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How Jamie Dimon's New Business Model From Hell Could Take Down Wall Street – Again

An "Investment" office sans licensed investment brokers is the latest deregulatory mutation on Wall Street.

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Under securities law, if all Drew and her traders were doing was hedging the bank’s risk exposure by buying conservative instruments like U.S. Treasury notes, the typical function of a Treasury Department at a bank, no securities licenses were needed, providing they did not make transactions with customers.

In the spring of 2003, the SEC adopted new rules governing trading within banks to address exceptions that resulted from the repeal of the Glass-Steagall Act, which occurred when Congress passed the massively deregulatory Gramm-Leach-Bliley Act.  The relevant wording reads: “The question of whether a bank acts as a ‘dealer’ that must register with the [SEC] Commission therefore turns upon a two-stage analysis. The first stage of the analysis, which is the general ‘dealer/trader’ distinction, focuses on two factual questions: (1) whether the bank is ‘buying and selling securities’ for its own account; and (2) whether the bank is ‘engaged in the business’ of that activity ‘as part of a regular business.’ A bank would not be a dealer unless both of those factual tests are met.”

According to documents and job advertising placed by JPMorgan Chase, the Chief Investment Office was a morph between a proprietary trading desk making bets for the firm’s account, a hedge fund operating off the regulatory radar screen, and a typical investment bank engaging in market making for its customers. What it clearly was not was a conservative T-note desk investing the bank’s surplus insured deposits in liquid government securities as a hedge against another U.S. credit seizure or a banking tsunami in Europe.

One job ad for a mortgage trader for the Chief Investment Office indicated the following under Key Job Functions: “Provide liquidity to our lender customers through market making functions…Develop and maintain relationships with dealers and lender customers.”  Oops.  There’s that word, “customers;”  the very word that requires a license to trade securities and registration with the SEC as a broker dealer.

Other job advertisements indicate that London is not the only outpost for the Chief Investment Office.  JPMorgan says in the ads that the Chief Investment Office operates in London, New York, Hong Kong and it is opening a unit in Shanghai.  If JPMorgan’s regulators weren’t aware of what was going on in the London operation, are they equally in the dark about the other corners of the globe?

Another red flag for a unit that is supposed to be a liquid, risk management operation is that the Chief Investment Office also has a private equity component – it’s investing in share holdings of companies that are not publicly traded and are valued at whatever someone is willing to say they are worth. (Think liar loans, or even better, Facebook.)  There is limited price discovery on private equity as well as limited liquidity.

An online announcement by Johnson Publishing Company, publisher of Ebony and Jet magazines, indicates that “during June 2011, the Special Investment Group of JPMorgan Chase & Co. acquired a minority stake in Johnson Publishing…The Special Investments Group is a private equity group within the Chief Investment Office of JPMorgan Chase & Co.”

Thus far, the story presented to the public is that the Chief Investment Office was not overseen by the SEC because it was operating within a unit of the bank – a unit called “Corporate.”  But the unit placing the job ads for the Chief Investment Office was not the bank, JPMorgan Chase, N.A. but the holding company, JPMorgan Chase & Co.

The FBI is investigating the matter but won’t say why.  Five other regulators are also investigating but are vague on just what they’re investigating.  The theory on the street is that JPMorgan had simply moved its proprietary trading desk to London to fly below the radar of its myriad Federal regulators in the U.S.,  as Wall Street firms were supposed to be winding down, not ramping up, proprietary trading under financial reform legislation. As the theory goes, Ina Drew, who had a long history of managing surplus deposits as a Treasury function for the banking operations, was put in charge to cement the story that this was a risk management operation.

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