From Whale To Rat: DOJ Has Cooperating Witness In JPMorgan Case

Over the past week many have been scratching their heads over why JPMorgan is so eager to comply with the DOJ's investigation into the bank's misrepresentation of the quality of its RMBS bundled mortgages, having gone so far as to suggest that JPM is weilling to settle for as much as $4 billion in cash (with a $7 billion non-cash component) though still shy of the DOJ's $20 billion ask. The reason, as the WSJ reports, may be very simple one: a rat is providing the Feds with information deep from within the house of the whale. "The Justice Department's pursuit of possible criminal charges against J.P. Morgan Chase & Co. is based in large part on a key cooperator from inside the bank who is aiding the government and has provided information suggesting the bank vastly overstated the quality of mortgages that were being bundled into securities and sold to investors, according to people familiar with the matter."

The WSJ has more:

Among the offices that received leads was Sacramento, Calif., which got documents related to billions of dollars of mortgage-backed securities issued by J.P. Morgan between 2005 and 2007, according to people with knowledge of the investigation. Among them, according to two people familiar with the investigation, was an email from a bank employee, warning her superiors they were vastly overstating the quality of the mortgages being bundled into securities. The bank went ahead and securitized them anyway, according to these people.

The woman who wrote that email has been cooperating with federal authorities and is expected to be available as a witness if the government ever brings a case to court, these people said. Her cooperation, along with documents, has fueled confidence among some lawyers within the Justice Department that they have built a solid, prosecutable case built on hard evidence. Among the documents the government has are ones suggesting J.P. Morgan knew the underlying mortgages it sold were of poor quality but told investors otherwise, according to people familiar with the investigation.

Curiously, it was also internal bickering, mostly between the firm's CIO office and various peripheral banking offices, that led to the media leaks in April 2012 exposing the London Whale's position, leading to the first "tempest in a teapot" comment from Jamie Dimon, which has since cost the bank very dearly, resulted in the admission of securities fraud guilt, cost many JPM employees their jobs, and has two ex-JPMorganites being charged criminally in NY court.

However, back then it was mostly cash and credibility damage to the bank, which primarily abused client deposits to serve as collateral for highly leveraged margined bets gone horribly wrong in an attempt to corner the IG9 market. This time there appears to be malfeasance in an area near and dear to Obama's heart: housing. And the DOJ seems to have locked in on not only JPM but the man who seemingly committed perjury in Congress in his recollection of the London Whale events.

Which is why this time the bottom line damage to JPM will be far greater.

Based partly on that belief, the Justice Department has been pressing the bank in negotiations to admit wrongdoing in some form. Bank officials have been adamant no crimes were committed and insist they won't admit to criminal wrongdoing. In the discussions, the bank has also denied suggestions that the Sacramento evidence is particularly incriminating or damaging to J.P. Morgan's reputation, according to people familiar with the discussions.

Reputation? Jokes aside, we can only hope this case goes to trial: because it is only in the treasure trove of public discovery that one will discover, beyond a reasonable doubt, just what other markets JPM was manipulating, and finally close the book on the biggest "conspiracy theory" of all - JPM's involvement in the precious metals market, despite the CME's most recent scrambling to shove all such allegations under the carpet as quickly as possible.

* * *

In parallel news, while John McCain has shown himself to be an adept poker player when it comes to foreign policy, he does bring up some valid point in this just released letter to Attorney General Eric Holder w/r/t JPMorgan. Highlights ours:

Dear Mr. Attorney General:

News reports indicate that you personally met last Thursday with JPMorgan CEO Jamie Dimon in the course of settlement talks between JPMorgan Chase and the Department of Justice (DOJ). Your meeting with Mr. Dimon reportedly centered on multiple investigations into JPMorgan's issuance of mortgage-backed securities in the lead-up to the financial crisis. These discussions are taking place while DOJ is also investigating the bank's actions related to the $6 billion "London Whale" trading losses, which the Senate Permanent Subcommittee on Investigations independently investigated.

Your personal meeting with the CEO of the corporate target of a major criminal investigation, at the request of the CEO, while negotiations on a global settlement agreement are pending, is highly unusual and, under the circumstances that the meeting occurred, gives rise to concern. It is noteworthy that at the same time the bank is facing a litany of regulatory woes that carry hefty fines and potential liability in private civil suits, individuals within JPMorgan and other similarly culpable financial institutions have escaped accountability.

JPMorgan's misconduct seriously harmed investors, wreaked havoc on our nation's financial security, and continues to have painful effects on homeowners in Arizona and around the country. Any government response relating to these events must hold the proper institutions and individuals accountable. In matters involving major corporate malfeasance, individual accountability is vital to deterring similarly severe misconduct by financial institutions and their officers, directors, or key employees in the future. Government enforcement actions must no longer be viewed by institutions and their management teams as simply the cost of doing business.

With this in mind, please provide responses to the following questions when the settlement agreement is announced:

1. Is the DOJ considering requiring admissions of wrongdoing on the part of any individuals within the bank as part of the settlement negotiations? If not, why not?

2. Will the settlement agreement with the company preclude either civil or criminal enforcement action against individuals at JPMorgan? Why or why not?

3. Will you seek to hold any top officer, director or key employees within JPMorgan personally accountable for the wrongdoing?

4. Please describe how each of the following will be determined and structured in any potential settlement.

a. Penalties
b. Fines
c. Disgorgement
d. Compensatory damages and/or restitution
e. Admissions of wrongdoing

5. How will the DOJ ensure that the settlement provides the proper relief for consumers?

6. Will any settlement reached specify whether JPMorgan is permitted to receive a tax deduction or favorable tax treatment for any resulting restitution, fines or penalties, or will such a determination be left to the IRS? How will this decision be reached? If deductions are permitted, please specify which aspects of the proposed settlement will be given favorable tax treatment.

Thank you for your timely response to this matter. If you have any questions or concerns, please contact Stephanie Hall, Counsel to the Minority, Permanent Subcommittee on Investigations, at 202/224-XXXX.

Sincerely,

John McCain
Ranking Member
Permanent Subcommittee on Investigations