It couldn’t get worse for JPMorgan Chase & Co., a global financial services firm that operates in over 100 countries.
The latest negative publicity concerns missing funds from the now defunct MF Global Holdings Ltd. The final missing funds, which total close to $660 million, are most likely held in a custodial account at JPMorgan.
Jon S. Corzine, former CEO at MF Global, suggested what could have happened to the missing funds in his testimony before the U.S. House Committee on Agriculture on Dec. 8, 2011.
“There were an extraordinary number of transactions during MF Global’s last few days, and I do not know, for example, whether there were operational errors at MF Global or elsewhere, or whether banks and counterparties have held onto funds that should rightfully have been returned to MF Global,” Corzine testified.
The media picked up on and reported in November 2011 that JPMorgan could be holding the funds. JPMorgan admitted that it was holding MF Global funds, but that the money had nothing to do with the missing funds.
“People familiar with the situation suggest that the funds are still at JPMorgan,” suggested Reuters, a media source known for well-researched information, in a Jan. 19 article about MF Global.
As reported, MF Global, before its bankruptcy filings, was facing a liquidity crisis, and JPMorgan was handling fund transfers at the time.
A run on MF Global ensued, as customers of this firm, which had been downgraded by Fitch Ratings and Moody’s Investors Service to a speculative/junk rating, were trying to withdraw their funds. JPMorgan was the middleman in transferring funds from sales of assets, which somehow had slowed down far more than normal in that type of business transaction.
“By adhering to procedure and not cutting MF Global any slack, these people say [individuals familiar with the MF Global situation], JPMorgan was able to slow the delivery of funds, worsening MF Global’s distress. As a result, they note, hundreds of millions of dollars of MF Global money may be still stuck in accounts at JPMorgan,” according to the recent Reuters article.
Banking experts suggest that slowing down the fund transfer process by JPMorgan was not illegal.
Media reports suggest that JPMorgan has in the past, through different kinds of maneuvering, hastened along bankruptcies without crossing the line into illegalities.
The Reuters article pointed to actions taken by JPMorgan, again completely legal, during the Lehman Brothers Holdings Inc.’s final days. JPMorgan demanded collateral or would otherwise withhold funding, hastening the demise of the Lehman Brothers.
“The role that JPMorgan played as both a lender and middleman to MF Global illustrates the procedures banks can deploy to protect their own interests when dealing with weaker counterparties. … JPMorgan, in its role as middleman, was able to control the speed with which MF Global’s asset sales were processed,” the Reuters article said.
Getting Away With Less Than a Black Eye
The Reuters article has been adopted by a number of media sources, and it is suggested that JPMorgan will hold its own since it is considered too big to fail (TBTF). It ranks No. 1 on the list of 50 bank holding companies, published by the National Information Center, that are controlled by the U.S. Federal Reserve System.
JPMorgan is also on the list of 29 TBTF organizations, as determined by the G20 Financial Stability Board, with $2.3 trillion in total assets. Rumors are that legal finagling will allow JPMorgan to hang on to the MF Global funds.
“It’s also pretty clear that a lot of customer money is sitting at JP Morgan, but JP Morgan will argue in bankruptcy court that it should not have to disgorge it. … Unfortunately, since most of the counterparties hurt don’t have the political clout of [a] TBTF bank, JP Morgan is unlikely to take a reputational hit anywhere close to what it might deserve,” according to a Jan. 19 article on the naked capitalism website.
JPMorgan knows how to be in the right place at the right time. The Office of the U.S. Trustee, under the auspices of the U.S. Justice Department, named JPMorgan a member of the Unsecured Creditors Committee, which is dealing with the MF Holdings bankruptcy proceedings.
“Several big-name banks, including JPMorgan Chase … made the cut for the companies that were appointed by the United States Trustee’s Office to the unsecured creditors’ committee for MF Global Holdings Ltd., the futures brokerage company now in bankruptcy,” according to an entry on the attorneys.com website.
Accused of Hurrying Along County-Level Bankruptcy
“The County would continue to vigorously pursue its claims against New York-based JPMorgan Securities, Inc.,” said Alabama officials of the Jefferson County Commission in its Nov. 9, 2011, press release about its Chapter 9 bankruptcy filing.
The county had difficulties servicing its $4 billion debt, as creditors, including JPMorgan, refused to negotiate restructuring the debt.
The present refusal to negotiate restructuring of the debt is the second time the county has run into problems with JPMorgan. On Nov. 4, 2009, the U.S. Security and Exchange Commission (SEC) charged JPMorgan with bribing Jefferson County commissioners’ families, paying over $8 million so it would be named managing underwriter of that county’s sewer system bond offering.
JPMorgan settled the charges without admitting or denying guilt and was fined $25 million. They also had to pay Jefferson County $50 million and forego $647 million in termination fees.
“This self-serving strategy of paying hefty secret fees to local firms with ties to county commissioners assured J.P. Morgan Securities the largest municipal auction rate securities and swap agreement transactions in its history,” said Glenn S. Gordon, associate director at the SEC’s Miami Regional Office, in a Nov. 4, 2009, press release.
JPMorgan Playing by Its Own Rules
“The Securities and Exchange Commission today charged J.P. Morgan Securities LLC (JPMS) with fraudulently rigging at least 93 municipal bond reinvestment transactions in 31 states, generating millions of dollars in ill-gotten gains,” according to a July 7, 2011, SEC press release.
JPMorgan paid $51.2 million, which was turned over to the victims of the JPMorgan scheme by the SEC. Again, JPMorgan neither admitted nor denied guilt.
On June 21, 2011, a SEC press release publicized another settlement for $153.6 million with JPMorgan for misleading investors concerning a mortgage security transaction. Again, JPMorgan did not admit or deny guilt.
JPMorgan even violated a law that was enacted to protect active duty military personnel. It illegally foreclosed on the mortgages of 14 families, overcharged 4,000 active duty personnel on their interest payments, and made harassing collection phone calls. JPMorgan apologized and refunded $2 million in January 2011, a mere pittance when compared to the $25 billion it received under the taxpayers’ Troubled Asset Relief Program (TARP).
Respondents to a number of media articles are very vocal with their displeasure, as JPMorgan received only small fines when compared to its income and net worth. It is being said that getting caught once or twice drives the lesson home, but it is unacceptable to be caught over and over again, receiving no more than a slap on the wrist.
“While we are encouraged that JP Morgan Chase is making restitution to these families they have unjustly overcharged, we also note that these irregularities came to light because of a lawsuit—not through internal review,” said Jimmie Foster, national commander of the American Legion, in an article on the American Legion website.