Regulators Penalize JPMorgan Over Lehman Ties - NYTimes.com
When
Lehman Brothers collapsed at the height of the financial crisis,
JPMorgan Chase was at the center of the storm. The bank was a major lender to the firm, which filed the biggest bankruptcy in United States history.
Now, more than three years later, regulators have penalized JPMorgan for actions tied to Lehman’s demise.
The
Commodity Futures Trading Commission filed a civil case against JPMorgan on Wednesday, the first federal enforcement case to stem from Lehman’s downfall. The bank settled the Lehman matter and agreed to pay a fine of approximately $20 million.
JPMorgan extended the credit using an inaccurate evaluation of Lehman’s worth, improperly counting Lehman’s customer money as belonging to the firm. Under federal law, firms are not allowed to use customer money to secure or extend credit.
The trading commission accused JPMorgan of overextending credit to Lehman for roughly two years leading up to its bankruptcy in 2008.
The arrangement worked well for both parties. Lehman wanted a larger loan, and suggested counting money from the customer account to justify it. JPMorgan complied, treating the money as part of Lehman’s coffers.
In a statement on Wednesday, JPMorgan noted that the size of this customer account was small relative to the overall relationship with Lehman.
The trading commission also accused JPMorgan of withholding separate Lehman customer funds for nearly two weeks, rather than turning them over to authorities. In the course of resolving that matter, regulators became aware of JPMorgan’s questionable credit to Lehman, a person briefed on the matter said.
“The laws applying to customer segregated accounts impose critical restrictions on how financial institutions can treat customer funds, and prohibit these institutions from standing in the way of immediate withdrawal,” David Meister, the agency’s enforcement director, said in a statement. “As should be crystal clear, these laws must be strictly observed at all times, whether the markets are calm or in crisis.”
It is unclear whether JPMorgan knew the money belonged to clients. The agency did not charge JPMorgan with intentionally breaking the law. But in the view of regulators, the bank should have known — the customer funds were kept at a JPMorgan account. The funds belonged to investors trading in the futures market.
The actions did not in and of themselves cause Lehman to fail. JPMorgan neither admited nor denied wrongdoing as part of the settlement.
“The firm cooperated with the investigation and is pleased to have resolved this matter with the C.F.T.C.,” the bank said in the statement.
Peter Foley/European Pressphoto AgencyLehman Brothers collapsed in September 2008.In some ways, the commission’s case echoes the situation involving MF Global, which is the biggest financial collapse since Lehman. In the case of MF Global, JPMorgan received money belonging to the brokerage firm’s customers, who are still out $1.6 billion. The money vanished in the final week before the firm went under and its disappearance is the subject of a federal investigation. Unlike the MF Global fiasco, however, customer money never went missing from Lehman. JPMorgan is not accused of any wrongdoing in the MF Global case.
In addition to being an investment bank, JPMorgan and
Bank of New York Mellon are the two big institutions that process transactions for most other Wall Street firms. As a result, JPMorgan is often at the center of financial maelstroms. So-called clearing banks have a great deal of leverage over the firms they serve, because they play central roles in their financial solvency.
This role is particularly important when a company is under duress. In the case of Lehman Brothers, JPMorgan grew nervous as questions about Lehman’s capital and real estate holdings mounted in the late summer and fall of 2008. The bank asked Lehman to post more than $8 billion in collateral to continue clearing its trades, a condition that if not met might have expedited Lehman’s collapse.
Those collateral calls — issued in the week before the firm collapsed — drained Lehman of money it could have used to stay afloat. And that money is the subject of a 2010 lawsuit Lehman’s estate has filed against JPMorgan that accuses the bank of hastening its demise.
State and private lawsuits have emerged after Lehman’s bankruptcy, including one from the New York attorney general against Lehman’s auditor, Ernst & Young. But federal regulators have not previously filed Lehman-related actions, even though its collapse was at the center of the financial crisis.
The trading commission’s action against JPMorgan is the latest prominent action filed by the Commodity Futures Trading Commission, which once had a reputation as a sleepy regulator. On Monday, the agency sued the
Royal Bank of Canada, accusing it of operating a major trading scheme that it used to reap lucrative tax benefits.
The agency’s enforcement division has experienced a makeover under its current chief, David Meister, a former federal prosecutor. The division filed a record 99 enforcement actions last fiscal year, 74 percent more than the previous year.
The MF Global case presents a bigger test for the agency. In the firm’s final days, MF Global tapped $175 million in customer money to patch an overdrawn firm account at JPMorgan.
The bank, suspicious about the origin of the money, sought assurances from MF Global that the money did not belong to customers. In testimony before Congress last week, a JPMorgan official said MF Global never signed a letter verifying that the transfer was legitimate
