Category Archives: JPMorgan Chase

Synthetic collateralized debt obligations, or CDOs, are complex mortgage-linked debt products that have been blamed for bringing Wall Street to its knees and pummeling millions of investors in the process. It was in the fall of 2007, when the financial markets first started to become unhinged, that these high-risk instruments found their way into the public’s eye.

Today, CDOs are a hot topic on Capitol Hill, where members of Congress and regulators like the Securities and Exchange Commission (SEC) are trying to determine exactly how and why synthetic CDOs created the financial tsunami that they did.

As reported Dec. 24 in an article by Gretchen Morgenson and Louise Story for the New York Times, regulators are said to be looking at whether current securities laws or rules of fair dealing were violated by the investment firms and banks that created and sold CDOs and then turned around to bet against clients who purchased them.

“One focus of the inquiry is whether the firms creating the securities purposely helped to select especially risky mortgage-linked assets that would be most likely to crater, setting their clients up to lose billions of dollars if the housing market imploded,” the article says.

Pension funds and insurance companies are some of the institutional investors that lost billions of dollars on synthetic CDOs – investments they thought were safe investments.

The New York Times article devotes space mainly to the synthetic collateralized debt obligation business of Goldman Sachs and, specifically, mortgage-related securities called Abacus synthetic CDOs. Abacus CDOs were developed by Goldman trader Jonathan Egol, who had the idea that they would protect Goldman from investment losses if the housing market ever collapsed.

According to the article, when the market did tank, Goldman created even more of these securities, enabling it to pocket huge profits. Meanwhile, clients of Goldman who purchased the CDOs – and who thought they were solid investments – lost big.

One can easily infer from the article and other news reports on the subject that Goldman put the best interests of clients in harm’s way with Abacus because it not only served as the structurer of the deals involving the product, but also held onto the short side of those same deals. In other words, the company would be advising clients to buy assets that, in turn, it was betting to fail.

Goldman certainly is not the only investment firm that employed this strategy. Others banks created similar securities that they sold to clients and then bet against the future performance of those assets.

Goldman and other investment banks will soon have to answer tough questions about accountability and fiduciary duty. In the meetings being held on Capitol Hill, the Financial Crisis Inquiry Commission – a group that has been compared to the 9/11 Commission – plans to call several panels of investment banks to appear as witnesses. Among them: CEOs of Goldman Sachs, Morgan Stanley, JP Morgan Chase, and Bank of America.

Kelvin Koma, a former financial adviser with JP Morgan Chase Bank, has been barred from associating with any member of the Financial Industry Regulatory Authority (FINRA). FINRA imposed the sanction over allegations that Koma obtained ATM cards belonging to customers of his member firm’s affiliated bank and then used the cards to make unauthorized withdrawals from customers’ accounts for his own personal use.

Other recent disciplinary actions taken by FINRA include those against:

• William J. Gray, former financial adviser for AXA Advisors LLC. Gray was barred from association with any FINRA member in any capacity for allegedly forging the signatures of a customer, as well as those of brokers of his member firm, on paperwork related to the customer’s purchase of a variable annuity.

• Dermot A. Graham, former registered representative with PFS Investments. Without admitting or denying the allegations, Graham consented to FINRA’s entry of findings that he wrongfully and without authorization converted $8,666.12 in funds for his own use by securing debit or credit cards linked to customers’ accounts and used the cards for his personal benefit without the individuals’ knowledge or consent.

• Ronald Dwayne James, former registered representative with TD Ameritrade. James was barred from associating with any FINRA member over allegations that he conducted securities transactions in a customer’s account without that customer’s prior authorization or consent.

If you suffered investment losses because of fraud, unauthorized trading, conversion or misrepresentation on the part of the above individuals, please contact us.

Credit default swaps (CDS) may be described as insurance-like contracts designed to hedge against default on loans or bonds, but they are far from ordinary insurance. Created in the early 1990s by JPMorgan Chase & Co., credit default swaps belong in a derivatives class all by themselves. Some call them ticking bombs; others – most notably billionaire investor Warren Buffett – refer to credit default swaps as financial weapons of mass destruction, carrying dangers that are potentially lethal and deadly.

Now matter how you characterize them, most financial experts now agree that credit default swaps are, in large, responsible for the upheaval in the stock and credit markets and the resulting financial crisis happening around the world.

A credit default swap essentially is an obscure and complex derivative instrument that takes the form of a private contract between a buyer and a seller. The buyer (investor) of a credit default swap pays an upfront fee plus annual premiums to a seller, which typically is a bank or hedge fund, to cover potential loss on the investment outlined in the contract.

The underlying caveat to a credit default swap is the counterparty risk involved in the contract. The credit default swaps market – estimated at $62 trillion in 2007 – is unregulated, with swaps sold over the counter. With no regulation, there’s no entity overseeing the trades to ensure a purchaser of a credit default swap has the financial resources to make good on a swaps contract if it is called in.

Think Bear Stearns. American International Group (AIG). Lehman Brothers Holdings. Lehman Brothers was deeply entrenched in the credit default swaps market. When the company filed for bankruptcy on Sept. 15, 2008, sellers of its credit default swaps contracts found themselves on the hook for billions and billions of dollars.

As for AIG, its involvement in credit-default swaps reportedly pushed the financially troubled firm to the brink of bankruptcy in September before the federal government stepped in with a bailout that now totals more than $182 billion.

And then there’s Bear Stearns. It, too, became crushed under the weight credit default swaps. Its fate was finally sealed when JP Morgan – ironically the inventor of the derivative instruments – purchased the 85-year-old investment firm in March 2008 for the fire-sale price of $2 a share. Under pressure from shareholders, the deal was later revised to $10 a share.

As the recipient of $25 billion in funds from the government’s Troubled Asset Relief Program (TARP), JPMorgan Chase should be focusing on how and when it will pay back taxpayers’ money. Instead, ABC News reports that the bank plans to spend nearly $140 million on two new luxury Gulfstream jets and embark on a lavish renovation of a hangar at the Westchester Airport to house them.

The news comes on the heels of recent public outrage over TARP recipients allocating money to buy luxury items or pay corporate bonuses. Last week, criticism reached a boiling point after it was learned that American International Group (AIG), which has received more than $180 billion in bailout money from the U.S. government, handed out $165 million in employee bonuses.

In January, a firestorm of criticism forced Citigroup, also a recipient of billions in TARP funds, to abandon plans to purchase a $50 million French-made corporate jet for executives.