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JPMorgan Chase Franklin International: JPMorgan Is Penalized $2 Billion Over Madoff

JPMorgan Chase Franklin International: JPMorgan Is Penalized $2 Billion Over Madoff | Chase Franklin |
1 discussion post. Chase said: Updated, 9:37 p.m. | Two men who occupy coveted roles in Manhattan’s power elite, one the city’s top federal prosecutor an...
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Updated, 9:37 p.m. | Two men who occupy coveted roles in Manhattan’s power elite, one the city’s top federal prosecutor and the other its top banker, sat down in early November to discuss a case that was weighing on them both.


Preet Bharara, the United States attorney in Manhattan, and Jamie Dimon, the chief executive of JPMorgan Chase, gathered in Lower Manhattan as Mr. Bharara’s prosecutors were considering criminal charges against Mr. Dimon’s bank for turning a blind eye to the Ponzi scheme run by Bernard L. Madoff. Mr. Dimon and his lawyers outlined the bank’s defense in the hopes of securing a lesser civil case, according to people briefed on the meeting.


But at the cordial meeting in Mr. Bharara’s windowless conference room lined with law books, the prosecutors would not budge. Mr. Bharara — flanked by his own lieutenants, including Richard B. Zabel and Lorin L. Reisner — made it clear that he thought the wrongdoing was significant enough to warrant a criminal case.


On Tuesday, Mr. Bharara announced the culmination of that case, imposing a $1.7 billion penalty stemming from two felony violations of the Bank Secrecy Act, a federal law that requires banks to alert authorities to suspicious activity. The prosecutors, calling the amount a record for violating that 1970 federal law, will direct the money to Mr. Madoff’s victims.


The outcome of the case and the tenor of the settlement talks underscore the significant leverage prosecutors wield when negotiating with Wall Street’s biggest firms. Even though JPMorgan had defeated a similar private lawsuit just months earlier, bank executives were unwilling to gamble against the government.

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Steep Penalties Taken in Stride by JPMorgan Chase Franklin International

Steep Penalties Taken in Stride by JPMorgan Chase Franklin International | Chase Franklin |
JPMorgan Chase has agreed to pay $20 billion the last year to settle legal cases filed by the government, an amount that doesn’t seem to have strained the bank much at all.
Lillian G. Long's insight:

To settle a barrage of government legal actions over the last year, JPMorgan Chase has agreed to penalties that now total $20 billion, a sum that could cover the annual education budget of New York City or finance the Yankees’ payroll for 100 years.


It is also a figure that most of the nation’s banks could not withstand if they had to pay it. But since the financial crisis, JPMorgan has become so large and profitable that it has been able to weather the government’s legal blitz, which has touched many parts of the bank’s sprawling operations.


The latest hit to JPMorgan came on Tuesday, when federal prosecutors imposed a $1.7 billion penalty on the bank for failing to report Bernard L. Madoff’s suspicious activities to the authorities.


Yet JPMorgan’s shares are up 28 percent over the last 12 months. Wall Street analysts estimate that it will earn as much as $23 billion in profit this year, more than any other lender. And JPMorgan’s investment bankers, who on average earned $217,000 in 2012, can look forward to another lush payday as bonus season approaches.


“The fines have been manageable in the context of the bank’s earnings capacity,” Jason Goldberg, a bank analyst at Barclays, said. “It makes $25 billion in revenue per quarter and has record capital.”


“JPMorgan failed — and failed miserably,” Preet Bharara, the United States attorney in Manhattan, said on Tuesday in announcing the action.


As much as such words might sting at first, the bank’s shareholders and clients show every sign of remaining loyal. JPMorgan’s financial success highlights a deep quandary that regulators have to grapple with as they press the largest banks to clean up their acts. The government’s penalties may seem large on paper — JPMorgan’s mortgage settlement with the Justice Department last year cost it a record $13 billion — but the largest banks seem capable of earning their way out of serious legal trouble.


“JPMorgan’s shareholders may believe these billions of dollars don’t count because they see them as extraordinary expenses,” said Erik Gordon, a professor at the University of Michigan Law School. “But they keep popping up one after another — and the bank could have done something about them.”


One reason that JPMorgan can absorb the $20 billion is that it has steadily set aside reserves over the last few years to finance future legal payouts. Mr. Goldberg, the bank analyst, estimates that, as of last year’s third quarter, JPMorgan had injected $28 billion into its legal reserves since the end of 2009. The legal payouts that have been subtracted from the reserves, including those booked since the third quarter, might have taken the reserve down to about $10 billion. Most analysts expect JPMorgan will be able to cover any remaining settlements, though the bank said on Tuesday that it might have to set aside an extra $400 million for the Madoff settlement.


In theory, regulators have other ways of improving ethics at banks. They can try to hold more individuals personally accountable. Some senior executives have left JPMorgan as a result of recent scandals at the bank, including the so-called London whale incident, in which the bank’s traders lost more than $6 billion on botched derivatives trades. In recent months, the bank has also added two members to its board to improve oversight.


But facts contained in the government’s Madoff action suggest that efforts to hold executives responsible may go only so far.


The action describes how the chief risk officer of JPMorgan’s investment bank allowed the bank to increase its financial exposure to a Madoff entity in 2007 to $250 million. The risk officer had spoken with Mr. Madoff but approved the increase even though Mr. Madoff appeared to make it clear that he would not answer more probing questions about his firm. The government’s action says that the risk officer understood that Mr. Madoff “would not authorize any further direct due diligence of Madoff Securities.” The risk officer, John Hogan, still works at JPMorgan as chairman of risk.


“Our senior people were trying to do the right thing and acted in good faith at all times,” Brian J. Marchiony, a JPMorgan spokesman, said in a statement. The bank also said, “We recognize we could have done a better job pulling together various pieces of information and concerns about Madoff from different parts of the bank over time.”


Still, some banking experts say they think that companies like JPMorgan are so large and complex that it might be almost impossible to keep all employees in line.


“With respect to the big banks, it is not so much a culture problem but a complexity problem,” said Kurt N. Schacht, a managing director at the CFA Institute, an organization that promotes ethics and standards at financial firms. “We think these firms are so large that they are always going to be plagued by rogue operators.”


As a result, breaking up the banks to make them smaller might improve their cultures, some bank specialists contend.


“I think JPMorgan is too big to manage and it should be broken up,” said Paul Miller, a bank analyst at FBR Capital Markets. The London whale incident, he said, showed that some employees at large banks may still try to maximize their compensation at the expense of the firm. “There is too much of an incentive for an individual to cut corners.”

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