JPMorgan: Poster Child for the Most Dangerous Financial System Since 1929

JPMorgan: Poster Child for the Most Dangerous Financial System Since 1929

By Pam Martens ~ March 20, 2013

Wall Street On Parade

Last Friday, Senator Carl Levin told the Senate’s Permanent Subcommittee on Investigations that JPMorgan “piled on risk, hid losses, disregarded risk limits, manipulated risk models, dodged oversight, and misinformed the public.” And here’s the punch line: that’s not even the worst of what JPMorgan did.

Each of the charges leveled by Levin occurred on a regular basis over the past decade at the largest Wall Street investment banks. What has elevated JPMorgan to the top of the Wall Street dung heap is that the long laundry list of violations cited by Levin occurred in the commercial bank, not the investment bank. JPMorgan was gambling with the insured deposits of its customers – not its own capital. Thus far, it has acknowledged $6.2 billion in trading losses using other people’s money.

Both Senator Levin, who chairs the Senate Subcommittee, and Senator John McCain, ranking minority member, confirmed that insured deposits of the bank were used for the risky trades that reached into the hundreds of billions of dollars in notional (face) amounts. ~

Levin said: “JPMorgan’s Chief Investment Office rapidly amassed a huge portfolio of synthetic credit derivatives, in part using federally insured depositor funds, in a series of risky, short-term trades, disclosing the extent of the portfolio only after intense media exposure.”

McCain stated: “This case represents another shameful demonstration of a bank engaged in wildly risky behavior. The ‘London Whale’ incident matters to the federal government because the traders at JPMorgan were making risky bets using excess deposits, portions of which were federally insured. These excess deposits should have been used to provide loans for main-street businesses. Instead, JPMorgan used the money to bet on catastrophic risk.”

According to documents released by the Senate, as of the close of business on January 16, 2012, JPMorgan’s Chief Investment Office held $458 billion notional (face amount) in domestic and foreign credit default swap indices. Of that amount, $115 billion was in an index of corporations with junk bond ratings, which the bank was not allowed to own. To get around that, according to the Office of the Comptroller of the Currency, JPMorgan “transferred the market risk of these positions into a subsidiary of an Edge Act corporation, which took most of the losses.” An Edge Act corporation refers to the ability of a bank to obtain a special charter from the  Federal Reserve. By establishing an Edge Act corporation, U.S. banks are able to engage in investments not available under standard banking laws.

By the end of the first quarter, JPMorgan had a net long position in credit default swaps – meaning that it was obligated to pay counterparties if corporations in the credit default swap indices defaulted on their debt or filed for bankruptcy. This is what collapsed the giant insurer, AIG, requiring a $182 billion bailout by the U.S. taxpayer just five short years ago.

And still, we have not heard the worst part of this story. The worst part is that under current law, banks are legally allowed to use insured deposits to make risky trades in stocks, bonds and derivatives.

According to the Office of the Comptroller of the Currency’s “Activities Permissible for a National Bank” dated April 2012, all of the following are perfectly legal for JPMorgan and its brethren like Citigroup, Bank of America, and Wells Fargo.

“National banks may enter into credit derivative transactions. A national bank may use debt securities that are not investment grade debt securities or the credit equivalents thereof, to hedge bank permissible derivative, including credit derivative, transactions…

“National banks directly, and without registering with the SEC, may engage in many types of securities broker-dealer activities, including transactions for trust customers, private placements, issuance and sales of certain asset-backed securities, transactions for certain stock purchase plans, and transactions in ‘identified banking products’ (including generally deposit instruments, banker’s acceptances, loan participations (subject to certain sales restrictions), and derivatives)…

“National banks may offer investment advice and engage in a variety of derivative activities (including swaps, futures, forwards, and options) as a financial intermediary or to manage or reduce risks…

“A national bank operating subsidiary may own, hold, and manage all or part of the parent bank’s investment securities portfolio…

“National banks may provide full service securities brokerage (investment advisory services and brokerage services) or act as a futures commission merchant, and provide credit and other related services.”

We have financially “modernized” our way back to 1929 when unregulated banks were free to  gamble with deposits in the stock market, blow up the financial system, and bring a decade of abject suffering to the Nation with the Great Depression.

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