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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.

The following piece is a co-exclusive with Wall Street on Parade.

If you want to trade securities at any brokerage firm in the U.S., you’ll need to study intensively for about three months, memorize dizzying rules and regulations, then take a six hour licensing exam. (The exam is so rigorous that it’s compared to the CPA exam. I don’t know if it’s fact or lore, but I was told exam rooms in past decades had puke buckets in the corners.  My room didn’t in 1986.) Then, you’ll need to get fingerprinted, pass a background check, register with a host of stock exchanges, make sure you have a supervisor who holds a principal’s license, get approved in each state in which you plan to conduct business, and take ongoing continuing education classes to keep your licenses.

Or, you could skip all of that and earn $14 million a year trading – without a license – stocks, bonds, swaps, options, futures with $374 billion of bank depositors’ money at JP Morgan Chase’s Chief Investment Office – a unit few on Wall Street had ever heard of until it reported losing billions of dollars in May in the same derivative transaction that made AIG a ward of the taxpayer in 2008.

An “Investment” office sans licensed investment brokers is the latest deregulatory mutation on Wall Street. The other mutation is the JPMorgan model to create an art form out of depicting itself as a “fortress balance sheet” while holding $156 billion of capital and $66 trillion (with a “t”) in derivatives according to financial filings for March 31, 2012 with the Comptroller of the Currency.

Ina Drew, the head of the Chief Investment Office at JPMorgan in New York earned $29 million total for years 2010 and 2011.  She was paid on a par with a hedge fund manager because, in essence, she was a hedge fund manager.  She held no securities licenses so she was ineligible under securities law to supervise others who did hold a license; sort of like an operating room full of unlicensed brain surgeons who never went to medical school.

But even though Drew was not licensed as a principal, she was somehow supervising traders in London who were registered with the Financial Services Authority (FSA), the UK securities regulator.  That included the infamous London Whale, Bruno Michel Iksil, whose trades in a credit derivative index were so large that he effectively cornered the market, pushing up the cost for American businesses to buy credit insurance on exposure they legitimately held on their balance sheets.  We used to prosecute people who corner markets. But that’s so yesterday.  Today, Congress just wants to study “lessons learned” like it’s fallen under a Vatican trance – there are no bad men or prosecutable crimes, just evil temptations.

The unit’s trading bets paid off big in the past two years.  But like your average hedge fund manager that takes huge risks and collects big paydays as long as the market goes in the right direction, the music eventually stops abruptly, dumping excruciating losses on investors. The hedge fund manager has fully mastered heads I win, tails you lose: he doesn’t give back any of his outsized pay for the winning years, even if his  investors  give back all those gains and then some. JPMorgan’s Chief Investment Office has racked up an acknowledged $2 billion in losses as of May 10 and a street estimate of $4 to $8 billion currently. Drew left the firm last month.

According to records at the Financial Industry Regulatory Authority (FINRA), the U.S. regulator, Ina Drew skipped all the licensing requirements during her 30-year career at JPMorgan Chase and its predecessor banks.  (An email and a phone call to JPMorgan on the matter went unanswered.) Drew came up through the ranks of the banking side of JPMorgan Chase, first at Chemical Bank, then in its merger with Chase in 1995; culminating in the purchase of JPMorgan by Chase in 2000, following the repeal of the Glass-Steagall Act which had prevented banks holding insured deposits from merging with Wall Street trading firms.

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