Opinion

Correcting the Record: J.P. Morgan and the Financial Crisis

Nearly a decade past the worst American financial crisis since the Great Depression, millions continue to rebuild their lives in an economy that was, in large measure, shattered by an imploding mortgage market. Although Wall Street and its aligned institutions have been heavily criticized for their part in the subprime debacle, J.P. Morgan Chase remains notable for having sold itself as the era’s “last bank standing.”

Nevertheless, beneath the veneer of such positivity lies a more troubling tale. The management of J.P. Morgan, under the leadership of CEO Jamie Dimon, is still suffering from the hangover of the financial crisis.

While Dimon is remembered by some as the “charismatic chief executive who could be trusted to get things right,” others caution that such notions of greatness are merely examples of what Wall Street like to hear about its own.

Despite federal authorities confirming that the bank illegally hired the children of Chinese leaders as part of a quid pro quo to win business in China, or that Bruno Iksil, the so-called London Whale, was inappropriately blamed by the bank for a failed trading strategy, manifest failures of senior management abounded, as losses pushed into the billions.

For those who prefer their financial media lite, Dimon is continually portrayed as The King of Wall Street or America’s Least-Hated Banker. The editor of Fortune Magazine, Shawn Tully, perhaps drove this line of reasoning most in his article “Jamie Dimon’s swat team.”

Despite this prevailing narrative, enormous losses were suffered by some neglected J.P. Morgan investors — despite the bank’s subprime pre-crisis revelation.

In 2008, Dimon was busy dumping J.P. Morgan’s exposure in the subprime mortgage market, and in doing so avoided structured investment vehicles and collateralized debt obligations. Sadly, not all investors were treated the same.

In this context, it should be remembered that in 2015 J.P. Morgan reached a $388 million dollar settlement with the Fort Worth Employees’ Retirement Fund. At the time, the bank was being sued for misleading “them about the safety of $10 billion worth of residential mortgage-backed securities it sold before the financial crisis.”

Earlier this month, two other cases regarding such failure went to trial before the New York State Supreme Court: Orkney Re II Plc v. J.P. Morgan and Ballantyne Re plc v. J.P. Morgan. While both were arguably victims of such “selective foresight,” the cases contain so much commonality that they are being tried together.

J.P. Morgan, while reducing its own exposure to the subprime market, arguably ignored Ballantyne’s and Orkney’s investments whilst keeping more than 90 percent of their funds in subprime bonds, resulting in a loss of more than $2 billion.

Each company’s investment was covered by an investment management agreement that required J.P. Morgan to maintain a safe and diversified portfolio. Yet as one of the lawsuits states: “Despite recognizing the increasing risks of holding Subprime Securities and responding to those risks for its own account and for selected clients, JP Morgan did absolutely nothing to eliminate – or for that matter, to even reduce – the Portfolios’ exposure to the Subprime Securities market.”

To some observers, these managers who call themselves “the best team on Wall Street” were neglecting portfolios worth billions.

J.P. Morgan was very likely negligent in its management of these funds. That is why this blunder should be rectified immediately, for the sake of J.P. Morgan, who would be best off to settle and remove this uncertainty from their balance sheet, as well as for the investors in question. The media, in turn, should remove their rose-colored glasses and hone in on the underlying realities of history.

 

Tim Evans is a professor of business and political economy at Middlesex University in London. He holds a PhD from the London School of Economics.

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