The Financial Landscape: Small Wins for Unions, Greece; A 'Small' Hit for JPMorgan
By Eamon MurphyPosted 9:30AM 06/22/11
http://www.dailyfinance.com/2011/06/22/the-financial-landscape-small-wins-for-unions-greece-a-small/
In part:
Now JPMorgan Chase & Co (JPM) has announced its agreement to pay $153.6 million to settle SEC charges "that it misled investors about a mortgage securities transaction just as the nation's housing market was starting to plummet."
As Bloomberg explains, "The company, the only major Wall Street bank to remain profitable throughout the financial crisis, didn't tell investors that hedge fund Magnetar Capital LLC helped pick assets linked to a synthetic collateralized debt obligation in 2007." Magnetar, like Paulson, was looking for subprime mortgage-backed CDOs to short.
When the Goldman case was announced, one line of defense was that the parties on the other side of the Abacus deal (i.e., a German and a Dutch bank) were "sophisticated investors" who ought to have been able to assess the risk of the investments even without disclosure of Paulson's role. The investors defrauded by JPMorganSecurities LLC (the company's brokerage unit) include Thrivent Financial, a membership organization for Lutherans based in Minneapolis; Security Benefit Corp., an insurance and retirement services company based in Topeka, Kan.; and General Motors Asset Management, which manages company pension plans.
I say "defrauded," but in fact JPMorgan "simply admitted that it 'messed up the documentation,' " according to an analyst who spoke to Bloomberg. Goldman, on the other hand -- despite the pro forma lack of acknowledgment of wrongdoing -- essentially conceded that it knew what it was doing. This despite the fact that JPMorgan reportedly worked more closely with Magnetar to select CDOs than Goldman had done with Paulson. The analyst continued, "This looks like a win for JPMorgan," and indeed, at the end of trading Tuesday, the company's stock was up 1.1%. Those looking for harsher justice -- and not holding financials stocks -- might take heart from the fact that "the KBW Bank Index (KBX) is down nearly 10%"; Goldman in particular is trading "only about 4% above the 52-week low it hit last summer when investors were nervous about the SEC's fraud charges." Paulson, meanwhile, just booked a $720 million loss for his investors by selling all his 34.7 million shares of Sino-Forest Corp. (TRE), a troubled Chinese logger. His fund is down 20% for the year; bets on the banks have also failed to pay off.
The parallel between the Goldman and JPMorgan cases was not lost on SEC enforcement chief Robert Khuzami: "It's the same general allegation of wrongdoing," he told Bloomberg Television. "The message in both cases is if you engage in this kind of wrongdoing, if you mislead investors, you're going to pay a fine."
But that's all that will happen: Khuzami all but admits that no criminal charges will be countenanced. "We look hard and long at the conduct of individuals," Khuzami insisted, "and make our decisions based on the evidence." It's strange that, in an industry notorious for lavishly compensating individuals -- on the theory that the absolute best talent must be recruited -- no particular managers should be obviously responsible for delinquent decisions.
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