The New York Times looks at a lawsuit over conflicts of interest at JPMorgan and how the bank covered its own flank—and made a couple billion dollars—while letting its clients lose hundreds of millions of dollars. It’s interesting stuff.
Louise Story expands on an October story she wrote on how JPMorgan made bets with other people’s money that it could profit from but couldn’t lose on. In it she looked at how JPMorgan made out in the collapse of the Sigma structured investment vehicle while its pension-fund clients got hosed:
JPMorgan had inside knowledge of Sigma, because the bank had helped finance it. But Sigma collapsed after JPMorgan pulled out to protect itself.
“They sensed there were problems with these investments, but they didn’t tell the clients,” said one of the former employees. “They knew all along: we’ve got the out — the losses are yours.”
Today the NYT uses documents unsealed in a lawsuit against JPMorgan to show that concerns about Sigma and the bank’s conflict on it made it all the way to press favorite CEO Jamie Dimon’s desk.
Basically, you have JPMorgan Asset Management putting half a billion dollars of its clients’ money into the Sigma SIV in June 2007, just a couple of months before that market started to crater. Sigma itself went bust fifteen months later and the clients lost almost all of their investment. But JPMorgan made $1.9 billion lending money to the troubled Sigma.
JPMorgan says that, by law, one hand can’t know what the other hand is doing—that Chinese walls separated asset management from its lending operation.
But Story’s smart angle here is that the executives in the C-suite sure knew what both hands were doing.
But because the information rose to executives who oversee the entire company and were in a position to intervene, analysts say the issue is trickier.
“In one sense, I don’t think it’s good enough to say, ‘We’re a large organization, we can’t relay information.’ That, in many respects, is a cop-out,” said William Fitzpatrick, a banking analyst at Manulife Asset Management, a Canadian insurance company that is not party to the case. “Does Jamie Dimon have some sort of veto power where he can overrule it? That gets very gray.”
And they didn’t do anything to prevent their clients, to whom they had a fiduciary duty, from losing their shirts. The question is: Which of the executives, if any who knew about this had a fiduciary duty to the bank’s clients?
The bank’s chief risk officer, John Hogan, wrote back that JPMorgan needed to protect its own position and not worry about what its clients were invested in.
At the very least it looks very bad for JPMorgan and Dimon.
And a tip of the cap to the Times for putting the documents online.
Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR’s business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu. Follow him on Twitter at @ryanchittum.