JUDY WOODRUFF: And we turn to the government’s probe of financial giant J.P. Morgan, and specifically two former employees charged today with covering up huge losses.
The case is tied to more than $6 billion in trading losses early last year. A team at the bank made big bets known as derivatives against the credit health of some companies. The bets were wrong and losses spiraled out of control. It tarnished the bank’s reputation and it raised questions about Wall Street’s behavior in the wake of the financial crisis.
Prosecutors said that Javier Martin-Artajo, who oversaw trading at the bank’s investment office in London, tried to falsify just how big the problems were. He was charged with several criminal counts, as was Julien Grout, a trader who used what prosecutors call complex financial derivatives.
PREET BHARARA, U.S. Attorney, Southern District of New York: While the transactions and financial products involved may be complex, the criminal conduct alleged is simple and straightforward. The defendants deliberately and repeatedly lied about the fair value of billions of dollars in assets on J.P. Morgan’s books in order to cover up massive losses that mounted month after month at the beginning of 2012.
Those lies misled investors, regulators, and the public, and they constituted federal crimes. As has already been conceded, this wasn’t a tempest in a teapot, but rather a perfect storm of individual misconduct and inadequate internal controls.
JUDY WOODRUFF: The man at the center of the case, Bruno Iksil, became known as the London Whale because of his central role in these huge trades. But he is cooperating with investigators and wasn’t charged.
For its part, J.P. Morgan still pulled in a record profit last year.
Reporter Dawn Kopecki is with Bloomberg News, and she joins me now.
Dawn Kopecki, welcome back to the NewsHour.
First of all, explain to us exactly what these two men did that was ill — that the prosecutors say was illegal.
DAWN KOPECKI, Bloomberg News: Yes. What they did is — in trading derivatives, they are a very complicated financial instrument, and the pricing of them isn’t very clear.
They can use a range of prices, and in the past J.P. Morgan had typically used the midrange of prices that were available on the market. As their losses started mounting, they started using more favorable pricing. It sounds like a very minor detail, but by the end of March, we’re talking about a difference of about $700 million just by using a slightly more favorable price at the end of the day, when they would mark their books.
It amounted to hiding about $700 million in losses that the U.S. attorney’s office accused the men of hiding today. That’s at the crux of it. When they used the more favorable pricing, they also reported that to the bank. Those numbers then went into the bank’s bottom-line numbers that were reported to shareholders. So you have falsifying books and records, falsifying internal documents.
You have a whole host of a snowballing effect of criticism charges that fell out from that simply by using slightly more favorable prices to make their losses look a little bit better ever single day over a two- to three-month period of time.
JUDY WOODRUFF: Why were the losses so big? They ultimately ran into the billions, and then they kept — they continued with this behavior.
DAWN KOPECKI: Yes. Yes.
No, the losses were large because what happened is, the markets started getting wind, they started catching wind about what these traders were doing and where their positions were. We started reporting on it. We actually broke that story last year. Other news outlets reported on it.
And as soon as hedge funds and other major banks found out where these — where these guys were trading, what they were trading, they started trading against them. And so it had the combination of the economics, the economy going against them. In addition, the market just descended.
It’s like sharks smelling blood in the water, and they just descended upon these traders, squeezed them out of the position, and it caused the trade to just hemorrhage. Also, in mid-March, Ina Drew, who ran this division, told the traders to just stop trading, so they couldn’t defend their position. They couldn’t go out and put other hedges against this position.
And that’s when you saw the daily losses just escalating into the hundreds of millions of dollars. We’re talking going from, like, $30 million to $50 million to $60 million to a daily loss of $350 million. And so you saw the trade just blow out completely in mid-Match after they stopped trading and after they were able to hedge against that particular position.
That’s how it ended up being a $6.2-plus billion loss.
JUDY WOODRUFF: So, the prosecutors have just charged these two men. Are they saying that higher-ups had no idea what was going on here?
DAWN KOPECKI: They’re not saying that.
They’re, in fact, not closing the door on looking at other executives. I was at the press conference today, and specifically asked them. They said that the investigation is still open. And I said, so does that mean that other executives may be under investigation?
And they said that, generally, when an investigation is still open, they’re looking at other executives. Some securities attorneys, criticism attorneys we spoke with said that this is typically — these guys are relatively small, relatively low rungs on the ladder at J.P. Morgan, and typically they will bring these guys in and try to turn what state — it’s called turn state’s evidence, try to get them to turn on their colleagues, strike a similar non-prosecution agreement type of deal, as Bruno Iksil, the London Whale, got, and then testify against other executives.
The prosecutor’s office did hint at the fact that, at some point, Martin-Artajo, who was the manager of — Bruno Iksil’s manager and Julien Grout’s manager, said that these orders were coming down from New York, and so there’s a hint in the charges that, at least according to Martin-Artajo, he thought these orders were coming down from higher-ups in New York.
And so that, other attorneys have said, makes them think that they may want to try to go after other executives. But if they can’t extradite these guys — these guys aren’t in this country — if they can’t extradite them and get them to talk, the investigation isn’t going to go very far beyond the two that they have named today.
JUDY WOODRUFF: So there’s a question of whether they will even be able to get their hands on them.
DAWN KOPECKI: Yes.
JUDY WOODRUFF: But I want to ask you about, what does this mean for J.P. Morgan, the fact that it’s just two lower-level people at this point who have been charged, the fact that regulators spent months looking into this, and as you say, they’re still looking at J.P. Morgan?
DAWN KOPECKI: Yes. Yes.
Well, they are, and J.P. Morgan expects to pay some pretty hefty fines. They expect to be fined by virtually every regulator looking at this. So, you’re talking about the Department of Justice, civil fines. Criminal is not so clear just yet, but civil is probably definitely on the table, according to people we have spoken to, the Securities and Exchange Commission, the Commodity Futures Trading Commission, and as well the Financial Conduct Authority in the United Kingdom.
And so, for J.P. Morgan, this is going to be — they’re going to be writing checks. They’re going to be writing a lot of checks for the next couple of months on this. They’re facing an enormous amount of litigation from shareholders. The company lost as much as $51 billion in shareholder value at one point last summer.
Their stock price has recovered from that, but shareholders can still sue based on what it lost last summer. So they’re facing shareholder lawsuits on that. It’s just such a big black eye to their reputation. It increases the scrutiny that they’re getting for other regulators as well.
And, also, because they were trying to game regulatory capital rules — the trade is very complex, and they were trying to game basically the regulatory capital rules — it has drawn much more scrutiny on those rules, and regulators are much more in tune to try to tighten those rules so that banks can’t do this.
Also, the Volcker rule, which bans proprietary trading, they’re looking at strengthening that to prohibit banks from being able to make these kinds of risky bets with their own money. And so it’s had a whole cascading effect on the regulatory front, litigation, and also it’s going to hit their bottom line with all of these fines.
JUDY WOODRUFF: And I was going to ask you if there were implications more broadly for Wall Street, and it sounds like you’re saying that it will.
DAWN KOPECKI: Yes, it is. Exactly.
JUDY WOODRUFF: Dawn Kopecki, we’re going to have to leave it there for now. We thank you very much, Dawn Kopecki.
DAWN KOPECKI: Thank you.