Posts Tagged ‘Department of Justice’

JP Morgan Chase’s $2 Billion Loss Under Investigation

Monday, May 21st, 2012

As the Department of Justice and the FBI open their investigation into how JP Morgan Chase lost $2 billion, the government is investigating to determine if any criminal wrongdoing occurred.  The inquiry is in the preliminary stages.  Additionally, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC), which regulates derivatives trading, are also looking into JPMorgan’s trading activities.  JPMorgan CEO Jamie Dimon said that the bank made “egregious” mistakes and that the losses tied to synthetic credit securities were “self-inflicted.”

The probe is perceived as necessary, given the ongoing debate about bank regulation and reform, and one expert said it raised the level of concern around what happened.  “The FBI looks for evidence of crimes and goes after people who it alleges are criminals.  They want to send people to jail.  The SEC pursues all sorts of wrongdoing, imposes fines and is half as scary as the FBI,” said Erik Gordon, a professor in the law and business schools at the University of Michigan.

According to Treasury Secretary Timothy Geithner, the trading loss “helps make the case” for tougher rules on financial institutions, as regulators implement the Dodd-Frank law aimed at reining in Wall Street.  Geithner said the Federal Reserve, the SEC and the Obama administration are “going to take a very careful look” at the JPMorgan incident as they implement new regulations like the “Volcker Rule,” which bans banks from making bets with customers’ money.  “The Fed and the SEC and the other regulators — and we’ll be part of this process — are going to take a very careful look at this incident and make sure that we review the implications of what that means for the design of these remaining rules,” Geithner said.  Under review will be “not just the Volker Rule, which is important in this context, but the broader set of safeguards and reforms,” Geithner said, noting that regulators will also scrutinize capital requirements, limits on leverage and derivatives markets reforms.  “I’m very confident that we’re going to be able to make sure those come out as tough and effective as they need to be,” Geithner said.  “And I think this episode helps make the case, frankly.”

Geithner said that Dodd-Frank wasn’t intended “to prevent the unpreventable in terms of mistakes in judgment, but to make sure when those mistakes happen — and they’re inevitable — that they’re modest enough in size, and the system as a whole can handle them.”  The loss “points out how important it is that these reforms are strong enough and effective enough,” he said.

With the passage of Dodd-Frank, banks are required to hold more capital, reduce their leverage and assure better cushions across the financial system to accommodate losses.  Geithner’s comments are similar to those made by other White House officials, who have avoided blasting the bank for its bad judgment, and instead used the event to bolster the case for the financial overhaul.

“We are aware of the matter and are looking into it,” a Justice Department official said “This is a preliminary look at what if anything might have taken place.”  The inquiry by the FBI’s financial crimes squad is in a “preliminary infancy stage,” the official said, and federal law enforcement agents are pursuing the matter “because of the company and the dollar amounts involved here.”

JPMorgan’s and the financial system’s ability to survive a loss that large showed that reforms put in place after the 2008 financial crisis have succeeded.  Nevertheless, the loss by the nation’s largest bank highlights the need for tough implementation of the Volcker Rule on proprietary trading and other rules that regulators are still finalizing.  “The whole point was, even if you’re smart, you can make mistakes, and since these banks are insured backed up by taxpayers, we don’t want you taking risks where eventually we might end up having to bail you out again, because we’ve done that, been there, didn’t like it,” according to President Obama.

Mark A. Calabria, Director of Financial Regulation Studies for the Cato Institute, takes a contrarian view.  Writing in the Huffington Post, Calabria says that “Unsurprisingly, President Obama and others have used the recent $2 billion loss by JPMorgan Chase as a call for more regulation. Obviously, our existing regulations have worked so well that more can only be better!  What the president and his allies miss is that recent events at JPMorgan illustrate how the system should — and does — work.  The losses at JPMorgan were borne not by the American taxpayer, but by JPMorgan.  The losses also appear to have been offset by gains so that in the last quarter JPMorgan still turned a profit.  This is the way the system should work.  Those who take the risk, take the loss (or gain).  It is a far better alignment of incentives than allowing Washington to gamble trillions, leaving someone else holding the bag.  The losses at JPMorgan have also resulted in the quick dismissal of the responsible employees.  Show me the list of regulators who lost their jobs, despite the massive regulatory failures that occurred before and during the crisis.

According to Calabria, “President Obama has warned that ‘you could have a bank that isn’t as strong, isn’t as profitable making those same bets and we might have had to step in.’  Had to step in?  What the recent JPMorgan losses actually prove is that a major investment bank can take billions of losses, and the financial system continues to function even without an injection of taxpayer dollars.  It is no accident that many of those now advocating more regulation are the same people who advocated the bailouts.  Banks need to be allowed to take losses.  The president also sets up a ridiculous standard of error-free financial markets.  All human institutions, including banks and even the White House, are characterized by error and mistake.  Zero mistakes is an unattainable goal in any system in which human beings are involved.  What we need is not a system free of errors, but one that is robust enough to withstand them.  And the truth is that the more small errors we have, the fewer big errors we will have.  I am far more concerned over long periods of calm and profit than I am with periods of loss.  The recent JPMorgan losses remind market participants that risk is omnipresent.  It encourages due diligence on the part of investors and other market participants, something that was sorely lacking before the crisis.”

Regulators Cracking Down on Banks Over Foreclosures

Tuesday, April 26th, 2011

Federal regulators at the Departments of Justice, Treasury and Housing, as well as the Federal Trade Commission, have ordered the nation’s largest banks to revamp their foreclosure procedures and compensate borrowers who were financially hurt by “pervasive” bad behavior or carelessness.  According to the bank regulators, failure to comply with the rules will result in fines and a broad investigation conducted by state attorneys general and other federal agencies.  The regulators acted after being criticized for not putting a halt to risky lending practices during the housing boom.

Describing the lending practices as “a pattern of misconduct and negligence,” the Federal Reserve said that “These deficiencies represent significant and pervasive compliance failures and unsafe and unsound practices at these institutions.”  Borrowers in trouble have complained that applying for a modification using the Obama administration’s program has been too complicated and characterized by multiple games of telephone tag.  Enforcement requires servicers to set up compliance programs and hire an independent firm to review residential-foreclosures.  The banks will be required to make sure that communications are more “effective” between borrowers and banks when it comes to foreclosure and mortgage-modification proceedings.

Citibank, Bank of America, JPMorgan Chase and Wells Fargo, the nation’s four leading banks, top the list of financial firms cited by the Federal Reserve, Office of Thrift Supervision and Office of the Comptroller of the Currency.  Citigroup said that it had “self-identified” desired changes in 2009 and that it has helped more than 1.1 million homeowners avoid foreclosure.  “We are committed to working with our regulators to further strengthen our programs in these areas and meeting these new requirements,” the company said.

As stern as the recent move seems to be, there are still critics.  “These consent orders are worse than doing nothing,” said Alys Cohen, staff attorney for the National Consumer Law Center.  “They set the bar so low on some things and they give the banks carte blanche on others.  And they give the appearance of doing something while giving banks control of the process.”  Additionally, consumer advocates and members of Congress said the new rules are too little, too late.

Congressional critics maintain that the order is too moderate.  House Democrats introduced legislation that would require lenders to perform specific actions, including an appeals process, before starting foreclosures.  “I want to know what abuses (the government agencies) identified, which banks committed them and how their proposed consent agreement is going to fix these problems,” said Rep. Elijah Cummings (D-MD) the ranking member of the House Government and Oversight Committee.  “Based on what I have read…I am not encouraged at all.”

More than 50 consumer groups don’t like the settlement,  and claim that the expected settlements do little more than require mortgage servicers to obey existing laws and that they lack penalties.  “They’re left to police their new improvements,” said Katherine Porter, a University of Iowa law professor who is an expert on mortgage services.  Another concern is that the settlements may weaken the ability of 50 state attorneys general to force concessions from mortgage servicers.  The attorneys general have been investigating mortgage servicers since last fall, and in March sent the companies a list of terms, which go further than those pursued by bank regulators.  Iowa Attorney General Tom Miller, who’s leading the joint effort, says any settlements with banking regulators will not “pre-empt” the states’ efforts.

Government Investigating Possible Law Violations in Foreclosure Crisis

Thursday, November 11th, 2010

 Feds are investigating foreclosure irregularities, searching for possible law violations.  The Department of Justice has opened an investigation to determine whether banks and other financial institutions broke federal law by using deceptive court documents to foreclose on homes.  Although the investigation is just underway, it will probe whether companies deceived federal housing agencies like Fannie Mae and Freddie Mac, which currently insure a large percentage of American homes.  The investigation will also examine whether firms committed wire or mail fraud in filing false documents.

The probe is intended to send the message that banks will be held accountable for illegal foreclosures.  President Barack Obama’s Financial Fraud Enforcement Task Force is also taking a look at the foreclosure mess.  “In more than 25 years dealing with major financial crisis issues, I have never seen this many agencies focused on a single issue,” said Andrew Sandler, an attorney who specializes in government investigations.  “We are beginning to see signs of extensive governmental investigation that may also have criminal law implications.”

With reports that big banks filed court documents without proper review, federal investigators want to know if similar paperwork was submitted to housing agencies to collect insurance payouts.  Bank employees have admitted to signing documents without reading them.  If similar filings occurred at the governmental agencies, that action could constitute a violation of United States law.  Although the investigation so far has no specific target, it could center on banks, independent mortgage servicers, law firms and other companies involved in the foreclosure process.  Shaun Donovan, Department of Housing and Urban Development Secretary, is working with other regulators to assure that all foreclosures are legal.  “We are working closely with others in the administration, as well as independent regulators and law enforcement agencies, in insuring that no one loses their home as a result of a mistake or criminal behavior,” Donovan said.