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I'll skip the normal single stock options piece today to draw attention to what may have gone largely unnoticed over the last several days and when taken in conjunction with what's happening behind closed doors with the rating agencies, may signal an unbelievable shift in the Federal Government's dealings with the largest financial institutions in the country (read: JPM, Goldie and the rest) and the largest rating agencies.
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Let's start with the banks (which have more recent news) then move to the rating agencies which I accosted several weeks ago.
But first, as always, my conclusion upfront:
Go get the banks (admitting fraud). Go get the ratings agencies (admitting fraud). And give us our money back. That's what the constituency is calling for, and that's what I think Congress is going to do. And that amount may be close to a-quarter trillion dollars.
And then... I do believe people may go to Federal prison.
Thursday night, 3-14-2013:
A Senate report found JPMorgan had misled regulators with regard to disclosures (and non-disclosures) surrounding the infamous London Whale trade (Source: Yahoo! Finance Suddenly, Things Are Going “Terribly Wrong” for the Big Banks.
The 300 page+ page report from Congress was just the start as JPM had to sit down in front of Congress and explain what exactly it didn't explain when the original investigation into the "Whale loss" began. Here is some contextual news from the same Yahoo! Source:
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The 300-page report was just an appetizer for Friday’s hearing, when JPMorgan executives were grilled under oath and former CFO Douglas Braunstein essentially admitted the bank kept regulators in the dark about its mounting losses.
“Things went terribly wrong,” testified Ina Drew, who ran the firm’s Chief Investment Office before stepping down under pressure after the London Whale losses first surfaced last spring. The Senate report and subsequent testimony could expose JPMorgan to additional litigation risk, which is a problem for a number of big banks these days.
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Let's take one phrase from that testimony: "CFO Douglas Braunstein essentially admitted the bank kept regulators in the dark about its mounting losses."
That would be a knowingly (purposeful) misrepresentation which to the rest of the free world is known as a lie. If the CFO is admitting it, then would it be a stretch that the CEO knew about it as well? No, it would be a stretch to say that he didn't know. The CEO has a name, it's Jamie Dimon. And he too looks like a liar. And lying to the Federal Government is a felony if done under oath.
More quotes (same source):
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The bank’s disclosures “were incomplete, contained numerous inaccuracies, and misinformed investors, regulators and the public” said Senator Carl Levin (D-MI), chairman of the Senate’s Permanent Subcommittee on Investigations.
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Some people are calling it an oversight of internal controls -- is it possible the internal controls were well in place and this was simply a lie? ...Oh, sorry, I mean, admittedly "[keeping] regulators in the dark," or "misinformed investors, regulators and the public?"
Before anyone gets on a high horse (higher than mine I mean), the whale loss at JPM did not cost US taxpayers any money at all -- there was no bailout nor was one ever discussed or even hinted at, at all. I'm speaking more to the symptomatic failures / normal MO of the large banks. This is just an example -- a very newsy / headline grabbing one. We need to go back to 2008 and re-open the investigations.
Another worthy read is this Yahoo! article: London Whale Isn’t Dead Yet: JPMorgan Is Out of Control, Rosner Says.
Friday got worse for JPM and Goldie:
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Indeed, things kept going terribly wrong for JPMorgan on Friday when the Federal Reserve gave only conditional approval to its capital plans. But that wasn’t just a JPMorgan story as the Fed said the same of Goldman Sachs.
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And then worse yet: Updated 3-20-213
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The Senate report on JPMorgan Chase's London Whale fiasco revealed that federal regulators secretly downgraded the bank's management rating last summer-a fact kept from investors and the public until [this] week.
The downgrade of JPMorgan's management resulted from the Office of the Comptroller of the Currency finding that the bank suffered from "lax governance and oversight in the chief investment office," as well as other "oversight deficiencies," according to the Senate report.
This news is another blow to JPMorgan, which had long enjoyed the reputation of being one of the best managed megabanks in the U.S. That reputation was already diminished by the derivatives trading losses in its London chief investment office. And then there was that report from the Federal Reserve citing weaknesses in JPMorgan's capital planning process.
The ratings are usually disclosed only to senior bank management and regulators. But the revelation about the downgrade of the management component appears on page 249 of the 300 page Senate report. It was reported Tom Braithwaite and Shahien Nasiripour of the Financial Times on the day it was released.
The Senate report doesn't specify how far the management rating was downgraded, doesn't give the actual score and doesn't reveal the overall score.
Source: CNBC via Yahoo! Finance: JPMorgan Secretly Downgraded by Regulators
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I love this line: "The Senate report doesn't specify how far the management rating was downgraded, doesn't give the actual score and doesn't reveal the overall score." Come on Congress... How about some transparency...
Then on Saturday the Dallas Fed president (Richard Fisher) spoke at the annual CPAC conference and discussed a plan to break up the "too big to fail" banks. This is the Republican audience, mind you, as the first "C" in CPAC stands for Conservative and the "P" stands for Political. Dems have already taken a stance (albeit a different approach) on punishing the big banks. I believe they call agreement from both sides of the aisle bi-partisan. I know, it's a new term we haven't heard before...
Aaron task says it best, "more than five years after the financial crisis began in earnest, we may finally have arrived at a moment where there’s bipartisan support to “get tough” on the big banks."
What about auditors?
Audit
- an official examination and verification of accounts and records, especially of financial accounts.
- to make an audit of; examine (accounts, records, etc.) for purposes of verification:
Source: Dictionary.com
Try this on for size:
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You might think that when shareholders pay a firm $105.5 million in audit and audit-related fees for an opinion on whether the financial statements presented fairly, in all material respects, the financial position of JPMorgan Chase & Co. and its subsidiaries, private equity funds, commingled trust funds and special purpose vehicles at year end, that audit firm, PricewaterhouseCoopers LLP, would also be held accountable when so many things about those financial statements and management’s assertions turned out to be so terribly wrong.
Oddly enough, PricewaterhouseCoopers LLP, JPMorgan Chase’s external auditor since 1965, is referred to only once in the US Senate Permanent Subcommittee on Investigations mammoth report, “JPMorgan Chase Whale Trades: A Case History of Derivative Risk and Abuses”. The JPMorgan auditor came up only a few times at the Committee’s hearing last Friday led by Sen. Carl Levin (D-Mich.).
The Senate Subcommittee did not interview auditor PwC while preparing its report, according to a Subcommittee spokeswoman I questioned during a press briefing on Thursday. When I asked why, the question was brushed off. It wasn’t a priority, apparently.
The Senate’s investigation makes several allegations against JPMorgan Chase and its executives for the way its Chief Investment Office managed the synthetic credit portfolio or SCP, a derivatives book later known as the “Whale” trades after it blew up and the bank lost $6.2 billion dollars.
Source: No Accounting For Auditor PwC At Levin's Whale Hearing
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If regulators really get tough on banks, there is a potential windfall from banks to the government (the American tax payer) of a ~quarter trillion dollars. How the hell did I come up with that number? It's about five years of Net Income from the big boys combined. Five years?... What the hell am I talking about?...
Let's turn to an article I wrote about the rating agencies on Monday, Feb 4.
McGraw Hill (MHP) - Vol Explodes on News of 10-figure Law Suit; S&P Needs to Burn on This One (and so does Moody's)
Quoting my own article:
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The Justice Department, along with state prosecutors, plans to file civil charges against Standard & Poor’s Ratings Service, accusing the firm of fraudulently rating mortgage bonds that led to the financial crisis, people briefed on the plan said Monday.
Up until last last week, the Justice Department had been in settlement talks with S&P, these people said. But the negotiations broke down after the Justice Department said it would seek a settlement in excess of “10 figures,” or at least $1 billion, these people said, which would wipe out the profits of S.&P.’s parent, the McGraw-Hill Company, for an entire year.
McGraw-Hill earned $911 million last year.
Source: DealB%K via Yahoo! Finance; U.S. and States Prepare to Sue S.&P. Over Mortgage Ratings, written by ANDREW ROSS SORKIN and MICHAEL J. DE LA MERCED.
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While the news about the rating agencies was being digested, everyone seemed to migrate to $1 billion (when the report from the DOJ simply said 10-figures). Just to be clear, $1 billion is the smallest 10 figure number there is... Just think about that for a sec...
The middle "10-figure number" is $5 billion -- or five-years of Net Income from MHP. Five-years... Five-years...
My opinion (not Livevol's opinion) is that S&P needs to burn on this one (and so does Moody's). I think $1 billion would be a shame -- if it has to be "10 figures", how about this number: $9,999,999,999?" That's also 10 figures.
I went on to state that:
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"[t]his is an incredible turn of events, as the housing debacle of 2008 for which blame can be levied on several types of firms (and people), had the feel of a "broom and a rug" if you catch my drift... and I know that you do...
But, again, IMHO, the ratings agencies were the worst of them all -- they were the single bottleneck that could have prevented all of it. They are for profit enterprises, but not "for fraud" enterprises -- at least that was what we thought... what we trusted... what we believed... Don't get me wrong, the I-Banks are filthy in the stench that's left behind, but if S&P and Moody's didn't "pay-for-rate," this entire debacle is 75% mitigated (or whatever).
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I felt back then (Feb 4th) that there was a changing of sentiment toward the entire entity that controls... well, everything... That's not the government, as Congress has shown time and again that they control nothing. I mean the bank --> rating agency --> bank circle that ends up being the "take huge bets and keep the upside but cover the downside with tax payers money" circle.
Take the S&P negotiation breakdown with the news out last Thursday, the testimony on Friday (with admitted fraud by the CFO of JPM) and then the CPAC conference on Saturday, things are changing. And why?... Here's the big secret... are you ready?
Because incumbents in Congress can keep their jobs when they do what their constituency asks them to do. And now... it's bi-partisan.
Go get the banks (admitting fraud). Go get the ratings agencies (admitting fraud). And give us our money back. That's what the constituency is calling for, and that's what I think Congress is going to do. And that amount may be close to a-quarter trillion dollars.
And then... I do believe people may go to Federal prison.
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