I'm getting a little behind on the news here, but I can't let pass the latest government settlement with J.P. Morgan Chase.
Back on July 1, commenting on a string of huge settlements between large banks and various federal prosecutors and regulators, I said this:
Basically, any Federal agency that wants its name in the paper can pick one of the big banks and go out and get at least a few hundred million. Sorry, but this is a very sick game of government aggrandizement with funds provided by the taxpayers through the backdoor.
Well, the settlements keep coming fast and furious, and they get more and more preposterous. The latest is a settlement of J.P. Morgan with the SEC for $920 million over the so-called "London whale" trading losses. A September 20 report from Bloomberg on the settlement can be found here. The underlying event is that a J.P. Morgan trader in London took some huge positions that led to big losses in April and May 2012. Reports have put the losses in excess of $6 billion. At the current run rate, that is about equal to one quarter's net income for the bank.
You are probably asking, so what? J.P. Morgan's trading controls weren't up to snuff and a guy placed some big bets that he shouldn't have and they lost a bunch of their shareholders' money. Why is that of concern to anyone but their shareholders?
The answer is that somewhere along the way, the government made everybody's business its business, and most particularly so if you are a big bank. Do you think there were no consequences to taking those big bailouts?
Still, now that the government is involved, shouldn't its actions at least make a little sense? Here's the concept for this one: J.P. Morgan has been directed by the all-knowing regulators to have trading risk perfectly under control at all times. Instead they went out and lost $6 billion, causing not only a loss to shareholders, but also putting the government at slightly enhanced risk of future bailouts. So we're really going to teach them for having lost that much money. We'll make them lose even more money! We'll add on a $920 million fine! That'll show 'em!
The Bloomberg article, quotes Paul Miller of FBR Capital Markets as saying: "The regulators were embarrassed,that's why the fines are so big." So this has nothing to do with any actual violations of the law, and certainly not with making the bank safer -- it actually makes the bank less safe. Instead, the criterion is "embarrassment of the regulators." We ordered you to eliminate all risk from your operations and you dissed us! Of course, these are the people who missed Madoff. You'd think they would be beyond embarrassment by this point.