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‘London Whale’ scandal costs JPMorgan nearly $1B

CEO Dimon says lessons learned from loose trading

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JPMorgan Chase, the country's largest bank, will pay almost $1 billion in fines and admit that it failed to rein-in loose trading practices that led to a $6 billion loss last year, U.S. and U.K. regulators said Thursday.

Authorities said the bank has been ordered to pay a combined $920 million fine after a yearlong investigation into the "London Whale" scandal that rekindled global fears of another 2008-style meltdown of the financial sector.

The investigation concluded that more than $6 billion in derivative deals were lost after JPMorgan regulators vastly underestimated their losses in April and May of 2012. JPMorgan employees working on the financial data were required to keep their work "strictly confidential," thus preventing regulatory trade examiners from conducting inspections, according to a report by the Securities and Exchange Commission.

"JPMorgan failed to keep watch over its traders as they overvalued a very complex portfolio to hide massive losses," said George S. Canellos, co-director of the SEC's Division of Enforcement. "While grappling with how to fix its internal control breakdowns, JPMorgan's senior management broke a cardinal rule of corporate governance and deprived its board of critical information it needed to fully assess the company's problems and determine whether accurate and reliable information was being disclosed to investors and regulators."

London trader Bruno Iksil, who gained oversized CDS market portions during this time, gained notoriety as the "London Whale." Although two of Mr. Iksil's colleagues have been charged with fraud, Mr. Iksil has avoided criminal charges in exchange for cooperation with authorities. To date, no JPMorgan executives have been charged with any criminal wrongdoing.

JPMorgan CEO Jamie Dimon said the banking giant cooperated fully with regulators in the U.S. and in the U.K. and is committed to reforming its practices.

"We have accepted responsibility and acknowledged our mistakes from the start, and we have learned from them and worked to fix them" he said in a statement released Thursday. "We will continue to strive towards being considered the best bank — across all measures — not only by our shareholders and customers, but also by our regulators. Since these losses occurred, we have made numerous changes that have made us a stronger, smarter, better company."

Public interest advocates, however, believe that more needs to be done to prevent a future catastrophe.

"JPMorgan's admission of certain facts and acknowledgment that it violated the law is an important step in the right direction" said Dennis Kelleher, president of Better Markets, a nonprofit organization that promotes the public interest in financial markets. "But, using shareholder money to pay headline-grabbing fines to buy a get-out-of-jail-free card for its executives will not end the Wall Street crime spree."

Colin Linsley, an accounting professor at George Washington University, believes that the fine will not curb JPMorgan's past mistakes.

"The fines are imposed on the firm, which hurts the shareholders, not the executives," Mr. Linsley said. "The punishment isn't falling on the people responsible for this, it is falling on the shareholders. If that continues, it is not clear if the offices at JP Morgan have an incentive to change their behavior."

Although the fine is just a fraction of JPMorgan's $2.4 trillion in assets, the scandal has hurt the bank's reputation.

James Angel, an associate professor of finance at Georgetown University's McDonough School of Business, believes that the fine both administers justice and gives the company an opportunity to improve its image in the financial industry. "The regulators are compounding the damage to the long-suffering shareholders" Mr. Angel said. "The $920 million (so far) in fines is just a piling-on that does little beyond the already $6 billion in losses to send a strong signal to financial firms to have good risk management."

"JPMorgan Chase appears to be accepting the fine as a form of penance," added Brian Gunia, an assistant professor at Johns Hopkins University's Carey Business School. "Research has shown that penance can help to redeem those who have wronged in the eyes of those who were wronged."

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