Graham Fisher Sees Parallels to Fannie Mae in JPMorgan

Joshua Rosner, co-author of a book detailing Fannie Mae’s role in the housing crisis, said he sees parallels between the failed mortgage-finance giant and the strategies JPMorgan Chase & Co. uses to win government and investor confidence.

JPMorgan, like Fannie Mae before its collapse in 2008, has a reputation among industry executives and analysts for being the best managed among its competitors, yet the bank still faces more regulatory and legal actions unrelated to mortgages than most of its rivals, Rosner, a 46-year-old analyst at Graham Fisher & Co. in New York, wrote yesterday in a 45-page note titled “JPMorgan Chase: Out of Control.”

“JPM appears to have taken a page out of the Fannie Mae playbook,” Rosner wrote, referring to the New York-based company by its stock ticker. Fannie Mae “perfected the art of cozying up to elected officials, dominating trade associations, employing political heavyweights and their former staffers and creating the image of American flag-waving, apple-pie-eating, good corporate citizen.”

Rosner, who was one of the first analysts to say the housing market was overheated in 2005, doesn’t suggest that JPMorgan has an accounting problem akin to the one that toppled Fannie Mae and led to its government rescue. Yet he said regulators have gone easy on the firm, which escaped fines from bank supervisors earlier this year over control weaknesses related to at least $6.2 billion in losses at its chief investment office in London. The bank uses campaign contributions and Washington influence to soften oversight, Rosner said.

Joe Evangelisti, a JPMorgan spokesman, declined to comment on Rosner’s report.

Early Warnings

Rosner was one of the first analysts to highlight accounting and control problems about a decade ago at mortgage finance companies Fannie Mae and Freddie Mac before each was forced to restate earnings and oust management amid separate earnings scandals. He was also among early analysts to warn of an impending credit crisis in late 2006 in the residential mortgage-bond markets.

JPMorgan had the second-largest corporate political action committee and employed dozens of lobbyists, including former Capitol Hill aides, at year-end, according to Rosner.

JPMorgan’s new global head of regulatory strategy, Timothy Ryan, 67, rejoined the firm this year after running one of the industry’s largest securities trade groups, the Securities Industry & Financial Markets Association, for five years.

Senate Hearing

JPMorgan’s trading loss last year, caused by a derivatives bet that Chief Executive Officer Jamie Dimon, 57, said “violated common sense,” will be the subject of a March 15 hearing called by the Senate Permanent Subcommittee on Investigations. The panel is set to release a report tomorrow detailing findings from a probe into the bets, which were handled by Bruno Iksil, a trader known as the London Whale because his positions were big enough to move markets.

The bank, which has stopped providing updates on the size of the loss, said it totaled more than $6.2 billion in the first nine months of 2012. At one point, the trade helped wipe out as much as $51 billion in the value of the firm’s stock as its market capitalization fell.

JPMorgan has spent at least $8.5 billion, or about 12 percent of net income, to settle regulatory and legal disputes from 2009 through 2012, Rosner estimated.

“We could not find another ‘systemically important’ domestic bank that has recently been subject to as many public, non-mortgage-related regulatory actions or consent orders,” Rosner wrote. “The firm’s pride in a disputable ‘fortress balance sheet’ -- which underestimates their off-balance sheet risks -- appears to have given investors false comfort.”

Record Profit

JPMorgan reported its third-straight year of record profits with $28.9 billion in net income for 2012.

“I do want to remind people in spite of the fact that ’the Whale’ happened during that time -- during that time we also had three record years of net income,” Dimon told analysts on a Jan. 16 conference call in talking about former Chief Financial Officer Doug Braunstein’s service. “It’s something we’re very proud of at this company.”

Rosner co-authored “Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon” with New York Times columnist Gretchen Morgenson. The analyst focused on Fannie Mae and Freddie Mac’s accounting controls before they were taken over by the U.S., and warned of a crisis before the housing market collapsed, almost toppling the financial system.

Fannie’s Fate

JPMorgan’s reputation and too-big-to-fail size help it avoid greater investor scrutiny, similar to Fannie Mae’s position before it was forced to restate earnings and later rescued, Rosner said.

Still, “we are not suggesting that JPM will meet the fate that Fannie did, nor that its actions will result in accounting problems,” he wrote. Fannie Mae and its sister mortgage firm Freddie Mac have drawn almost $190 billion in federal aid since they were seized by the U.S. government in 2008 amid soaring losses.

JPMorgan’s trading loss highlighted flaws in the firm’s internal controls and resulted in cease-and-desist orders from the Federal Reserve and Office of the Comptroller of the Currency, neither of which appears “to have resulted from any meaningful investigation,” Rosner wrote. He said most federal investigations into complicated trading and accounting issues generally take longer than eight months. The Securities and Exchange Commission, Federal Bureau of Investigation and U.K. Financial Services Authority, also are investigating the trades.

‘Fixed CIO’

Dimon ousted the three London traders and managers involved in the loss, shuffled senior managers and accepted resignations from executives. “We obviously fixed CIO totally, 100%,” Dimon said in January. “People in it, reporting, risk, controls, committees, guidelines and we don’t do synthetic credit there at all.”

Rosner called the lender’s internal analysis of the loss a “whitewash,” arguing that it wasn’t more revealing in part because it was too narrow in scope. Michael Cavanagh, co-CEO of the corporate and investment bank, led the review.

“The breakdowns in controls are not isolated” and may lead to more shareholder losses, Rosner wrote, citing dozens of open regulatory or legal cases against JPMorgan. Since 2009, JPMorgan has been censured or settled claims by regulators for knowingly executing fictitious commodities trades on behalf of a client, violating position limits on futures contracts and misleading investors in selling certain structured securities contracts. It agreed to a $722 million settlement with the SEC in 2009 over payments bankers allegedly made to help win business with Jefferson County, Alabama.

Municipal Contracts

In July, the company agreed to pay $211 million in a separate settlement with state and federal regulators, admitting that former employees had rigged bids of municipal-investment contracts.

“JPMorgan’s list of regulatory violations over the past five years is long, diverse and crosses legal and regulatory jurisdictions,” Rosner wrote. “Many of these infractions are for repeated violations of specific control failures, which the company had previously agreed to remedy.”

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