Last spring the City of London was rife with rumours about a trader at the vast JP Morgan investment bank who was making such huge bets on the highly complex – and deeply risky – derivatives markets that he was known as "the London Whale" or "Voldemort".
After racking up losses of $6bn (£3.7bn) from his reckless trading, the London Whale blew another hole in the bank on Thursday – landing the Wall Street firm with one of the largest fines ever levied against a single bank.
The Whale was a French-born trader, Bruno Iksil. When stories of his dangerous dealings and the scale of the potential black hole first surfaced, JP Morgan's chairman Jamie Dimon, then Wall Street's most respected banker, shrugged off the losses off with a phrase that will haunt his career: "It's a complete tempest in a teapot," he insisted.
On Thursday, however, the bank agreed to pay some $920m in penalties to US and UK regulators over the "unsafe and unsound practices" that had allowed the bank's losses to balloon to $6.2bn. The near record fine comes as former JP Morgan bankers face criminal action in the US and it has all but sunk Dimon's once promising political career. It is also just one of a series of costly and damaging scandals that are rocking the financial institution.
The US's biggest bank must now hand over $300m to the US office of the comptroller of the currency, $200m to the Federal Reserve, $200m to the securities and exchange commission (SEC) and £137.6m to the UK's City watchdog, the Financial Conduct Authority (FCA). One other US regulator, the commodity futures trading commission, did not sign off on the fine and is still investigating whether the bank is guilty of market manipulation.
JP Morgan admitted wrongdoing as part of the settlement – an unusual step for a financial firm in the crosshairs of multiple legal actions. This week, in a letter to staff, Dimon warned them that, even after the fine, there was "more to come".
The opinions of the regulators were uniformly damning. "JP Morgan failed to keep watch over its traders as they overvalued a very complex portfolio to hide massive losses," co-director of the SEC's division of enforcement, George Canellos, said. Senior management "broke a cardinal rule … and deprived its board of critical information," he said. The bank was accused of "unsafe and unsound practices".
The FCA, levying its largest fine to date, said: "The firm's failings were extremely serious. The losses were caused by a high-risk trading strategy, weak management of that trading and an inadequate response to important information which should have notified the firm of the huge risks present."
The Whale's losses are not JP Morgan's only problem. The bank emerged relatively unscathed from the financial crisis, leaving Dimon as the only untarnished king of Wall Street, but the recovery has been less kind. JP Morgan has already faced vast fines for what became known as robosigning – automated procedures which forced thousands of US homeowners out of their houses without following the correct procedures.
On Thursday the bank also agreed to pay $389m to settle allegations that its credit card customers were duped into purchasing services they did not want. At least eight federal agencies are investigating the bank on issues ranging from its mortgage lending practices to its role in fraudster Bernard Madoff's Ponzi scheme. Regulators are reported to be pressing for a $6bn penalty to settle allegations that the bank mis-sold $33bn of bonds backed by sub-prime mortgages to US government-controlled mortgage companies in the run-up to the financial crisis.
In an indictment unsealed in federal court this week Javier Martin-Artajo, who oversaw trading strategy at the bank's London office, and Julien Grout, a trader who worked for him, were charged with securities fraud, conspiracy, filing false books and records, wire fraud and making false filings to the SEC.
Dimon has learned from his "teapot" comment and is now expressing contrition for the bank's debacle. "We have accepted responsibility and acknowledged our mistakes from the start, and we have learned from them and worked to fix them," he said. This year the bank has hired 3,000 staff to work on "compliance" – or working within the rules.
But reaction to the fine was mixed. John Coffee, professor at Columbia Law School, said: "The victims of this enormous loss were the shareholders of JP Morgan and the remedy is for those shareholders to pay $900m plus in fines. It's not just adding insult to injury, it's adding injury to injury."
No senior bank official has been charged with wrongdoing and Coffee described those indicted so far as "relatively small fish". He added: "Ideally the regulators should fine actual individuals who are responsible. But time and again the SEC settles for large penalties and gives virtual immunity to some officers."
Five banks – Wells Fargo, JP Morgan, Citigroup, Bank of America and Ally Financial – hit in 2012 with bill totalling £15.6bn for abusing the procedures to repossess homes.
$9.3bn 13 Banks, including JP Morgan, Wells Fargo and Bank of America, ordered this year to pay equivalent in cash and other help to homeowners for abusing procedures to repossess their homes. $1.9bn
HSBC's 2012 fine for failing to prevent money laundering on a massive scale.
UBS (Switzerland) was fined this much last year for manipulating Libor, the interbank lending rate.
10 banks, including JP Morgan and Goldman Sachs, hit in 2003 with fines for serious conflicts of interest between their research for investors and their investment banking businesses.
guardian.co.uk © Guardian News and Media Limited 2010
image: © brydeb