JPMorgan agreed to pay $920 million in fines to settle charges over the $6 Billion ‘London Whale’ loss. If that sounds like a big number, don’t worry: JPMorgan will get over it. Shares are down less than one percent — and that’s after rising on Tuesday, when news that a settlement was coming first broke. For the bank, think of it as teachable moment that’s already made JPMorgan, as chief executive Jamie Dimon says in the company’s press release, “a stronger, smarter, better” company.
A few hundred million in civil penalties leveled by four separate regulatory bodies may satisfy the good-government types, but if you want ordinary folks to see that there’s some real knocking of heads on Wall Street, you really need a trial that’ll call to account the people responsible for the ills and misdeeds of the financial world. That would be: Frenchmen.
A month and a half ago the Securities and Exchange Commission secured a rare courtroom victory when a jury found Fabrice Tourre liable for civil fraud in a Goldman Sachs derivatives deal. Now the U.S. attorney in New York, Preet Bharara, has leveled criminal charges in JPMorgan’s $6 billion “London Whale” loss. The targets, Javier Martin-Artajo and Julien Grout are two European employees of JPMorgan. Unlike Tourre, they didn’t even live or work in New York.
Over the last days, as the bank was building a “more open and transparent relationship with regulators” (cf. Jamie Dimon again) one of those targets, Julien Grout has been hitting back against the prosecutors via his attorneys. His lawyer has pointed out that it’s strange that Grout should be charged here when Bruno Iksil, the London Whale himself, was not. There’s good reason for the objection. It would be hard by any stretch to say that Grout was the person most liable in JPMorgan’s loss.
That doesn’t seem to especially matter here. What does is that he was a well-paid (million dollar a year) banker, and apparently — unlike Iksil — not initially cooperating with prosecutors. And after years of paltry efforts to find someone to prosecute for banking misdeeds, it’s become clear that mid-level Europeans with funny accents make good targets. When I wrote about the Senate’s JPMorgan hearings in March, it seemed to me from the details that the Senate made public that Julien Grout was the good guy in this story. Grout, a lower ranking trader than Iksil, seems to have had the gravest doubts about where Iksil’s trading was headed and sounded the alarm first. Grout told Iksil:
“I have a vague idea you know how this is going to end up … it will be a big fiasco and it will be a big drama when, in fact, everybody should have, should have seen it coming a long time ago. … Anyway, you see, we cannot win here. … I believe that it is better to say that it’s dead, that we are going to crash.”
It’s after that conversation that Grout and Iksil agreed to keep a new spreadsheet of their positions, showing higher estimates of the loss than Iksil’s boss, Martin-Artajo wanted. That spreadsheet — intended to bring the issues to light for senior management — is pretty much the key to the case against Martin-Artajo and Grout himself. Had Grout and Iksil not decided that they wanted to do an honest an accurate assessment of where they stood, the whole prosecution would be a lot harder to get off the ground. That spreasheet is cited extensively in the complaint. (Update: You can read the criminal complaint here.)
Now, you might say that the fact that Grout had doubts doesn’t absolve him of skullduggery; bank robbers express doubts, too. And you can dismiss the fact that Grout wasn’t very high up as irrelevant to the moral and legal questions. As Matt Levine says, it’s hard to get much sympathy for being a low-level record-keeping schmo when you make a million bucks a year. So you can choose to throw the book at Grout (if there’s a book to be thrown, which is not as certain as some reports portray).
The basic message this prosecution sends, though, is that you are far, far better off keeping your head down and following orders. In my earlier post I made the point that folks on Wall Street avoid disclosing mistakes not just because of greed, but because of fear. Prosecuting Grout shows that fear is well-founded: the last thing any employee will want to do is create a record of their misgivings or take them up to management.
Speaking of management: one of the charges against Grout and Martin-Artajo is that they caused JPMorgan to file false and misleading financial statements with the Securities and Exchange Commission. This one is a head-scratcher. Not so long ago, Sarbanes-Oxley promised to make top executives liable for lies in financial documents. Now that principle has been turned around, and the company financial disclosures are a way to load up more charges in a case of mid-level malfeasance. This is doubly strange because JPMorgan’s shareholders have amply demonstrated that they are happy with the way the bank is run and are less concerned about misleading statements than about government sanctions.
So what we have are charges that send the wrong message to anyone who wants to bring their concerns to management, in the name of protecting shareholders who don’t much want the government’s protections, for misdeeds that took place in London. That last part, incidentally, is by no means a first; the Guardian’s Heidi Moore has cogently noted the attraction for U.S. authorities in crimes committed far away, by foreign banks.
Having heard the banging of the drums demanding that evil bankers be held responsible (for something, if not exactly the mortgage meltdown that most of the country actually cared about), U.S. attorney Preet Bharara has chosen a comforting target: an overpaid Frenchman who reinforces the idea for Americans that folks responsible for financial crashes are nothing like them. (The one awkward scene to crop up in the script: being a Frenchman, , Grout probably can’t be extradited for a U.S. trial.)
I can’t resist telling here the story of a conversation I had a couple of years ago with a defense lawyer in Georgia. The lawyer worked in a suburban county with little crime. Nonetheless, he said, the cops found plenty of drug dealers to arrest. What they did was set up a buy in Atlanta, have the dealer drive down to the county, and then arrest them. Then local prosecutors got to send out a press release. What business, the lawyer wondered, did prosecutors have bringing criminals (yes, his clients were not saints) into the county?
The whole searching-in-London for crimes to prosecute strategy reminds TMN of that conversation. Two differences: One, you don’t even need to bring them here (except for the trial). And two, unlike that suburban county, it feels like the U.S. has bigger fish to fry at home.