PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay. And welcome to this week’s edition of The Lascaris Report on Finance.
Now joining us from London, Ontario, is Dimitri Lascaris. He’s a lawyer, practices in New York and the province of Ontario. He was previously a securities lawyer for a big Wall Street firm in New York and Paris.
Thanks for joining us, Dimitri.
DIMITRI LASCARIS, SECURITIES CLASS ACTIONS GROUP, SISKINDS LLP: Good to be back, Paul.
JAY: So you’ve been following the JPMorgan case. What’s happening?
LASCARIS: Well, it all of course rolls around the central figure in the JPMorgan saga, a person I like to refer to as the boy wonder, Jamie Dimon. And the reason why I refer to him as the boy wonder is because there has been a perception about him up until very recently that he was perhaps of all the CEOs of major banks the one who was most successful in avoiding the worst effects of the financial crisis as the CEO of JPMorgan.
What’s not talked about so much in the financial press is that there are credible reports that before the markets really began to take a beating in 2007 and 2008, JPMorgan took a quite significant hit in connection with the bankruptcy of a company called Delphi, and that more or less by chance caused JPMorgan to become rather conservative relative to its competitors from a risk perspective just before the real problems began to materialize in the financial market.
But whatever the reasons may have been for JPMorgan escaping the worst effects of the financial crisis, it was in fact the one major institution which seemed to be most successful in navigating its way through the crisis. And as a result, JPMorgan, and in particular Mr. Dimon, earned considerable plaudits from the political class. In fact, President Obama has not been shy about expressing admiration for his skills as a manager of risk, almost to a sycophantic degree, and has continued to do that, remarkably, even as a crisis has enveloped JPMorgan and Mr. Dimon and even as Mr. Dimon has been critical of the Obama administration’s approach to financial regulation.
And this crisis really began to unfold a couple of years ago, or about 18 months ago, when there were rumors swirling in the United Kingdom about a trader, a JPMorgan trader who became known as the London Whale. His real name is Bruno Iksil.
The term whale, by the way, comes from the gambling industry. Whales are those persons who wager enormous amounts of money, enough to make or break a casino. And the reason why Mr. Iksil began to garner attention within the financial press is because his bets, his wagers were so large that he was actually by himself able to move prices within the financial markets of various derivative products.
When this became known to the financial press and they began to ask Mr. Dimon about it, he was quite dismissive initially and referred to it as a tempest in a teapot, but then within a matter of weeks or months was forced to disclose, with considerable embarrassment, that Iksil’s trades were going to result in a loss to JPMorgan of at least $2 billion and perhaps significantly more. Over the ensuing months, it became clear that the losses were going to be a multiple of that. Some thought they would go as high as $9 billion. Ultimately, they appear to have resulted—or these trades appear to have resulted in losses of about $6 billion.
And even more significantly from the perspective of, you know, those of us who practice in the area of securities law, JPMorgan was forced to restate a quarter’s worth of financial results, and in that restatement reduced its reported results by hundreds of millions of dollars and revealed what are known to securities regulators as weaknesses or material weaknesses in internal controls. This is quite significant from a liability perspective, because after the Enron scandal and the bursting of the tech bubble back in 2001, the Bush administration, of all administrations, adopted a law, or with the assistance of Congress adopted a law known as Sarbanes-Oxley. That law required that senior executives—the CEO and the CFO—of public corporations certify certain things, including the adequacy of the company’s internal controls. Mr. Dimon in his capacity as the CEO of JPMorgan had certified the adequacy of the company’s controls quarter after quarter, and then suddenly, after he had dismissed these rumors as a tempest in a teapot, had to admit that in fact there was a material weakness in the company’s internal controls.
JAY: So, I mean, it suggests that he actually didn’t know they were $6 billion. In fact, it suggests he actually had no idea what size—what was actually going on.
LASCARIS: Well, either he certified that he had conducted enough diligence to satisfy himself that the internal controls were adequate and just screwed up, or the other more nefarious possibility is that he had just simply misrepresented knowingly that the controls were adequate and had hoped that somehow they were going to be able to smooth over the results in the future and effectively sweep under the rug what had happened in the context of these enormous trades. At the end of the day, clearly JPMorgan has now made material misrepresentations to the public. That’s implicit in any restatement of a company’s financial statements. The company has now become embroiled in litigation.
But what I think is most remarkable is that as all of this has been going on—and by the way, this has resulted in a Senate investigation, the results of which were released a few weeks ago, and they were extraordinarily damning, in some respects far worse than any observers had imagined. For example, the Senate investigation revealed that as the losses began to accumulate in these enormous trades, the traders at JPMorgan who were conducting the trades were accorded the responsibility of valuing them for financial reporting purposes, and they altered without disclosing it the methodology by which they were valuing the trades or the derivative products. And this resulted in a more favorable presentation of how these products were performing than would have been presented to the public if they had simply maintained the system of evaluation that had been put in place previously. You know, that suggests concealment, conscious concealment of the truth.
And the question really is not whether it happened at this stage, if the Senate report is to be believed; the question is who knew about it. And it may very well go all the way to the top. And so Mr. Dimon, the boy wonder of American finance, is under intense scrutiny.
And in the context of all of this, Barack Obama is called upon to appoint a replacement for Mary Schapiro as head of the Securities and Exchange Commission. And there were a lot of very qualified candidates out there, people who would have, I think, taken enforcement at the SEC to a much needed higher level. One such person, for example, would have been Neil Barofsky, who had been appointed as the inspector general in respect of TARP. That was the program that was set up by Hank Paulson and George Bush at the height of the financial crisis to support banks that were on the brink of collapse.
Other very qualified candidates were out there, but he chose an individual by the name of Mary Jo White. Mary Jo White had been a prosecutor in the southern district of New York, which is where most of the banks are headquartered back, I think, in the late ’90s, early 2000s. But she left her position as a prosecutor, as many in her position have done over the years, regrettably, to become a Wall Street defense attorney at a firm called Debevoise & Plimpton, and in that capacity earned very considerable compensation. I think in her last year before her appointment to run the SEC she earned $2.4 million. And remarkably, while she was a defense attorney at Debevoise & Plimpton, she actually acted for JPMorgan.
Her husband, by the way, John White, is or was a senior partner at Cravath, Swaine & Moore, one of the whitest of white-shoe law firms in New York City. And even though all of the partners at Cravath, Swaine & Moore historically have been equity partners, when Mary Jo White was nominated to be the head of the SEC, he did something that had not previously done in the history of the firm: he became a non-equity partner. From my perspective, that really was trying to paper over some very significant questions about whether she could be called upon to act independently in that role, you know, while her husband was in effect representing the very institutions who are under the scrutiny or the supervision of the SEC.
But in any event, Ms. White has now been appointed to run the SEC. And when she was put up for that position—and this shouldn’t surprise anybody—Mr. Dimon described her as the perfect choice. Those were his words.
Now, one ought to ask what is wrong with this picture when the CEO of a major financial institution identifies somebody who’s succeeding to that position as the perfect choice, when she has previously represented the very bank at which he is the CEO, and he does that at a time when the bank and he himself are under intense scrutiny for potential violations of the securities laws.
This is precisely what is wrong with regulation, and in particular securities regulation, in the United States, although it’s by no means confined to securities regulation. The same problem exists in the context of environmental regulation, bank regulation. There is a revolving door between the private sector, lucrative employment within the private sector and the regulatory bodies that are charged with supervising the activities, overseeing the activities of organizations such as JPMorgan. And until that problem gets rectified, you’re going to see incidents like the London Whale debacle causing, you know, massive harm to investors and consumers throughout the U.S. economy.
JAY: Well, the thing is that the Dimons and that whole financial sector have become so powerful and so powerful politically that they get—I mean, they’re controlling not just the regulatory—who gets appointed to the regulatory authorities; they more or less seem to be appointing who becomes secretary of the Treasury, and President Obama’s administration seems up to his eyeballs in all of this.
LASCARIS: Of course. And, you know, as I’ve indicated, as I’ve discussed with you previously, you’ve discussed with many others on The Real News, Obama’s campaign, the financing of his campaigns was heavily dependent on the generosity of Wall Street. And, you know, as I indicated earlier, I think it’s astounding that even as this crisis was unfolding and real questions were being raised, serious and legitimate questions about the integrity of JPMorgan’s financial reporting and the accuracy of statements that Mr. Dimon had made to the public, such as this was nothing but a tempest in a teapot, even as that was going on, even as he was criticizing himself, the tepid attempts of the Obama administration to increase bank regulation, Obama was expressing admiration for his supposed skills as a manager of risk and had identified him as being one of the most admirable, successful, and intelligent senior managers of any financial institution in the United States. You know, it rose almost to the level—or sunk, I should say, to the level of a sycophancy. And I think there’s a clear connection between that attitude and the financing of political campaigns in the United States.
JAY: Alright. Thanks for joining us, Dimitri.
LASCARIS: My pleasure.
JAY: And thank you for joining us on The Real News Network.