment Office — the London Whale — is to offset risk caused by the Washington Mutual loans:Under Mr. Dimon’s leadership, the chief investment office — which was responsible for the outsize credit bet — was retooled to make larger bets with the bank’s money, a former employee said. Bank executives said the chief investment office expanded after JPMorgan Chase’s 2008 acquisition of Washington Mutual, which added riskier securities to the company’s portfolio. The idea behind the strategy was to offset that risk.
It should also be noted that, these days, Bill Daley is now sharing (virtual) office space with former Treasury Secretary Tim Geithner over at one-time Citigroup Board Chairman and Clinton Treasury Secretary Robert Rubin's Council on Foreign Relations.