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Stockpiling Penalties

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U.S. and U.K. regulators brought home a whale of a trophy last week--a combined $920 million fine against megabank JPMorgan. That number pales in comparison to the $11 billion settlement figure being tossed around this week for bad mortgages made by JPMorgan and the banks it acquired during the crisis, but is nevertheless substantial. The violations to which JPMorgan confessed last week, while indicative of needed changes at the bank, are not sufficiently grave to warrant the massive penalty that was levied against the firm's shareholders.

The underlying sin was losing $6 billion of the bank's own money by making some very big--and, as it turned out, very bad--trades. It probably didn't help that fellow traders had nick-named the JPMorgan employee making the huge trades that caused the loss "the whale." It also didn't help that the investments were made by a part of JPMorgan that was supposed to be in the business of protecting the bank from risk, not exposing it to additional risk. The regulators, in imposing their fines, cited JPMorgan's poor risk monitoring, flawed internal controls over financial reporting, poor valuation procedures, and inadequate processes for escalating problems within the company and for keeping the board and regulators apprised.

The SEC's co-head of enforcement, George Canellos, acknowledged that the $200 million it demanded from JPMorgan was "unprecedented for an internal controls case and is one of the largest penalties in the history of the SEC." He went on to explain that "[t]he penalty reflects the SEC's assessment of the gravity of the control failures and the risks to which they exposed the firm and investors." What he fails to mention is that the company's shareholders are going to be paying that penalty, which will then be distributed back to some of them.

Losing the kind of money that JP Morgan did in this incident ought to be enough to get the attention of JPMorgan's shareholders and its board of directors. It's not clear that an enforcement action, let alone one carrying a $920 million price tag for the company's shareholders who have already lost $6 billion, was the right way to bring pressure on JPMorgan senior management to clean up their act.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.