Mike Krieger Asks Which Is ‘Fraudulent’: Bitcoin Or JP Morgan?

Authored by Mike Krieger via Liberty Blitzkrieg blog,

I’m really grateful JP Morgan CEO Jamie Dimon decided to once again lash out in anger at Bitcoin, as it provides us with ample opportunity to highlight a practice very near and dear to how the bank operates. Fraud.

The way the news cycle works, any topic that isn’t already at the forefront of enough people’s minds will be largely ignored irrespective of its importance. The fact that Jamie Dimon ironically called Bitcoin a fraud, allows us to ask highlight some very important facts about the seemingly systemic fraud inherent in America’s largest bank, JP Morgan.

First, let’s take a quick look at some of what Mr. Dimon said. Courtesy of the financial plutocrat network, CNBC:

Jamie Dimon has not changed his mind about bitcoin.

 

Mr. Dimon, the long-time CEO at J.P. Morgan Chase, continued his well-documented criticism of the digital currency bitcoin. Speaking at the Barclays financial services conference on Tuesday, Mr. Dimon was asked whether his bank had a trader who traded bitcoin.

 

His response? “If we had a trader who traded bitcoin, I’d fire them in a second,” he said. “It’s against our rules” and any trader that deals in them is “stupid.”

 

Ultimately though, Mr. Dimon said that he thinks Bitcoin is “a fraud” and it “will eventually blow up.” He referenced approvingly the comments of another titan of the traditional markets, Howard Marks, who recently called bitcoin “an unfounded fad.”

Of course he hasn’t changed his mind about Bitcoin, and he never will. As he himself noted back in 2014.

It’s not the first time Dimon has issued a warning about Silicon Valley businesses.

 

“They all want to eat our lunch,” he told investors a year ago. “Every single one of them is going to try.”

What he once saw as competition, he now seems increasingly terrified of, which is notable in its own right. Beyond that, the most interesting aspect of his recent comments was the use of the word fraud, which provides us with a textbook case of psychological projection. After all, it’s there’s anything Jamie Dimon seems intimately familiar with, it’s fraud.

But don’t take my word for it. Financial journalist and author, William Cohan, wrote an important piece earlier this month for Vanity Fair titled, Jamie Dimon’s $13 Billion Secret—Revealed. I thought about sharing it when it was published, but ultimately decided it wouldn’t get the traction it deserved. Fortunately, Dimon’s Bitcoin commentary has propelled him into the spotlight long enough to turn your attention to this very important piece. Indeed, you can barely read a single paragraph without coming into contact with the word fraud, not in relation to Bitcoin, but in myriad descriptions of routine practices at JP Morgan.

Here are a few choice excerpts:

In November 2013, JPMorgan Chase, the nation’s largest bank, agreed to pay a then-record $13 billion fine to federal and state authorities in order to settle claims that it had misled investors in the years leading up to the financial crisis. JPMorgan Chase’s settlement raised many eyebrows on Wall Street. The huge settlement appeared inconsistent with the oft-repeated narrative of the bank’s heroism during the crisis…

 

People wondered why one of Wall Street’s ostensible white knights would pay $13 billion—$9 billion of its shareholders’ cash, plus another $4 billion in mortgage relief—in a government case…

 

A number of clues about what had forced Dimon’s hand, however, began emerging soon after the conference call. As I reported in The Nation in 2014, JPMorgan Chase’s settlement came at the end of an intense series of negotiations with a wide range of government officials. Perhaps the most pivotal moment in the conversations occurred in September 2013 when D.O.J. lawyers shared with Dimon and his attorneys a draft of a 92-page civil complaint that Benjamin B. Wagner, the then U.S. attorney in the Eastern District of California, and his colleagues were prepared to file in federal court. The draft complaint—based upon hundreds of thousands of subpoenaed internal JPMorgan documents; and interviews with its bankers, employees in its mortgage-backed securities division, and third-party mortgage originator—alleged that the bank’s due-diligence process had been subverted, and ignored, during the years before the crisis. In Wagner’s narrative, the bank was not nearly the white knight of Wall Street.

 

No one knew precisely what Wagner’s investigation had uncovered about JPMorgan Chase, however, because his brief was never filed publicly. Within weeks of Wagner sharing a draft copy of the complaint with Dimon—and following a tense face-to-face meeting at the Department of Justice between Dimon and Eric Holder, then the U.S. attorney general—the two sides agreed to the $13 billion settlement, at the time the largest ever. (It has since been surpassed by Bank of America’s $16.65 billion fine, settling similar claims.) In return, the Department of Justice agreed with Dimon and JPMorgan Chase that, among other things, it would not file Wagner’s complaint. Instead, an anodyne 11-page “Statement of Facts” was released. But it didn’t offer a tremendous amount of insight.

There’s some banker justice for you.

Wall Street C.E.O.s have many reasons for using their shareholders’ money to settle nettlesome lawsuits—from “optics” and brand preservation, to boosting their stock price and keeping embarrassing facts out of the public’s hands. And in the wake of his bank’s $13 billion settlement, Dimon made clear that he was frustrated that the bank had to settle. At a Microsoft C.E.O. summit, Dimon confessed that he “had to control his rage” regarding the topic.

 

To keen observers, though, it also seemed that he and JPMorgan Chase appeared intent on keeping Wagner’s unfiled complaint out of the public record. The specter of the document becoming public was again raised in a separate court case, when, a few weeks after the Department of Justice announced the settlement with JPMorgan Chase, lawyers for the Federal Home Loan Bank of Pittsburgh, which had sued JPMorgan Chase’s investment bank, along with other defendants, alleging it had sold the bank more than $1.7 billion in squirrelly mortgage-backed securities, wanted a copy of Wagner’s complaint. In fact, a state judge in Allegheny County, Pennsylvania, ordered the bank to turn over the draft complaint. But JPMorgan Chase settled the litigation after the judge’s ruling—a settlement that, among other things, included a provision that the draft complaint was to remain private. (Disclosure: after JPMorgan Chase fired me as a managing director in January 2004, I brought—and lost—an arbitration claim against the bank. I also remain in litigation with the bank as the result of a soured investment I made in 1999.)

 

Now, nearly four years later, as part of a Freedom of Information Act lawsuit initiated by Daniel Novack, an enterprising First Amendment attorney in New York City, the D.O.J. sent Novack a partially redacted copy of Wagner’s curiosity-stoking draft complaint against JPMorgan Chase. Novack provided a copy of the partially redacted complaint to me. “By this action,” the draft complaint begins, “the United States seeks to recover civil penalties” against JPMorgan Chase and its investment banking arm “for a fraudulent and deceptive scheme to package and sell residential mortgage-backed securities” that the bank “knew contained a material amount of materially defective loans.” As the unfiled complaint continued, “JPMorgan knowingly securitized and sold billions of dollars of mortgage loans that were originated in material violation of underwriting guidelines and law.” (When reached for comments and responses to the various allegations in Wagner’s unfiled brief, a spokesperson for JPMorgan Chase told me, “These allegations have been addressed, resolved, or refuted years ago.”)

Perhaps I’m delusional, but I think I saw the word fraud in there somewhere.

Wagner’s unfiled brief catalogs behavior rather at odds with the public narrative about the bank in the years preceding the crisis. It further asserts that JPMorgan Chase knew that “many of these loans were tainted with fraud” and “knowingly misrepresented” that the loans met its underwriting guidelines, even though they clearly did not, and that the loans had sufficient equity value to collateralize the mortgages even though they did not. Notably, Wagner’s complaint argues that “these fraudulent misrepresentations” cost investors “to suffer billions of dollars in losses.”

There’s the pesky word again. Twice in one paragraph, but, but Bitcoin.

Worse, the unfiled brief notes, the bank continued to sell mortgage-backed securities even though Dimon himself was worried that the residential mortgage-backed securities market was about to crash. According to Wagner, during the second week of October 2006, Dimon allegedly told King, the co-head of the Securitized Products Group, that he needed to “watch out for subprime”—a reference to low-quality mortgage-backed securities—because he feared that the market “could go up in smoke.” The document also notes that Dimon wanted King to reduce the bank’s exposure to that market. The “impetus” for Dimon’s concern, Wagner continues, was his review of reports from the mortgage-servicing arm of the bank that showed that delinquencies on such mortgages “were rising at an alarming rate.” At Dimon’s “insistence,” the unfiled complaint asserts, “JPMorgan formulated an exit strategy to divest itself” of the riskiest pieces of mortgage-backed securities that had been accumulating on its balance sheet. But, Wagner writes in the draft complaint, “despite knowledge at the highest levels that underwriting had deteriorated across the industry and early payment defaults were spiking, JPMorgan continued to purchase and securitize subprime loans without addressing the known breakdown of its due diligence practices and without disclosing its knowledge to investors.” This is pretty much the exact same thing that Goldman Sachs did leading up to the financial crisis, a practice for which the bank was roundly criticized.

 

Wagner’s unfiled complaint provided details on 10 allegedly fraudulent mortgage-backed securities that JPMorgan Chase underwrote and sold to investors. (Four of the 10 examples were redacted in the copy the D.O.J. provided to Novack and that Novack provided to me, because “the D.O.J. contends that these paragraphs contain information pertaining to an ongoing investigation,” according to a recent ruling in Novack’s case.)

 

The draft complaint further stated that the 10 examples “do not encompass the full extent of JPMorgan’s fraudulent scheme.” In one un-redacted example, the U.S. attorney’s office in the Eastern District of California described what happened to a $1 billion security that JPMorgan underwrote in August 2006 that contained more than 5,500 mortgages issued by Countrywide Financial, then an independent public company (and now part of Bank of America). Prior to purchasing the Countrywide pool, one-quarter of the loans were tested by an independent third-party consultant hired by JPMorgan. The third-party evaluator’s report, received by JPMorgan in May 2006, showed that up to 17 percent of the mortgages contained “material” defects, including “excessive” loan-to-value ratios, “incomplete or defective” appraisals, and missing verifications of income, employment, or assets at closing, among other problems.

 

According to Wagner’s draft complaint, after JPMorgan received the third-party report showing the defects in the mortgages, the company’s bankers “manipulated” the results by re-categorizing the defective mortgages because of “missing documents,” which lowered their risk assessment and made them appear to comply with the bank’s underwriting standards. But, according to Wagner’s unfiled complaint, “these missing documents were not delivered” and despite “knowledge of the material defects in the Countrywide pool,” JPMorgan Chase nevertheless bought 99 percent of the mortgages, and securitized all but seven of them into what became known as JPMAC 2006-CW2. Furthermore, the bank “did not inform investors of material amount of materially defective loans” that created the security. Wagner’s complaint, drafted seven years after the security was issued, noted that JPMAC 2006-CW2 “has suffered hundreds of millions of dollars in cumulative lost principal balance, and more losses are projected.” The complaint noted that although the top tranches of the security were once rated AAA, they had since been downgraded to “junk bond” status or below. And some had defaulted.

 

In another un-redacted example from Wagner’s complaint, a mortgage-backed security that JPMorgan Chase underwrote in February 2007—relatively late in the cycle—for some $980 million contained around 35 percent of mortgages originated by GreenPoint Mortgage Funding, Inc. The mortgages, which were drawn from two pools with unpaid principal balances of $459 million and $300 million, respectively, had many of the same underwriting flaws as found in the Countrywide mortgages. Once again, JPMorgan hired a third-party consultant to look at a sample of them and to report back to it about their quality. Approximately 25 percent of the sample evaluated came back as containing unacceptable risks because of the low quality of the initial underwriting. According to Wagner’s draft complaint, “JPMorgan had knowledge that a substantial portion of the loans did not comply with the originator’s underwriting guidelines and had a substantial risk of default.” The bank packaged up the GreenPoint mortgages and sold them anyway. In the end, investors suffered “hundreds of millions of dollars” of losses on that one security. In all, the unfiled document concludes, JPMorgan Chase and its investment bank “reaped substantial profits from their fraudulent scheme, having sold over $25 billion in nonprime RMBS”—residential mortgage-backed securities—“certificates backed by toxic loans.”

Not only did the bank view fraud as a key revenue driver, but key employees escaped criminal prosecution and came out like bandits. Indeed, Cohan ends his piece with the following observation.

Dimon’s pay package for 2013, the year of the big government settlement, was $20 million—a raise of 74 percent from the year before.

Certainly, you say, bank executives must have learned lessons from the crisis and reformed their fraudulent ways. Certainly not.

Wall Street on Parade did an excellent job of chronicling post-crisis JP Morgan fraud. Here are some examples from the post, What JPMorgan and Citigroup Have in Common When It Comes to Crime:

The crime spree at JPMorgan Chase became so surreal that two trial lawyers, Helen Davis Chaitman and Lance Gotthoffer, published a breathtaking book on the subject, comparing the bank to the Gambino crime family. In addition to the settlements noted above, the authors add more details as to what has occurred on Dimon’s watch, such as:

 

“In April 2011, JPMC agreed to pay $35 million to settle claims that it overcharged members of the military service on their mortgages in violation of the Service Members Civil Relief Act and the Housing and Economic Recovery Act of 2008.

 

“In March 2012, JPMC paid the government $659 million to settle charges that it charged veterans hidden fees in mortgage refinancing transactions.

 

“In October 2012, JPMC paid $1.2 billion to settle claims that it, along with other banks, conspired to set the price of credit and debit card interchange fees.

 

“On January 7, 2013, JPMC announced that it had agreed to a settlement with the Office of the Controller of the Currency (‘OCC’) and the Federal Reserve Bank of charges that it had engaged in improper foreclosure practices.

 

“In September 2013, JPMC agreed to pay $80 million in fines and $309 million in refunds to customers whom the bank billed for credit monitoring services that the bank never provided.

 

“On December 13, 2013, JPMC agreed to pay 79.9 million Euros to settle claims of the European Commission relating to illegal rigging of benchmark interest rates.

 

“In February 2012, JPMC agreed to pay $110 million to settle claims that it overcharged customers for overdraft fees.

 

“In November 2012, JPMC paid $296,900,000 to the SEC to settle claims that it misstated information about the delinquency status of its mortgage portfolio.

 

“In July 2013, JPMC paid $410 million to the Federal Energy Regulatory Commission to settle claims of bidding manipulation of California and Midwest electricity markets.

 

“In December 2013, JPMC paid $22.1 million to settle claims that the bank imposed expensive and unnecessary flood insurance on homeowners whose mortgages the bank serviced.”

In contrast, Bitcoin is the fraud killer, and Dimon must know this. Its code is open source, while its supply is capped and distributed in a transparent process. Sure, there are many legitimate criticisms of Bitcoin, but one thing it certainly isn’t is fraud. This is what makes Jamie Dimon’s commentary so fascinating. He must know deep down that the financial system that has made him so fabulously wealthy is the real fraud and that Bitcoin, and technologies like it, threaten that corrupt and destructive paradigm. The more anger Jamie Dimon spews toward Bitcoin, the more confident we should be that we’re the right side of history.

Finally, let me end this on a more humorous note with a few tweets that perfectly sum up the situation.

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