The Securities and Exchange Commission's (SEC) current budget of $1.32 billion is dwarfed by the $4 billion to $9 billion JPMorgan Chase may ultimately lose through disastrous gambling on derivatives and related instruments for its own accounts. Ironically, the Dodd-Frank reform law's "Volcker Rule" restricting such noncustomer-related trading - opposed by JPMorgan's CEO and most Republicans - might have eliminated or limited the billions lost by this federally insured bank had it been in place (and enforced.) The current weak version of the Volcker Rule is slated to become effective July 21, but regulators say they can't meet that deadline, due largely to financial industry litigation and lobbying.
And since House Republicans have refused to grant the SEC funds to implement such reforms, little change can be expected in regulators' ability to police high-risk banking roulette. That leaves us in nearly the same position as before the bank-induced financial and economic meltdowns that commenced in 2008.
While regulators have done little in the face of JPMorgan's vast derivative losses and misleading statements about them, some institutional investors have already initiated private enforcement actions against the bank and its management. At least two pension funds have filed class action lawsuits in federal court charging JPMorgan and certain of its officers with violating Sections 10(b) and 20(a) of the Securities Exchange Act of 1934. In taking action themselves, these investors illustrate their critical law enforcement role in these times when regulators (and Congress) seem cowed and co-opted by financial behemoths.
Specifically, the pension funds charge JPMorgan with secretly amassing a risk-laden and unmanageably large position in credit derivatives and related instruments that had little or nothing to do with protecting, or "hedging," the value of other investments. The bank allegedly:
- reported false and misleading valuations of these investments, based on artificially inflated asset values assigned to them;
- and, then, suffered material losses that were not truthfully disclosed to shareholders.
Beyond the JPMorgan shareholders - who know reporting violations when they see them - other knowledgeable Wall Street commentators also question the bank management's believability. Back in May, CEO Jamie Dimon dismissed mounting worries about its London-based derivatives trading as a "tempest in a teapot." Then, in April, Mr. Dimon said the loss would likely be $2 billion. The Street picks up the story:
"The company's so-called rogue trading loss was just going to be $2 billion - and that appeared tolerable ... OK, maybe three. Or, uh, five. But no matter. Slick Jamie, who seemed to be telling the truth slowly on company misdeeds, charmed the pants off of the media, traders and politicians in Washington testimony ... [With the New York Times estimate of $9 billion in losses] we've finally reached the point of ridiculousness, of ever cascading losses ..."
NASDAQ's blog agreed "the reliability" of JPMorgan's management is "at stake," and added wistfully:
"We hope that the major banks in the country such as Bank of America Corporation, Wells Fargo & Company, The Goldman Sachs Group Inc., Citigroup Inc. and Morgan Stanley, which follow the trend set by JPMorgan, will not report similar losses in the near future."
That would truly be a shame for the investing public and taxpayers who now stand behind those giants. Does all this sound familiar? The same multibillion dollar casino-style betting and prevarications about the value of similar illiquid instruments were key elements in the crisis that first hit the fan in 2008.
In the movie "Groundhog Day," Bill Murray plays a cynical TV weatherman doomed to relive the events of February 2 in a seemingly endless time loop. Unlike Congress and regulators, however, the Murray character takes advantage of the added time and foreknowledge to help people avert disasters and, in doing so, redeems himself.
When will Congress and federal regulators find the courage to break the 2008 time loop trapping our markets and economy?