JPMorgan Chase agreed to pay $100 million in fines and admit that its traders in London acted recklessly in placing bets on derivatives that resulted in $6.2 billion in losses, the Commodity Futures Trading Commission said Wednesday.
The agreement is one of several the nation’s largest bank has reached with U.S. and British authorities over its handling of the disastrous “London Whale” trading losses. A month ago, JPMorgan paid a total of $920 million to four other regulators, including the Securities and Exchange Commission.
The trading blunder has been an albatross that JPMorgan has fought hard to shed. And yet the Justice Department and Massachusetts Securities Division are still conducting separate probes into the derivative losses.
In the CFTC agreement, JPMorgan admitted that it failed to supervise traders, who distorted prices to reduce the banks’ losses at the expense of other investors. The bank “recklessly disregarded the fundamental precept on which market participants rely, that prices are established based on legitimate forces of supply and demand,” according to the consent order.
From 2007 to 2011 the London desk of JPMorgan’s chief investment office amassed a $51 billion portfolio of derivatives that began suffering millions of dollars in losses by January 2012, according to the CFTC. To stem the tide, the agency alleges that traders sold $7 billion in derivatives in a single day, $4.6 billion of which was unloaded in a matter of three hours.
Officials at the CFTC say that strategy amounts to “manipulative conduct,” which is prohibited under the 2010 Dodd-Frank financial reform law. As part of the consent order, JPMorgan must enhance its risk management controls and improve the way it monitors trading activity.
“We are pleased to be able to put behind us another aspect of the trading matter by the resolution of the CFTC investigation,” said JPMorgan spokesman Mark Kornblau.
The bank’s admission of wrongdoing follows a regulatory trend to break from the traditional practice of allowing defendants to pay fines without acknowledging liability. The SEC, for instance, has successfully squeezed admissions out of hedge-fund billionaires and JPMorgan in recent months.
“Admitting to these findings of fact needs to be something part and parcel to these types of settlements,” said CFTC Commissioner Bart Chilton in a statement. “All too often, a firm will neither admit nor deny any wrongdoing. That needs to stop.”
For JPMorgan, the legal hits just keep coming. The financial goliath is embroiled in federal probes into its debt-collection practices and its role in the manipulation of a key interest-rate benchmark, among other matters.
It is also entangled in protracted negotiations with Justice to dispose of multiple government investigations into its sale of shoddy mortgage-backed securities in the lead-up to the financial crisis. That deal could cost the bank at least $11 billion, according to people familiar with the negotiations.
The barrage of federal investigations and multibillion-dollar settlements led JPMorgan to report its first loss in nearly 10 years last Friday. The bank suffered a net loss of $380 million after setting aside an additional $9.2 billion for future litigation expenses. All told, the bank has a $23 billion chest to cover its mounting legal costs.