Many Americans have called for the prosecution of the high-level bankers behind the 2008-and-onward economic collapse, and while that hasn't happened, they can take solace that things may be headed in that direction.
Reuters reported this week that two traders involved in last year's "London Whale" fiasco, in which J.P. Morgan Chase & Co. lost $6.2 billion, would be charged, while the "whale" himself would serve as a cooperating witness.
While this may seem like a step toward holding those who gamble with shareholders' money accountable, one has to wonder if this is enough. Will the prosecution of two mid-level employees, who allegedly disguised losses amid pressures to perform, really dissuade big banks from turning a blind eye towards' underlings' actions?
3-Man Plan Alleged
As odd as it may seem, the "whale" himself will not face prosecution. Bruno Iksil has cooperated fully with federal prosecutors. According to those prosecutors, Iskil was the reluctant member of the scheme who pushed back against his boss Javier Martin-Artajo and colleague Julien Grout, both of whom allegedly hid losses while increasing the stakes of the trades, ostensibly in hopes of recovering their losses.
The scheme was enabled by the lack of oversight from the one-man "flimsily structured" valuation control group, which was tasked with independently reviewing the allegedly falsified trading positions marked in the chief investment office's books.
Highly risky trading strategies, and flimsy oversight, are acceptable as long as they work. And for the management of the bank itself, it may work anyway.
The man at the top, CEO Jamie Dimon -- who famously referred to the $6 billion loss as a "tempest in a teapot" before apologizing after the extent of the losses were made clear -- had his bonus halved and was sternly rebuked by the board, yet kept his job. J.P. Morgan Chase itself is sitting on its highest stock prices in five years, per MarketWatch.
It seems the only two people harmed by the $6 billion fiasco will be the two men prosecuted, assuming they surrender to U.S. authorities or are extradited.
This illustrates the great disincentive for banks and other corporations to reform their practices. We laughed when Halliburton was criminally charged for destroying evidence, as the minor fine paled in comparison to the company's assets and the amount at stake in the BP oil spill case.
The same problem exists for banks. Why curtail risky investment strategies, such as the corporate default securities at issue in the London Whale case, or subprime mortgages that led to the Great Recession, when the only consequences might be a $100 million fine or $6 billion loss? After all, when mid-level employees can be scapegoated for an entire corporation's failings, and the sole repercussion is a cut bonus and temporary stock dip, why spend the time and money necessary to reevaluate risky practices?
- Charges Expected in 'London Whale' Trades (The Wall Street Journal)
- BP Hit With Flood of Lawsuits 3 Years After Deepwater Horizon (FindLaw's In House)
- JPMorgan Chase Not Liable Under RICO, 2nd Circuit Says (FindLaw's U.S. Second Circuit Blog)