The Golden Rule of government, “Whoever has the gold makes the rules,” was on full display in Washington over the past week as JPMorgan’s Jamie Dimon appeared at hearings held in both the Senate and the House to answer questions about the bank’s recently reported trading loss.
I am in full agreement with the argument that it is actually none of the government’s business when the shareholders of a private bank lose money due to the bad decisions of management, as long as the loss was incurred legally and does not threaten the integrity of the financial system.
However, the Congressmen and Senators missed an excellent opportunity to ask Mr. Dimon about any number of financial scandals (Madoff, Jefferson County, robo-signing, etc.) in which JPMorgan Chase has been involved, including the on-going MF Global scandal.
In our representative democracy, where Senators and Congressmen are supposed to serve the public interest, not the interests of big campaign bundlers, it is sad to report that not one member of Congress had the courage to ask Jamie Dimon the following questions:
1) It is reassuring to hear that JP Morgan has more than enough of its own capital to cover the trading losses that triggered this hearing. But suppose for the moment that under some circumstances the size of the loss were to grow to a substantially larger amount than you now anticipate. If you didn’t have enough capital to cover the loss, would you ever consider taking money from your customers’ accounts to cover the losses? That would be illegal, wouldn’t it?
Permit me to ask you one more not-so hypothetical question: If you were standing in the lobby of a JPMorgan Chase branch, and you saw through the window that one of your customers was robbing the candy store across the street, and the customer then ran into your bank with a bag of cash, would you let that guy pay off his car loan with the cash in his bag?
Isn’t that in essence exactly what happened last October with your customer, MF Global? According to the very detailed report released on June 6 by Trustee Giddens, the infamous transfer of $175 million from MF Global to your bank on October 28 to pay off an overdraft was a transfer entirely between JPMorgan accounts: From the segregated customer trust account to the MF Global Treasury house account to a JPMorgan London account. All of these moves were completely transparent on your blotter.
Your own employees, Donna Dellosso and Barry Zubrow, witnessed those transfers and were so concerned about them that they immediately requested a letter from Jon Corzine and Laurie Ferber, basically stating that they were not stealing customer money. You never got that letter, but kept the money anyway. Weren’t you concerned about receiving stolen property, and potentially being an accessory to the looting of customer accounts? Did you call the CFTC or SEC to report your suspicions?
[Mr. Dimon told the Senate Banking Committee that his bank received verbal assurances that the transfer was legitimate; however the Giddens report directly contradicts this………see page 134: MF’s in-house attorney, Dennis Klenja, “advised that he made no assurances of any kind to JPM”.]
JP Morgan was MF Global’s primary banker. You knew that they were scrambling to come up with cash to stay alive, day-by-day, hour-by-hour. Did you really think that they suddenly found a couple of hundred million dollars of excess cash in the segregated account? Or did you watch them steal customer money for a JPMorgan account, and then ask for the letter as a CYA in case they got caught?
2) Last month, your bank returned approximately $168 million in funds to the MF Global estate, money that you had been holding for over 7 months. Mr. Giddens believes that JP Morgan is still holding on to money that rightfully belongs to MF Global, and stated in his report that he will be suing you if no agreement to return the money is reached within 60 days. Are you aware of that? Can you tell us here today how much MF Global money is still being held by your bank?
Do you have systems and controls in place to identify what money belongs to you and what money belongs to your customers?
Millions of people have custodial accounts at JPMorgan for their retirement funds or their children’s education. Should they be worried about their funds being commingled with the bank’s own funds?
It seems that JPMorgan has a habit of commingling its own funds with customer segregated funds. Weren’t you fined 33 million pounds in the UK last year for failing to properly segregate $23 billion in client assets? That improper commingling took place over a period of 7 years, correct? And isn’t it true that in April of this year the CFTC ordered you to pay a fine of $20 million to settle charges that JPMorgan mishandled segregated customer funds at Lehman Brothers between November 2006 and September 2008? The CFTC also stated that after Lehman Brothers filed for bankruptcy, JPMorgan improperly declined to release customer segregated funds linked to commodity accounts.
Is that your modus operandi, Mr. Dimon, when a customer of the bank seems headed for bankruptcy to grab onto as much cash and collateral as possible, and then only release it after being sued or ordered to return it by regulators?
3) MF Global had many subsidiaries scattered throughout the world, but effectively operated as one company under one management. Were you surprised by the fact that in bankruptcy, MF Global was treated as two entities, with the Holding Company allowed to continue operating under Chapter 11, led by the very same executives who had blown up the company? Did your attorneys (either in-house or outside counsel) ever meet with MF Global executives and/or attorneys to discuss or plan the structuring of the bankruptcy?
As a result of the Chapter 11, you were able to continue trading with MF Global, and were involved in a sizable transaction involving European sovereign debt in early November; is that correct? According to Mr. Giddens’ report and news articles published by the Wall Street Journal, more than $14 billion in MF Global fixed income positions were liquidated by the London Clearing House at below-market prices, resulting in substantial profits for the buyers. JPMorgan bought some of those bonds, along with the George Soros Family Trust, is that correct? And JPMorgan is one of the owners of the London Clearing House, is that also correct? Did you use your influence at the LCH to increase margin requirements for MF Global?
At the time when those transactions took place, it was already an established fact that more than $1 billion was missing from customer segregated accounts, and you were certainly aware that customer money had been repo-ed to support those sovereign bond positions. So didn’t it seem probable to you that you were dealing in stolen property, sometimes referred to as “fencing” or money laundering? How much money did you make from those bond purchases?
In his report, Mr. Giddens stated that “because these transactions took place at the LCH, the Trustee has not had full transparency into these transactions or the amounts that might be owed to [MF Global customers]”. Given that JPMorgan is a co-owner of the LCH, perhaps you could ask them to provide some transparency on those transactions to Mr. Giddens. Don’t you agree, Mr. Dimon?
In another transaction that took place two weeks after JPMorgan was placed on the bankruptcy committee, you purchased MF Global’s ownership share in the London Metals Exchange (LME). That stake is now worth $103 million, a gain of more than 150% in seven months. Here again, JPMorgan is making a huge profit from dealings in the remaining assets of MF Global, while customers who had segregated custodial deposits in your bank await the return of their missing $1.6 billion. Does that seem right to you, Mr. Dimon? Don’t customers have priority under the law for recovery of their stolen money?
4) When did you first become aware that MF Global was at risk of going under, Mr. Dimon?
And which of the following choices best describes your reaction; was it:
A) As a custodial bank, we have a legal and fiduciary duty to our customers. How can we make sure that their deposits are protected?
or was it:
B) Holy Crap! Those guys owe us over a BILLION dollars. What can we do to make sure we get our money back?
Trustee Giddens reports (page 131) that two employees of JP Morgan, Fernando Rivas and Barry Zubrow, called Jon Corzine regarding the $175 million they owed to JPMorgan-UK. Are you aware of that call? Did they make it on your orders? According to Giddens, your employees threatened to stop handling MF Global’s asset sales until JPMorgan got its money back. It seems that you were willing to push MF Global over the cliff unless they wired the money to you immediately.
Is that the standard way that JPMorgan does business? Do you think that threat was a factor in MF’s decision to reach into customer segregated accounts to come up with the money?
When was the last time that you personally spoke with Mr. Corzine? Did you speak with him during the last two weeks of October, last year? Did you ever say anything to him that might be interpreted as a threat if MF Global caused losses at JP Morgan?
Mr. Corzine told our Committee under oath last December that he never directly ordered that money be taken from customer accounts to satisfy MF’s debts to you. Given that MF Global was in a desperate battle for survival and desperately trying to raise cash during the last week of October, do you think it would have been reasonable for him to think that suddenly MF Global had hundreds of millions of dollars in excess cash sitting around that they could wire to you? The total amount of customer money that is now missing, $1.6 billion, is equal to more than one and a half times the total net worth of MF Global as reported on their last financial statements. Would it be reasonable for a CEO to lose track of 150% of the value of his entire company? If, in fact, he didn’t ask about where the money was coming from, could it be that he it was because he didn’t really want to hear the answer, or already knew the answer? Isn’t this a classic example of WILLFUL BLINDNESS?
5) Did any JPMorgan executives or attorneys participate in any way with the discussions or process involved in structuring the MF Global bankruptcy, including the decision to allow MF Global Holdings to continue operating under Chapter 11? Did anyone from JPMorgan, or representing JPMorgan, participate in the big conference call in the early hours of the morning of October 31 where those decisions were made? Was JPMorgan represented at the November 1 hearing where the Chapter 11 petition was approved?
6) You have been a Director of the NY Fed since 2007, is that correct Mr. Dimon? Did you find it strange that, despite its small size and undercapitalization, MF Global was suddenly given Primary Dealer status by the NY Fed shortly after the arrival of Mr. Corzine? Prior to his arrival, MF Global’s application had been rejected, isn’t that correct? Do you think that the fact that Mr. Corzine was an old friend and colleague of Fed President Dudley, and has lots of friends in high places here in Washington, might have had any influence on that decision? Did you raise any objections to it, or warn the Fed about the weakening financial condition of MF Global in 2011? If not, didn’t you have a duty to do so in your capacity as a Fed Director?
7) As we sit here today, MF Global’s customers, many of whom had their segregated accounts at your bank, are still waiting for restitution of the $1.6 billion illegally transferred from those accounts. Who do you think is responsible for that? Should anyone be held accountable? Mr. Corzine, you, regulators??? Do you think that prison time would act as a good deterrent to this kind of thing happening again???