In July 2012, Public Citizen stated that Blythe Masters, head of JPMorgan’s Global Commodities group, should be fired if allegations about her involvement in electricity market manipulation schemes proved true. Today, The New York Times reports, based on its review of a non-public investigative document, that staff at the Federal Energy Regulatory Commission (FERC) claim that Ms. Masters was aware of the company’s manipulation strategies, helped to conceal the schemes and lied to state and federal officials when confronted about the company’s manipulation strategies. If FERC’s reported findings prove true, JPMorgan should terminate Ms. Masters and rescind all bonuses and any other compensation it can claw back under her contract from the time the alleged manipulation and lying occurred.
In addition, if the allegations described in The New York Times article prove to be true, Ms. Masters should face criminal charges for lying under oath, and FERC should permanently revoke the company’s market-based rate authority.
In November 2012, FERC revoked JPMorgan’s market-based rate authority for six months beginning April 1, 2013, because the company provided false information in connection with the investigation into manipulation of the California electricity market. If lying is grounds for a temporary market-based rate revocation, then a finding of guilt on the underlying manipulation scheme should be grounds to permanently ban the company.
JPMorgan’s “London Whale” episode may boil down to a few senior executives attempting to increase their personal compensation.
The London Whale episode was a trading travesty in April and May of 2012 during which JPMorgan lost about $6 billion on bets it made with some $300 billion in depositor funds.
The losses spurred congressional action, culminating in the Senate’s Permanent Subcommittee on Investigations’ release of a 300-page report and 500 pages of exhibits showing a widespread miscarriage of bank management, bank supervision and integrity.
Examine what’s labeled as “Exhibit 46” in the 500 pages of subcommittee exhibits. On December 22, 2012, JPMorgan Chief Investment Officer Ina Drew directed subordinates to implement a plan to enable the bank to buy back stock. But carrying out the plan was dependent on convincing regulators that such a step would be financially prudent. In a series of emails about the whale trades, Ina Drew states that she is “trying to work with CCAR submission for firm that is acceptable for an increased buyback plan.”
In conventional terms, the committee report alleges that JPMorgan sought to manipulate how the whale trade would appear to regulators so that JPMorgan could buy back stock – an action which typically boosts a share price and thus leads to higher executive compensation.
Last Tuesday, Luis Aguilar, a commissioner for the Securities and Exchange Commission (SEC), showed that he was serious about investor protection. At an annual conference for securities regulators, Aguilar expressed his personal support for an SEC rule that would permit investors to decide how to resolve disputes with broker-dealers and investment advisors. If Aguilar’s fellow commissioners agree and the SEC adopts such a policy, investors will have the option of pursuing their legal claims in court.
Aguilar said, “[i]nvestors … should have the unencumbered right to seek redress in all available forums.” He explained,
Arbitration may be a viable option after a dispute arises and both parties knowingly agree to go into arbitration. However, my main concern with pre-dispute mandatory arbitration is the denial of investor choice; investors should not have their option of choosing between arbitration and the traditional judicial process taken away from them at the very beginning of their relationship with their brokers and advisers.
Currently, the overwhelming majority of broker-dealers and investment advisors include language in their contracts that force investors to resolve disputes against them in private arbitration. Brokerage firm Charles Schwab has raised the stakes by not only forcing individual customers to resolve disputes in arbitration, but by recently adding a provision in its investor contracts that deny customers the ability to band together in class actions against it.
The ban on class actions will harm small investors the most because many lack the resources to pursue valid claims on their own in costly arbitration. They will be unable to recover for losses resulting from all-too-frequent violations, such as misrepresentations about the nature or value of investments.
Since last Monday, Commissioner Aguilar’s statement endorsing investors’ right to seek redress in court has been making headlines in the investment community. The Investment News also agreed with Aguilar that investors should be able to choose a forum to resolve their disputes with broker-dealers and investment advisors. While Aguilar’s statement is a positive development, our work is far from complete.
In 2010, Congress expressly authorized the SEC to restrict forced arbitration between investors and broker-dealers and investment advisors as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. To protect investors, the SEC must adopt a rule to eliminate forced arbitration from these contracts.
Jon Croteau is an intern with Public Citizen’s Congress Watch division
Note: Public Citizen submitted testimony to the House Financial Services Subcommittee on Oversight and Investigations in advance of its hearing today titled “Who is Too Big to Fail: Does Dodd-Frank Authorize the Government to Break Up Financial Institutions?” The testimony is available here.
Public Citizen commends the House Financial Services Subcommittee on Oversight and Investigations for holding today’s hearing to discuss the government’s authority to break up financial institutions under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
In January 2012, Public Citizen called on the Federal Reserve and the Financial Stability Oversight Council to break up the financial behemoth Bank of America. We relied on a relatively obscure provision in the Dodd-Frank Act, Section 121, which grants financial regulators authority to mitigate the grave threat that an institution poses to U.S. financial stability. More than 30,000 people have signed our petition calling for regulators to break up the bank into pieces that are smaller, simpler and safer for market stability.
But regulators appear unwilling to use the broad authorities in their arsenal to safeguard financial stability, and the Federal Reserve Board’s three-paragraph response to our detailed petition suggests that regulators may not be taking seriously their responsibilities under Dodd-Frank.
“Too big to fail” banks not only leave the country at risk of another crippling financial crisis, but also are holding the country’s political processes hostage because of the outsized power they wield.
That was the consensus among speakers at the release of Reality Check, a book by Public Citizen’s Taylor Lincoln that seeks to remind the public that deregulation caused the economic downturn and to counter the myths that have been propagated about regulations in recent years.
Watch the video (also embedded above) featuring highlights of the discussion.
Speakers included Neil Barofsky, the former inspector general of the Troubled Asset Relief Program, former Commodity Futures Trading Commission (CFTC) Chairperson Brooksley Born, and former Rep. Brad Miller (D-N.C.).
These three former public officials are among the best equipped to evaluate risks to the economy from insufficient regulation. Barofsky went toe-to-toe with the other financial regulators in pursuit of standards to prevent fraud and steps to ensure that loan restructuring programs perform their stated purpose of helping people avoid foreclosure rather than softening the blow to the banks’ balance sheets. Born warned about the risks of financial derivatives in the 1990s, a decade before they nearly brought down the financial system. Miller sought to police subprime lending abuses long before they were widely recognized and was an outspoken champion of the creation of the Consumer Financial Protection Bureau in the 2010 Dodd-Frank Wall Street reform bill.
The panelists’ discussion about the influence of too-big-to-fail banks and the force that industry wields through its ability to offer future employment to agency and congressional staffers was packed with eye-opening – and often appalling – observations.