World View: Misconduct Skyrockets in Published Scientific Papers

This morning's key headlines from
  • JPMorgan execs forced to admit investor fraud in 'Whale Trades'
  • London traders versus New York management
  • Misconduct skyrockets in published scientific papers
  • U.S. will deploy missile interceptors on West Coast
  • EU split on whether to supply arms to Syria's rebels

JPMorgan execs forced to admit investor fraud in 'Whale Trades'

The Senate's Permanent Subcommittee on Investigations grilled the JPMorgan Chase executives on Friday. Most Senate committee hearings are nothing but photo ops for the Senators who sit there and give campaign speeches for the folks back home, but this hearing was different. Only two Senators asked the questions--Republican Senator John McCain and Democratic Senator Carl Levin--both from the Silent Generation of World War II survivors. 

The charges are that JPMorgan's London office lost $6.2 billion and then their NY headquarters lied to investors about it. Here are some of the things charged in the hearing: 

  • JPMorgan's London Gen-X traders (with PhDs) repeatedly violated the bank's VAR (Value at Risk) rules and models, because they thought they were smarter than anyone else.
  • When they started to get into trouble, the traders actually changed the VAR financial models with the purpose of hiding or minimizing their losses.
  • JPMorgan stopped sending reports to the regulatory agency (the Office of the Comptroller of the Currency or OCC) in order to hide problems that arose. The reports were required by law, but JPMorgan didn't bother, and the OCC didn't do anything about it.
  • JPMorgan's New York Boomer managers claimed to be just poor little victims being led like lambs to slaughter and had no idea what was going on, despite their multi-million dollar salaries.
  • In a conference call on April 13, 2012, the NY managers, including CEO Jamie Dimon, openly lied to investors when he said he had known nothing about it. In fact, he knew about and authorized the changes in the models as early as January 2012.

Carl Levin really did a sensational job of grilling the execs, especially former CFO Doug Braunstein, forcing him to admit contradictions that showed he had lied. Levin had really done his homework, studying all the detailed evidence in advance, and quickly trapped Braunstein time and time again in contradictions or half-truths. 

In one particularly hilarious moment, McCain asked Braunstein whether anyone had been punished. Braunstein indignantly said that people had been fired. Those were traders--were the managers punished? Yes, they had their salaries cut. Was your salary cut? Errrr, yes, by 50%. How much is that in dollars? Errr, well, my salary used to be $10 million, now it's only $5 million. McCain displayed an expression of revulsion. 

London traders versus New York management

The humiliation of Braunstein was fun, but the most pathetic finger-pointing came from Ina Drew, former Chief Investment Officer (CIO). She started her testimony by whining about how tough her job was to run a large organization, while she was also a mother and took care of her kids. Levin asked her about the new VAR financial models that the London traders used to hid their losses. The new models were designed by Patrick Hagan, and they wasn't tested or questioned by the tradrers. Here's my transcription: 

LEVIN: The VAR model - the new one - depended on analyzing a daily stream of new trading data. Instead of constructing an automated data base, that automatically would feed the trading data into a VAR model, Mr. [Patrick] Hagan, the model designer, PhD, was stuck with having to manually enter the trading data every night, using spreadsheets that had calculation and formula errors. In other words, the new key VAR model, for the CIO's $350 billion portfolio, including the synthetic credit portfolio, was being run manually, using error prone spreadsheets with operational flaws. 
Ms. Drew, why did the bank model review that approved the VAR say -- why did they approve the VAR, knowing that there were problems, and then allow it to operate in such a shoddy fashion? 
DREW: It's very disappointing. I have no idea. the risk modeling group is an independent group staffed by very well trained and educated PhDs, who run the models, and certainly very disappointed that it was not reviewed properly, and delivered to me in poor form. 
LEVIN: Did Mr. Hagan work for your group?
DREW: He did, in London.

What we're seeing here is exactly the same pattern that I've described and documented many times as causing the financial crisis: 

  • The Gen-Xers, with Masters degrees or PhDs in financial engineering, think they're smarter than everyone else in the world, especially their bosses, who they think are contemptible. They think that this gives them the right to defraud anyone they want. This is something I've seen several times in the computer industry, and reported on many times in the financial services industry. This is the Generation-X culture.
  • The Boomer bosses pretend that they don't know what's going on, even though the financial results they're getting are often mathematically impossible unless fraud is occurring, and even though the Boomer bosses make multi-million dollar salaries and are paid to know. These bosses either did know, and they're lying, or they should have known, and looked in the other direction. (See "Financial Crisis Inquiry hearings provide 'smoking gun' evidence of widespread criminal fraud" from 2010.)

I've been reporting on this pattern for years. For example, this is what happened in the Libor fraud cases at Barclays, RBS, and other banks. Or perhaps, Dear Reader, you happened to see the report on 60 Minutes a couple of weeks ago, where a Framingham, MA pharmaceutical supply house ignored government regulations and shipped medical products that sickened and killed hundreds of people from meningitis.

The situation at JPMorgan Chase did not occur 8 years ago. It occurred last year, in 2012. What we see again is what I call the "Metastasis of Corruption," where the illegal activities begin with a few Gen-Xers, and then spread to wherever there's money or political power, like a cancer that spreads to wherever there's rich tissue. This is why I keep telling you, Dear Reader, that the same people are in the same jobs, or in Washington or on Wall Street, still finding new ways to defraud you, so wrapped up in their own lies that they're no longer even capable of distinguishing truth from fiction. Bloomberg and Senate Investigation Committee and CBS 60 Minutes

Misconduct skyrockets in published scientific papers

In another example of surging fraud, a study of 2,047 papers that had been published in biomedical journals and later retracted, the researchers found that the retractions were not due to simple errors, but in 67% of the cases were due to misconduct -- fraud, suspected fraud, duplicate publication, and plagiarism. The number of retractions began to skyrocket in 2005, which is exactly the same time that corruption and fraud in financial institutions began to skyrocket. 

Once again, I've seen this kind of fraud and corruption personally in the computer industry, and I've reported on in financial services and in media and in Washington many, many times. Nothing like this was true in the 1990s, but today there is literally no aspect of life in America anymore that isn't polluted with fraud and corruption. The only "good news" is that the same thing is true in China, and probably worse. Proceedings of National Academy of Sciences and

U.S. will deploy missile interceptors on West Coast

Because of threats by North Korea and Iran to attack the United States with long-range missiles, the Dept. of Defense announced on Friday that the U.S. will deploy additional ground-based missile interceptors (GMIs) on the West Coast. In response to a criticism that such interceptors have not been proven to work, Secretary of Defense Chuck Hagel said: 

We certainly will not go forward with the additional 14 interceptors until we are sure that we have the complete confidence that we will need. But the American people should be assured that our interceptors are effective.

The deployment will be completed by 2017. An early warning system will also be deployed in Japan. 

I'm going to guess (or perhaps hope) that these interceptors will also be effective against the greater threat of Chinese missiles. Washington Post

EU split on whether to supply arms to Syria's rebels

France and Britain are advocating an end to the European Union embargo on arms to Syria, and supplying arms to the anti-regime rebels. The proposal generated heated discussion over fears that any arms supplied to the rebels would fall into the hand of al-Qaeda linked terrorists. If no agreement can be reached by the EU, then France and Britain may supply arms on their own. BBC

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