Dick Bove Shames Regulators, Media Over JPM “Whale” Losses

Some people inside large banks might scratch their heads at times. They run or work in divisions that are vital to the U.S. economy, they obey the rules and follow risk management protocols. Some – gasp – might have a degree of respect for intelligent regulators who have as their mission protecting the economy and do so by writing clear rules that error on the side of featuring less complexity.

Some may, some may not.

But one thing is clear: when someone inside a big bank breaks risk protocols, engages in behavior on the edge of known legal and regulatory lines, and then walks away will a hefty bonus, what message does that send? When the bonus of those who play by the rules and enhance the long term value of a bank is less than the cowboy risk takers, what direction is the incentive pointing employees?

But perhaps the insult to insults is not just with the employees, but how shareholders are treated. It is here that banking analyst Dick Bove weighs in.

Dick Bove: “Shame, Shame, Shame”

In a research report today titled “Shame, Shame, Shame,” Dick Bove admonishes the abnormally large risks taken by a very small group of traders who put the entire JPMorgan Chase & Co. (NYSE:JPM) organization, one that helped build America, at risk. But then he also lobs questions at regulators who administered the shareholder fines. The vice president of equity research at Rafferty Capital Markets points to the fabled “London Whale” trade, where a derivatives bet went very wrong. Initial reports pegged the bank’s trading losses at $2 billion, but Bove indicated the actual loss was more likely near $6.2 billion. As reported in ValueWalk, the traders involved in the trade did not face accountability from government regulators.

“The governments of the United States and Great Britain were incensed by the London Whale trades and they set upon JPMorgan shareholders like sharks after swimmers off the South Carolina coast,” Bove writes, throwing shade on a familiar target.

But the target regulators hit, he notes, were shareholders. The punishment was administered in late September 2013 when the primary U.S. bank regulator OCC held out its hand and collected $300 million in fines, the Fed grabbed $200 million, the SEC and London’s FCA stuffed $200 million in their respective pockets and the CFTC, typically the Cinderella at the ball, was in for just $100 million.

Dick Bove: “Fines should never have been paid”

These fines “should never have been paid,” Dick Bove says.

His logic?

The U.S. government never went after the individual involved in the case, not even trying to pressure him into cooperating, Dick Bove observed. “Bottom-line no individual has been convicted of anything and every court test of what the company or its people did has indicated that JPMorgan broke no laws,” he said. “They made some bad trading decisions but as shown by the company’s operating earnings they must have made some pretty good decisions also since the bank had record earnings in 2012 and excluding the fines would have even bigger results in 2013.”

Who is the real loser? You guessed it. Not the individual employees involved in the incident. “The losers in this story were shareholders at JPMorgan,” Dick Bove wrote. The investors suffered losses when they panic sold on the news as well as due to the fines paid came out of earnings, not a trader’s pocket.

Blame the journalists, or perhaps fine them

Dick Bove has another target in his attack. It’s not just the fact that nothing improper was individually pinned on the traders, he also takes the press to task. From the point Bloomberg’s team of Stephanie Ruhle, Bradley Keoun and Mary Childs all first broke the story to today’s Bloomberg headline that “implied the trader got away with something,” the media was wrong.

“Bloomberg is unrepentant for what it has done,” Dick Bove notes. While certain journalists at the time, including myself, might have thought the London Whale story was interesting investigative work, Bove thinks the press needs to deliver an apology.  Here is his logic:

While The Financial Times headlined today’s story: “UK watchdog drops case against “London Whale’” The Bloomberg story is headlined: “London Whale Escapes $1.5 Million Fine as U.K. Drops Case” implying that the trader got away with something even though the Financial Conduct Authority spent 3 full years trying to find an irregularity and could not. You decide if this is the system that best protects you or whether the press should be held responsible for what it says and whether shareholders should get their ombudsman in these cases.

Reporting on the derivatives trades of large banks, particularly given the fact that the U.S. government could be on the line for untold trillions in the case of even a small percentage default, might be considered in some quarters as shining a light where darkness had previously prevailed. But Dick Bove, apparently, doesn’t see it this way. The press created panic selling for reporting a trade in the public interest that was critical news to government officials, is the apparent Bove point of view. Some might call this journalism in the public interest. Opportunistic traders might call the result panic selling an emotionally-driven buying opportunity. Bove sees it as something else.