Banking and finance roundup

by Walter Olson on January 9, 2014

  • Still money left in that piggy bank: Justice Department shakes $1.7 billion out of J.P. Morgan because its custody wing kept handling a primary Bernie Madoff account while a distant equity desk grew suspicious of him, in what “looks a bit like a tax on bigness and integration” [Matt Levine, Bloomberg; NPR].
  • Legacy of TARP one of cronyism and lawlessness [Mark Calabria, USA Today]
  • NYT assails a couple of academics as mouthpieces for Wall Street, Felix Salmon has a bit to say about that [Reuters, EconBrowser, Bainbridge, Pirrong] Daniel Fisher on a possible tie-in with Times reporter David Kocieniewski’s earlier piece flaying Goldman Sachs over aluminum warehousing [Forbes]
  • “Court Receptive to Overturning SEC’s Conflict Minerals Disclosure Rule” [Fed Soc Blog]
  • “Target Breach — Are Dodd-Frank ‘Swipe Fee’ Price Controls to Blame?” [John Berlau, CEI "Open Market"] “Volcker Rule Overshoots Wall Street to Hit Utah” [same]
  • “CFPB and Disparate Impact” [Hester Peirce, Point of Law]
  • “It might cost you $39K to crowdfund $100K under the SEC’s new rules” [Sherwood Neiss, VentureBeat via @jerrybrito]
  • Here’s a novel proposal for corporate governance: use the rules agreed upon by the original parties to the transaction [Hodak]

{ 5 comments }

1 Allan 01.10.14 at 11:48 am

I call BS on the Madoff/JPM headline.

JPM is one company. Indeed, as the Supreme Court has said, it is a person. This is sort of like a murderer claiming he should go free because the majority of his body did not know that his finger was pulling the trigger.

Basically, to take the “corporations are people” to the extreme, the excutive managers are the brain of the people. Its constituent components are the remainder of the body. The brain knows what (or should be responsible for) the rest of the body is doing.

I think that the linked article draws the correct conclusion. 1) JPM bankers did a lousy job of flagging fraude and 2) JPM has so many moving parts, it is impossible to manage.

the article also rightly faults the regulators. However, it simultaneously notes that is no excuse for JPM’s failures.

2 nhrpolitic13 01.10.14 at 7:30 pm

“A tax on bigness and integration”?

So, if I just get big enough I don’t have to comply with the law? This sounds like “the left hand didn’t know what the right was doing” argument — and it’s an asinine argument. It’s obviously illegal for me to pour oil down a drain; does it become legal (or at least, unpunishable) if I simply become a giant corporation and claim I didn’t know what my Oil Disposal Department was doing?

The law is the law; unless you’re willing to countenance the arguments above, if the argument is simply that JPM has grown so large that it can’t comply with the law, it sounds like the argument is for JPM to become smaller, not to become exempt from the law.

3 Walter Olson 01.12.14 at 12:11 am

I will take Allan’s word for it that he actually read the linked Matt Levine piece, but I much doubt that commenter nhrpolitic13 did. One of JPM’s investment divisions developed information that, had it been shared with the distant custodial banking division, might have saved both the bank and many others from being exploited by this fraud. As Levine points out, there are plenty of sound reasons not to expect two divisions of this sort to share information routinely and not improbably regulators and business critics would soon be screaming bloody murder if they *did* routinely share it, because too many new dangers of abuse would emerge. This has nothing to do with anyone being too big to obey any laws; it is more closely analogous to the ethical questions raised in the recent flap in which Bloomberg-as-terminal-provider was found to be allowing Bloomberg-as-news-gathering-enterprise certain types of access to identifying customer data that other journalists don’t get. Supposing (ex hypothesi) that this back-channel data sharing occasionally enables Bloomberg journalists to expose serious fraud by users of the company’s terminals, many ethicists would still say, no, it raises too many dangers to wink at such data-sharing, the better rule is to ask the two divisions to behave like separate companies for this purpose.

4 Boblipton 01.12.14 at 12:59 pm

My thoughts on this subject are informed by my being a shareholder of J.P. Morgan-Chase and antecedent companies since 1988; my interest in confidence games; and the fact that I decided not to invest trust money in Madoff’s funds almost nineteen years ago, not because a meeting with him convinced me he was a crook, but because the results he claimed were so at variance to what I thought could be expected with his claimed strategies, that I thought he had found a hole in the system he was exploiting and which could close at any moment. I had no idea the hole was in the SEC’s head.

Complaints about the unlikeliness of Madoff’s results were made to the SEC as early as 1992. Indeed, at least one short seller, Harry Markopolis, was investigated for market manipulation as a result of telling the SEC what he suspected.

As for J.P. Morgan’s suspicions, I offer the analogy: my sister thinks my brother is crook. I think he’s honest but stupid. Does this mean the family thinks my brother is a crook?

To me the key documents in this current flap are the ones in which a Morgan executive writes that they don’t make billion dollar loans without a lot of paperwork, but have a quarter of a billion dollars. Absent smoking gun evidence, that is a statement that is a statement that department thought Madoff was honest.

Given the fact that almost a quarter of a million people work for J.P. Morgan Chase, there are undoubtedly people there who still think Madoff was given a raw deal and that the real villain behind the mess is the frozen brain of Walt Disney. Is J.P. Morgan Chase under obligation to report this to the relevant Federal agencies and are they not to be held responsible if it turns out to be true?

If the London branch of J.P. Morgan Chase was an independent company, would it still be under obligation to report one officer’s suspicions to the SEC? What if it were a British owned-and-operated company?

Bob

5 Allan 01.13.14 at 11:02 am

If JPMorgan wants to be big and have so many moving parts, that is its choice. But, if it does so, it should be held responsible when one part of its operations says and does one thing and a different part does another. This is especially true when one or both parts have a fiduciary or legal duty to report (I am not saying this was the case in the Madoff matter).

I guess the question is: if a company has two components (and only two) and they act like JP Morgan did, should that company be liable? If so, why should JP Morgan not be?

This is as much a business ethics problem as anything else. How can we trust JP Morgan to do the right thing for its clients when it can just shrug and say “sorry” while raking in the profits?

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