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 theJPMorgan Chase executives on Friday. Most Senate committee hearings arenothing but photo ops for the Senators who sit there and give campaignspeeches for the folks back home, but this hearing was different.Only two Senators asked the questions–Republican Senator JohnMcCain and Democratic Senator Carl Levin–both from the SilentGeneration 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. Hereare 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 admitcontradictions that showed he had lied. Levin had really done hishomework, studying all the detailed evidence in advance, and quicklytrapped Braunstein time and time again in contradictions orhalf-truths.
In one particularly hilarious moment, McCain asked Braunstein whetheranyone had been punished. Braunstein indignantly said that people hadbeen fired. Those were traders–were the managers punished? Yes,they had their salaries cut. Was your salary cut? Errrr, yes, by50%. How much is that in dollars? Errr, well, my salary used to be$10 million, now it’s only $5 million. McCain displayed an expressionof revulsion.
London traders versus New York management
The humiliation of Braunstein was fun, but the most patheticfinger-pointing came from Ina Drew, former Chief Investment Officer(CIO). She started her testimony by whining about how tough her jobwas to run a large organization, while she was also a mother and tookcare of her kids. Levin asked her about the new VAR financial modelsthat the London traders used to hid their losses. The new models weredesigned by Patrick Hagan, and they wasn’t tested or questioned by thetradrers. Here’s my transcription:
LEVIN: The VAR model – the new one – depended onanalyzing a daily stream of new trading data. Instead ofconstructing an automated data base, that automatically would feedthe trading data into a VAR model, Mr. [Patrick] Hagan, the modeldesigner, PhD, was stuck with having to manually enter the tradingdata every night, using spreadsheets that had calculation andformula errors. In other words, the new key VAR model, for theCIO’s $350 billion portfolio, including the synthetic creditportfolio, was being run manually, using error prone spreadsheetswith 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 modelinggroup is an independent group staffed by very well trained andeducated PhDs, who run the models, and certainly verydisappointed that it was not reviewed properly, and delivered tome 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 describedand 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 iswhat happened in the Libor fraud cases at Barclays, RBS, and other banks.Or perhaps, Dear Reader, you happened to see the report on 60 Minutesa couple of weeks ago, where a Framingham, MA pharmaceuticalsupply house ignored government regulations and shipped medicalproducts that sickened and killed hundreds of people from meningitis.
The situation at JPMorgan Chase did not occur 8 years ago. Itoccurred last year, in 2012. What we see again is what I call thefew Gen-Xers, and then spread to wherever there’s money or politicalpower, like a cancer that spreads to wherever there’s rich tissue.This is why I keep telling you, Dear Reader, that the same people arein the same jobs, or in Washington or on Wall Street, still findingnew ways to defraud you, so wrapped up in their own lies that they’reno 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 hadbeen published in biomedical journals and later retracted, theresearchers found that the retractions were not due to simple errors,but in 67% of the cases were due to misconduct — fraud, suspectedfraud, duplicate publication, and plagiarism. The number ofretractions began to skyrocket in 2005, which is exactly the same timethat corruption and fraud in financial institutions began toskyrocket.
Once again, I’ve seen this kind of fraud and corruption personally inthe computer industry, and I’ve reported on in financial services andin media and in Washington many, many times. Nothing like this wastrue in the 1990s, but today there is literally no aspect of life inAmerica anymore that isn’t polluted with fraud and corruption. Theonly “good news” is that the same thing is true in China, and probablyworse. 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 Stateswith long-range missiles, the Dept. of Defense announced on Fridaythat the U.S. will deploy additional ground-based missile interceptors(GMIs) on the West Coast. In response to a criticism that suchinterceptors have not been proven to work, Secretary of Defense ChuckHagel said:
We certainly will not go forward with the additional14 interceptors until we are sure that we have the completeconfidence that we will need. But the American people should beassured that our interceptors are effective.
The deployment will be completed by 2017. An early warning systemwill also be deployed in Japan.
I’m going to guess (or perhaps hope) that these interceptors will alsobe 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 embargoon arms to Syria, and supplying arms to the anti-regime rebels. Theproposal generated heated discussion over fears that any arms suppliedto 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 maysupply arms on their own. BBC