This morning's key headlines from GenerationalDynamics.com
- 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
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
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"
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
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 newswise.com
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
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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