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Archive for the ‘JPMorgan Chase’ Category

Fourth of July:  I took a break the week of July 4th and enjoyed family, friends and the traditions of America.

Then we all got back to work and it appears that some of that work was once again of an unethical nature.

GlaxoSmithKline paid a record $3 Billion-with-a-B in civil and criminal penalties for marketing several drugs for unapproved purposes, which is sometimes referred to as “off prescription.” The conduct was characterized in the media as “fraudulent.”

In the on-going Chesapeake Energy saga, news sources revealed that Chesapeake and Encana may have colluded on setting prices for land deals in Michigan. In other words, the people who owned the land did not receive competitive bids from the two companies.

JPMorgan Chase restated a prior quarter’s results, due to the losses in its London hedging unit. When this story first broke, CEO Jamie Dimon said the losses were $2 Billion. That number has progressively been increased ever since. Now they are restating Q1 results to cover a $4.4 Billion loss and are recognizing that the total may exceed $7 Billion. My bet is we aren’t done yet.

Penn State dealt with the Freeh report which portrayed legendary coach Joe Paterno as part of the cover-up of Sandusky’s actions.

But all of those, significant as each may be, were totally eclipsed by one single word: Libor.

More on that in the next post.

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Chesapeake Energy:

Chesapeake’s Board of Directors named Archie Dunham, former CEO of Conoco, as their new Chairman, removing co-founder Aubrey McClendon from that role. Soon after, Dunham made it clear that Chesapeake needs to continue to sell off assets thereby raising cash. In the meantime, news surfaced that CEO McClendon may have violated anti-trust laws by allegedly sending emails related to bid prices on land for future drilling.

JPMorgan Chase:

Remember a previous post titled “Black Holes?” As predicted then, the hedge unit’s loss at JPMorgan continues to grow. Now reportedly at $ 9 BILLION-with-a-B dollars. Slightly more than the original $ 2 Billion.

News Corp:

Rupert Murdoch is apparently considering splitting News Corp. in two. The split would separate the entertainment business from the publishing business thereby cushioning shareholders who are primarily investing in the entertainment businesses from suffering the effects of the scandal going on in the publishing business. That scandal involves cell phone hacking allegations against the News of the World organization in London.  The company’s board quickly approved of Rupert’s wish. Hmmm.

Goldman Sachs:

No action against them, but the SEC is reportedly filing a civil law suit against a hedge fund manager for allegedly giving favorable treatment to some investors. Goldman was one of the names that allegedly received special treatment. The hedge fund is Harbinger Capital Partners LLC of Wall Street.

Facebook’s IPO:

The SEC opened an investigation into the NASDAQ stock exchange which was unable to effectively process the large number of trades on the stock’s opening day.

And Finally…..Madoff:

Remember Bernie? His brother Peter was planning to plead guilty while at the same time insisting that he did not know about his brother’s massive fraud. ….. sure.

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Investigations:

Jamie Dimon, CEO of JPMorgan Chase, appeared before Congress on Wednesday. Admitting that the bank let people down, but not admitting that stronger regulation might have kept them out of trouble, Dimon pinned the bank’s surprise loss on an internal complacency based upon the London hedging unit’s past successes. What is it that mutual fund prospectuses warn about? Oh yeah, past results are no guarantee of future success.

Prosecutions:

News of the World’s Rebekah Brooks made a court appearance and posted bail. She will be back in court next week.

Rajat Gupta, former director of Goldman Sachs, former head of McKinsey & Co., and former member of Proctor & Gamble’s board of directors, is on trial for insider trading. His case was went to the jury yesterday. Gupta allegedly fed inside information to now imprisoned felon Raj Rajaratnam who was then the co-founder of Galleon Group, LLC.

Justice:

R. Allen Stanford was sentenced to 110 years in prison for running a $7 Billion-with-a-B ponzi scheme. Stanford Financial was based in Houston. Some of my Houston friends invested money in Stanford’s “Certificates of Deposit” that were “issued” by his “bank” in the Caribbean. Paid good interest too. How do you spell Madoff?

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A bank, an IPO and an Oil & Gas Driller all potentially have that one key characteristic of the astronomical black hole – a massive implosion sucking everything close enough to them into the abyss.

First the bank — JPMorgan Chase

This week’s news included the analysis that the hedging unit which lost $ 2 BILLION-with-a-B dollars of asset value faces a loss that is growing and likely to continue to grow. Most recent estimates are around $5 BILLION. Recall that when this story first broke, there was a total bet… uh, I mean trade, on the table of around $100 Billion in the “risky” category. Now that the whole world knows the situation, you can bet…. uh, I mean trade, on the prospect that there will be no takers on the other side should the bank try to unwind its position. Do you see the black hole now?  So if a 2 to 5 percent loss in this position wipes out about $20 Billion of shareholder value in JPMorgan Chase then what would a 50% loss do? Poof. No more bank. And who could possibly come to the rescue in order to prevent the next world wide financial meltdown? Hmmm.

And by the way, remember how banks can regulate themselves? It turns out that the 3 JPMorgan Chase directors who had responsibility for risk evaluation and the oversight thereof don’t really have the experience to do that. One is the head of a museum.

Ethical Analysis: As commented on in earlier posts, fiduciary responsibility to one’s shareholders – F; professional codes of ethics for financial advisors – F; adherence to the ethical expectations of the investing public and general citizenry – F.

Next the IPO – Facebook, Morgan Stanley, the NASDAQ

Before its IPO, Facebook was heralded as the largest IPO ever. Now it may be a major IPO bust, with stock hitting its peak on the day of the IPO and down since. The NASDAQ apparently could not keep track of all the individual investor trades, with news in the past two days that some of those investors had money removed from their account to support the purchase but found no shares of FB appearing in their account to reflect that purchase. Morgan Stanley is planning to dole out millions of its underwriting fees to those investors. How long do you think it will be before Morgan sues the exchange? In the meantime, Facebook is considering a move off the NASDAQ to a competing exchange and everyone seems to be questioning the company’s valuation. Then there is the allegation that the underwriters went forward with the IPO even though new financial data was bringing the IPO price into question. Not to mention that only some (I believe they were at first called “preferred”) potential investors were informed of this news. How do you spell SEC?

Morgan Stanley and the NASDAQ have big black eyes over this one, but with a likely SEC investigation, shareholder lawsuits already launched and the prospect of continued sell-off in the shares, this mess can only get bigger, nastier and more expensive.

Ethical Analysis: My jury is still out on Facebook, although their leadership clearly consented to go forward with the IPO in spite of changing financial data. NASDAQ appears thus far to be an operational blunder. Morgan Stanley and the underwriting team may have broken securities laws, certainly didn’t maintain a level playing field for the retail investors and should have delayed the IPO for few days. I would give them an F in meeting the ethical expectations of investors and in conducting a professional financial underwriting operation.

Finally the Oil and Gas Driller – Chesapeake Energy

The major news this week was that Carl Icahn is/has accumulated over 4% of the shares of Chesapeake. Also, two of the nine board members are up for re-election at the annual shareholders meeting in early June.

So why do I consider this one a potential black hole?

Where is the money? All that money that founder and CEO Aubrey McClendon borrowed from various entities using his personal interest in company wells totals to somewhere well north of $ 1 Billion-with-a-B dollars. At one point (2008) he even got the company to buy his map collection for $12 million in addition to paying him an annual bonus of $75 million. Where is all this cash going? The guy seems to have an amazing appetite for cash. That tells me that something is going on behind the curtain. His investment (and the company’s too, of course) in the Oklahoma City Thunder pro basketball team isn’t nearly enough to account for all these loans.Maybe it’s his hedge fund that he’s been running out of his CEO offices at Chesapeake. Maybe he has personal margin calls on his stock in the company. I don’t know and nothing has been coming out in the press.  What I do know is that there is another big piece of this story that is yet to come out and that Chesapeake’s investments and Mr. McClendon’s appear very much intertwined.

The potential black hole has similarities with the one that took down Skilling, Fastow and all of the Enron shareholders and employees. It is related to the value of the company’s shares which have fallen with the abundance of natural gas. In Enron’s case, there were off balance sheet liabilities that were tied up in deals with Fastow’s friends. Those deals started to unravel when the stock dropped below a certain value. I’m not saying that’s the mechanism involved here, but I am saying that McClendon’s personal need for cash accelerated as Chesapeake’s share value went down, a sign that he is over leveraged somewhere in his financial picture. The company may be as well, since almost everything that the CEO is involved in personally has company involvement as well. That may be why McClendon, who has known Icahn for many years, is now eager to have a financial white knight come to the table.  Stay tuned.

Ethical Assessment: Conflicts of Interest abound like a mound of fire ants. F-.

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Another exciting week for corporate ethics watchers!

JPMorgan Chase competes with Facebook for the top financial news story of the week as the major bank’s exposure to losses from its London hedging unit has a strong probability of growing. While the news for Facebook is almost totally upbeat, the combination of troubles in Europe and losses at one of the most reputable of the biggest banks has been bad news for the stock market all week.

Here are the highlights on JPMorgan Chase:

  • Last weekend saw speculation that the entire London hedging unit would be closed down, and that the Chief Investment Officer, Ina Drew, would be asked to resign. There were also calls for Dimon to resign his position at the New York Fed.
  • On Monday, Ina Drew announced that she would retire from the bank.
  • On Tuesday, Jamie Dimon was facing his shareholders at their annual meeting in Tampa. Shareholders there defeated a proposal to separate the roles of Chairman and CEO, a proposal that would have meant the loss of one of those positions for Mr. Dimon.
  • On Wednesday, several shareholder lawsuits against the bank were announced. The suits were focused on the bank’s alleged failure to appraise shareholders of the level of risks being taken.
  • But the real news, reported early this morning in the Financial Times, is that JPMorgan Chase’s hedging unit may be sitting on a total exposure of $100 BILLION in risky trades, trades that it will be challenged to unwind. That provides the possibility of total losses multiple times larger than the $2 Billion that came to the CEO’s attention over a week ago.

Ethical assessment: As noted in prior posts the real issue here is fiduciary responsibility to shareholders and, due to the bank’s scale and role in the global economy, the investing public and the general public. The bank may not have broken any laws but the behavior of this particular part of the organization appears to not meet the professional ethical standards of any financial analyst, banker or licensed stockbroker. It does not meet the ethical standards of the communities (investing public, general public) that it serves.

In Brief

Chesapeake Energy – Corporate “raider” Carl Icahn was reported to be positioning himself for a move on the company. This may provide some temporary relief to Chesapeake’s employees’ retirement savings at the company which are estimated to be 38% invested in shares of the company. When are we going to stop using company shares as the basis for employee retirement programs? Isn’t it a principal of sound financial management to not put all of the eggs in the same basket?

News of the World – Rebekah Brooks, her husband and four others were charged in the UK phone hacking scandal. It also came out that, guess what, Ms. Brooks managed to cart off seven boxes of papers relevant to the case from her News of the World offices as the investigation was beginning last July. Hmmm. Hasn’t this been tried before?

Delete, shred, carry away. Rarely works in these high profile cases. Besides, if a physical document exits, there are multiple electronic versions out there all over the place. Yep, those electrons may be hard to see but they are also hard to destroy.

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