Jamie Dimon, chairman and CEO of JP Morgan Chase & Co. (AP Photo/Mark Lennihan)
In the spring of 2012, JP Morgan Chase CEO Jamie Dimon appeared before the Senate Banking Committee, where nearly all the senators present approached him as a supplicant would approach an altar. Last week, after a damning report from the Senate’s Permanent Subcommittee on Investigations and a hearing led tirelessly by Senator Carl Levin, it became clear what a false, deceptive and manipulative set of gods Washington has been worshipping.
Even in the wake of the financial crisis, the bailouts and ongoing bank malfeasance, Washington has remained deferential to the financial industry. Regulators parrot the industry’s talking points and use them as an excuse to water down important parts of the Dodd-Frank Wall Street Reform and Consumer Protection Act. And congressional representatives on both sides of the aisle continue to introduce bills to slowly gut Dodd-Frank.
What has JPMorgan Chase been doing while Washington is so dutifully doing its bidding? In the words of the stunningly comprehensive subcommittee report, JPMorgan Chase “manipulated models; dodged OCC oversight; and misinformed investors, regulators, and the public about the nature of its risky derivatives trading.” Lest you think this is all, rest assured that there is more: JPMorgan was also hiding losses and ignoring its own internal warnings that risk was increasing dramatically.
The deceptions and dodges detailed in the report occurred primarily in a group called the Chief Investment Office (CIO). The CIO, according to JPMorgan, is tasked with investing what are called “excess deposits.” This is customer money that has not been loaned out elsewhere. Typically, banks will invest excess deposits in very safe products that are easy to trade in and out of in the event that customers take their money out. JPMorgan had $350 billion in excess deposits managed by the CIO group by the end of 2012—an amount that, the subcommittee report points out, “would make the CIO alone the seventh-largest bank in the country.”
Rather than invest this massive amount of customer money in something benign like treasuries (debt issued by the government), the CIO group created a new portfolio (think of a portfolio as a collection of trades) called the Synthetic Credit Portfolio. And it began to gamble in complicated, rare and infrequently traded (a k a “illiquid”) derivatives. By the first quarter of 2012, this portfolio had amassed $157 billion worth of trading positions (a position is a trade you still own, and have not yet closed out). And the positions the group had accumulated were so large for the markets that it trades in that people began to speculate about who this “London Whale” trader could be.