It’s really easy to have a fortress balance sheet if you can get other people to eat your losses.
It’s also how some scandals are picked up and amplified by the media while others lie fallow. The London Whale scandal, which was never going to rise to the level of bank-threatening losses, did reveal JP Morgan to have grossly deficient risk controls and Dimon to be arrogant, lackadaisical, and dishonest in dealing with the problem. Predictably, regulators have refused to acknowledge serious Sarbanes-Oxley violations. And Dimon, who loves to take personal responsibility for JP Morgan’s successes, rapidly threw members of his laxly-managed Chief Investment Office under the bus to salvage his reputation.
We’ll go into more details on JP Morgan’s WaMu machinations below. The very short version is this story came to the fore last year, when Deutsche Bank filed a putback suit against both JP Morgan and the FDIC for dud loans in 99 WaMu mortgage securitizations (recall that when a mortgage backed bond is found to have worse merchandise in it than than the investors were promised, the trustee is supposed to put the bad loans back to the originator and have them replaced with good loans or get cash compensation. The Deustche Bank suit was noteworthy because trustees normally do nothing). The FDIC has made a compelling case that WaMu is no longer its problem and JP Morgan assumed the relevant liabilities.
Yet we’ve been told that in the next few weeks, JP Morgan is about to enter into a settlement with Deutsche Bank regarding…hold your breath….the liabilities it insists sit with the FDIC. I’m not making this up (the source is legally savvy). I’m not even sure how you paper up something which is so clearly nonsensical.