Carrick Mollenkamp is getting his post-WSJ days off to quite the start.
On Wednesday, he wrote, with Lauren Tara LaCapra and Matthew Goldstein, a tough Reuters story headlined “In MF Global, JPMorgan again at center of a financial failure.”
And yesterday ProPublica published a Mollenkamp investigation into Deutsche Bank’s CDO desk, “Deutsche Analyst Sounded Alarm When Asked to Alter Numbers.”
In the MF Global piece, Mollenkamp & Co. do a terrific job of trying to untangle where some of the infamous missing $1.2 billion ended up and how JPMorgan may have a good chunk of it—something which helped push the firm into bankruptcy.
JPMorgan was a big lender to MF Global and so was one of the first to see how much trouble the company was in during its last couple of weeks. MF Global drew down a $1.3 billion line of credit from a group led by JPMorgan. But press favorite Jamie Dimon’s bank was also MF Global’s clearing bank for many of its desperate asset sales. And it took its sweet time clearing the transactions so MF Global would have access to its cash. It’s unclear whether MF Global actually ever got the hundreds of millions of dollars from these sales, which implies that JPMorgan was trying to hang on to the firm’s cash long enough for it to go into bankruptcy and mitigate some of JPM’s downside. Reuters says this shows that:
The role that JPMorgan played as both a lender and middleman to MF Global illustrates the procedures banks can deploy to protect their own interests when dealing with weaker counterparties.
As Reuters’s headline says, this isn’t the first time questions have been raised about JPMorgan’s actions in a major bankruptcy:
JPMorgan, a major lender to rival firms as well as one of Wall Street’s biggest middlemen in settling trades, has previously drawn scrutiny for protecting its own interests when rival firms ran aground. In 2008, a week before Lehman Brothers Holdings Inc. sought bankruptcy protection, JPMorgan demanded collateral to protect its role as counterparty to Lehman. While the request was not improper, Lehman’s bankruptcy estate later claimed Lehman posted the collateral because JPMorgan had threatened to withhold funding.
Yves Smith further contextualizes Reuters’s reporting on MF Global:
This was not a time of generalized market stress. Goldman was clearly good for the trade. JP Morgan hanging on the money had nothing to do with that trade and everything to do with it trying to lower its credit exposure. I don’t know why there isn’t more noise about how this situation illustrates the dangers of having a bank be both a major clearing firm and a lender (ex via clearing exposures) to the same customers. Either JP Morgan should hive off its clearing business or there needs to be much stricter regulation about these conflicts of interest.
It’s also pretty clear that a lot of customer money is sitting at JP Morgan, but JP Morgan will argue in bankruptcy court that it should not have to disgorge it…
That doesn’t mean, of course, that MF Global is off the hook for misusing clients’ money. The signs are still strong that it did so.
Meantime, over at ProPublica, Mollenkamp is all by his lonesome on the byline of the Deutsche Bank story. Here’s the top:
At a time when mortgage-backed securities were imploding and customers were fleeing the market, a junior analyst at Deutsche Bank AG protested when he was asked to alter the numbers in a spreadsheet to make a Deutsche security look less risky to ratings agencies, according to a person with knowledge of the matter.
The analyst, this person said, was asked by a mid-level Deutsche executive in late 2007 to make it appear that the investment would produce more cash than the bank actually expected at certain time points.
The request came at a crucial moment. In the last months of 2007, investors had grown skittish about such investments amid signs that the housing bubble was deflating, if not bursting. Up and down Wall Street, banks were trying to persuade ratings agencies that large portions of their mortgage-backed securities merited the coveted AAA stamp, meaning that they posed negligible risks of default. The analyst was asked to alter the spreadsheets in order to get a better rating, the person said.
Two things here: First, as we get further out from the height of the bubble and financial crisis, we’re naturally seeing fewer stories about it. So hat’s off to the reporters still trying to show us what happened there, because so much of it is still untold.
Second, Mollenkamp and ProPublica are good to shine some spotlight Robert Khuzami’s way. He’s the SEC’s director of enforcement whose job during the crisis was CDO-churning Deutsche Bank’s top lawyer. As I once said, you wouldn’t hire Tom Hagen to investigate the olive-oil industry, why would you hire the top lawyer at one of Wall Street’s top CDO producers, who “oversaw Deutsche CDOs,” in the WSJ‘s words, to investigate Wall Street’s actions with CDOs and the like? The conflict is untenable no matter how upstanding Khuzami might be. It’s a conspiracy theorist’s dream come true.
Mollenkamp puts the SEC angle up high, noting that the analyst who raised questions at Deutsche has never been interviewed by the government:
But four years later, the revelation that an analyst protested raises questions about how vigorously, if at all, the government is investigating Deutsche Bank and its practices leading up to the financial crisis. In any case, ProPublica has learned, neither the S.E.C. nor any other government regulator or law-enforcement agency has interviewed the analyst.
The SEC’s director of enforcement is Robert Khuzami. Before joining the SEC in 2009, he had been Deutsche Bank’s general counsel for the Americas since 2004. He worked as one of the bank’s top lawyers during the time the analyst raised questions. Khuzami has said he would recuse himself from any actions regarding Deutsche.
Another key SEC official — George Canellos, who oversees enforcement for the New York regional office — used to be a corporate lawyer who defended Deutsche against M&T Bank Corp. M&T, which was suing Deutsche over a security similar to the one the analyst raised objections to, had sought to depose the analyst and obtain the results of Deutsche’s internal inquiry, according to people familiar with the lawsuit.
Very good stuff.
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.