Market Overview

Where Is the Justice? Another Slap on the Wrist for J.P. Morgan

For the second time in the past month, J.P. Morgan (NYSE: JPM) has reached a settlement with the Justice Department and Securites and Exchange Commission for “alleged” misconduct. Notice the quotes around “alleged.”

In the first settlement, and perhaps the most unjust, J.P. Morgan agreed to pay $153.6 million to settle charges that the company purposely misled buyers of mortgage securities before the housing collapse in 2008. Under the settlement, J.P. Morgan did not have to admit to any wrongdoing.

The SEC issued a statement regarding the settlement declaring that JP Morgan Securities, a division of the bank, “misled investors in a complex mortgage security transaction just as the housing market was starting to plummet.”

Robert Khuzami, Director of the SEC's Division of Enforcement, stated, “J.P. Morgan marketed highly-complex CDO (collateralized debt obligations) investments to investors with promises that the mortgage assets underlying the CDO would be selected by an independent manager looking out for investor interests. What J.P. Morgan failed to tell investors was that a prominent hedge fund that would financially profit from the failure of CDO portfolio assets heavily influenced the CDO portfolio selection.”

Essentially, J.P. Morgan failed the tell investors that related hedge fund, Magnetar Capital, helped to piece together the investment in question (Squared CDO 2007-1), while at the same time held a $600 million short position against it.

In an internal email, an employee for J.P. Morgan stated, “We all know Magnetar wants to print as many deals as possible before everything completely falls apart.”

Facing a huge financial loss, J.P. Morgan began a frenetic sales campaign, which went beyond its normal customer base in order to unload the toxic assets. A head salesman in charge of J.P. Morgan's distribution said in a March 22, 2007 email, “We are so pregnant with this deal, we need a wheel-barrel to move around. Let's schedule the cesarean, please!” The securities in question lost most, if not all of their value within ten months.

$153.6 million is all it costs to nearly collapse the financial system? While this one action was by no means the main culprit of the financial crisis, it was a collection of similar deplorable acts made by investment banks worldwide that led to the breakdown of the system.

So that brings us to today's settlement.

J.P. Morgan agreed to pay $228 million to settle allegations of rigging municipal bond deals. The SEC stated that the charges emanated from “at least 93 municipal bond reinvestment transactions in 31 states.”

J.P. Morgan was able to acquire municipal bond contracts by arranging deals with bidding agents, which allowed for the banking giant to illegally find out what its competitor's bids were between 1997 and 2005 – essentially manipulating the whole process.

Robert Khuzami, director of the SEC's Division of Enforcement stated, “Municipal issuers and investors didn't stand a chance against the fraudulent strategies J.P. Morgan and others used to guarantee profits.”

Elain C. Greenburg, head of the SEC's Municipal Securities and Public Pensions Unit added, “When powerful financial institutions conspire with each other to intentionally violate regulations designed to ensure fair investment prices, the integrity of the municipal marketplace becomes corrupted.”

Under the settlement, J.P. Morgan will pay $52.1 million to the SEC, $50 million to the Internal Revenue Service, $35 million to the Comptroller of the Currency, and $75 million to the states involved. The remaining $17 million will go to other associated state agencies.

As part of the deal, J.P. Morgan will not face criminal antitrust litigation assuming it cooperates with the investigation. The bank did not admit or deny any wrongdoing. Shares reacted positively to the settlement, closing up 1.9% on the day at $41.32.

So, to recap, J.P. Morgan has paid $381.6 million over the past month to dodge “allegations” of fraud and manipulation. To be honest, it is not the allegations that are being avoided; it is the probable sanctions and/or penalties that would be levied upon eventual conviction.

Last year, Goldman Sachs (NYSE: GS) was able to buy its way out of similar fraud allegations for $550 million, and just like J.P. Morgan, did not have to admit or deny any wrongdoing.

Starting to notice a pattern?

It appears as though banks are able to buy their way out of anything these days. Trillions of dollars in market value have been lost worldwide as a result of the financial crisis, while the tab for J.P. Morgan and Goldman Sachs currently sits at $931.6 million in “fines” paid. If only Lehman Brothers would have lasted….

Posted-In: Elain C. Greenburg Lehman Brothers Magnetar Capital Robert Khuzami SEC SEC Division of Enforcement SEC Municipal Securities and Public Pensions Unit Securities and Exchange Commission Squared CDO 2007-1 U.S. Justice DepartmentNews Hedge Funds Movers & Shakers Politics Legal Hot After-Hours Center General Best of Benzinga

 

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