The race for Treasury Secretary Tim Geithner’s replacement was a dead heat as recently as late last summer. Two financial services thoroughbreds – Jon Corzine and Jamie Dimon – were touted as equally likely candidates. Only a scratch or a spectacular mid-race collapse would disqualify either of them from serious contention.
The Treasury Secretary buzz for Jon Corzine was so strong MF Global juiced the bonds his comeback firm issued in August with special terms in the event he was selected. Investors would receive a higher interest rate if Corzine, viewed by the markets as indispensable to MF Global’s success, had to leave his Chairman, CEO, and (now we know) Chief European Sovereign Debt Trader position to serve the President.
Jamie Dimon, CEO of JP Morgan Chase, has successfully sustained the myth, even in the wake of new claims by mortgage bondholders, that his bank is “facing fewer mortgage problems than competitors,” according to The Wall Street Journal. Despite the fact that Bear Stearns/EMC and Washington Mutual – originators, securitizers, and servicers JP Morgan Chase inherited during the crisis – face huge amounts of litigation, Dimon’s charm has so far insulated his bank from the kind of investor skepticism plaguing Citigroup and Bank of America.
It’s not a stretch to imagine that Jon Corzine’s days as a wealthy free man may be numbered. The longer the mystery of the missing MF Global $1.2 billion goes on, the more we see him bob and weave in front of angry legislators, the more arrogant and entitled his excuses for knowing nothing sound, the more likely it is prosecutors will make him the poster boy for criminal prosecutions of Wall Street banksters.
Until recently Corzine was viewed as untouchable given his gold-plated, triple-crown of former titles – Senator, Governor, and Goldman Sachs CEO. He has also been one of the Democratic Party’s and President Barack Obama’s staunchest political and financial supporters. Last month he made back-to-back appearances in the Senate and the House where, instead of pleading the Fifth, he hemmed and hawed, neither admitting nor denying responsibility while claiming no knowledge of anything that went on at MF Global outside the range of his Blackberry and the Bloomberg screen.
Last week the rollback of support for Corzine from the Obama administration began. According to BusinessWeek, “Corzine was one of 41 donors who bundled more than $500,000 this year for Obama’s re-election effort, according to documents released by the campaign Oct. 14.” On Dec. 24 the magazine reported that President Obama’s re-election campaign returned $70,000 of Corzine’s personal campaign contributions.
So my first prediction is an easy one: This is the beginning of the end for Corzine. It’s gloves-off time. Look for an indictment by the Department of Justice’s Preet Bharara before the end of 2012 for criminal misappropriation of customer funds at MF Global.
My next prediction isn’t so obvious.
I think the Obama administration will pull Jamie Dimon down along with Jon Corzine.
They’ll do this to regain momentum with working-class voters—the 99%. Winning the November election, less than a year away, will require a significant show of prosecutorial force against banks and senior executives yet to be held accountable for the impact of the financial crisis on the middle class.
Jamie Dimon will have the misfortune, I believe, of catching a significant amount of fallout from the MF Global mess. As MF Global’s primary banker, JPMorgan Chase has been consistently accused in the media and by the attorney representing a customer coalition of taking advantage of the firm’s vulnerable financial state. Bloomberg News reported that the MF Global trustee said “certain” actions of JP Morgan Chase “are likely to be the subject of investigation.”
What JP Morgan Chase may have allowed – the use of customer funds to meet MF Global’s corporate obligations – is something JP Morgan was recently severely sanctioned for in the U.K. The bank’s London unit was fined a record 33.3 million pounds by the FSA, Britain’s financial regulator, for commingling client funds in its futures operation.
Dimon’s bank was also Bernie Madoff’s main bank. The trustee liquidating Madoff’s firm filed a revised lawsuit against the bank in June demanding a minimum of $19 billion in damages. JPMorgan Chase “was an active enabler of the Madoff Ponzi scheme,” The New York Times quoted David Sheehan, the attorney for Madoff bankruptcy trustee Irving Picard, as saying in June. The bank’s executives “not only should have known that a fraud was being perpetrated, they did know,” according to the statement from Sheehan.
In November a judge tossed out the claim against the bank, saying the trustee had no standing to bring claims on behalf of Madoff's clients. It could do this only for the bankrupt Madoff firm, the judge said. Picard, the trustee, plans to appeal because, as the Journal reported, the claims were reduced by billions. The trustee said he had “no choice but to appeal.”
In July, JP Morgan Chase agreed to pay $228 million in restitution and disgorgement in a settlement with the U.S. Department of Justice in which the bank “admit[ted], acknowledge[d] and accept[ed] responsibility for illegal, anticompetitive conduct by its former employees ... from 2001 through 2006, [when] certain former JPMorgan employees at its municipal derivatives desk, entered into unlawful agreements to manipulate the bidding process and rig bids on municipal investment and related contracts.”
Financial crisis litigation chickens have also come home to roost for JP Morgan Chase.
The bank and Jamie Dimon must answer to the OCC for faulty foreclosures related to the two firms picked up as a bargain during the crisis – Bear Stearns/EMC and Washington Mutual. As I write this, Deloitte, the former auditor to Bear Stearns and Washington Mutual, is the “independent” consultant reviewing the foreclosure process and working on an estimate of JPMorgan’s financial exposure to borrowers.
JP Morgan Chase is still subject to negotiations with the state attorneys general who are pursuing their own multibillion dollar settlement with the top mortgage servicers over foreclosures. The banks have yet to sign on to any final agreement and so the check is still blank.
In April, the bank agreed to pay $56 million to settle claims in a class action lawsuit brought by soldiers over improper foreclosures of military families’ homes.
New York City Comptroller John C. Liu (who himself is under investigation over dubious campaign financing practices) and the NYC Pension Funds recently filed shareholder proposals calling on the boards of JP Morgan and two other financial services boards to “hold senior executives financially accountable for losses that result from excessive risk-taking or improper or unethical conduct.” JPMorgan has paid, according to the Comptroller, more than $100 million over the past 18 months to settle state or federal charges in connection with mortgage securities.
The Federal Housing Finance Agency, the conservator of Fannie Mae and Freddie Mac, filed suit in September against 17 domestic and foreign banks, including J.P. Morgan Chase. The banks “falsely represented” the quality of the loans that were bundled into securities and sold to investors and “significantly overstated the ability of the borrower to repay their mortgage loans,” FHFA was cited as claiming in The Washington Post. JPMorgan Chase faces claims for selling $33 billion worth of fraudulent securities to the GSEs.
There’s more MBS exposure for JP Morgan Chase, but perhaps the biggest mistake Dimon made came right before Christmas when he joined the ranks of the rich in denouncing protesters and those hostile toward the privileged 1%. Bloomberg reports: “Jamie Dimon, the highest-paid chief executive officer among the heads of the six biggest U.S. banks, turned a question at an investors’ conference in New York this month into an occasion to defend wealth.”
With everything Dimon and JP Morgan Chase are facing, lunching with guys like Stanley Marcus who refer to OWS protesters as “imbeciles” was not the smartest PR move.
Francine McKenna writes the blog re: The Auditors, about the Big Four accounting firms. She worked in consulting, professional services, accounting and financial management for more than 25 years.