First Things First

While the players are frantically filling the air with chaff, it doesn’t take much to see that investment bankers pay a lot more attention to their own money than they do to those who entrust them with cash to invest. The latest smarmy deal to ooze into public view is a little (just a couple billion bucks) deal that the folks at J.P. Morgan profited from to the tune of a billion or two, while JPM clients took a half-billion dollar hit.

They began sorting it out in Federal Court last week. The investors claim JPM should never have put their bucks into so-called Structured Investment Vehicles (SIVs) issued by an outfit called Sigma. It may very well be that JPM will skate on this one. There seems to be no question that shortly after they plugged the investors’ money into Sigma, JPM could see that Sigma was headed for the rocks. That insight was so clear, JPM bet over $8 billion that Sigma was breathing its last. In return for their eight big ones JPM latched onto Sigma assets that the investors say netted JPM a couple billion.

JPM says Hey, the guys who put our clients into Sigma are in one division of our company (apparently the not too bright division) and the guys who made the other deal (the smart guys) are in another division. Sort of their right hand didn’t know what their left hand was doing. What’s more, they point out, they are required to maintain a “Chinese Wall” between these divisions (they have to keep their right hand behind their back). One division isn’t allowed to talk to the other. That may actually fly in court and JPM may walk on this one.

There are a host of reasons why it won’t fly anywhere else. First off, a lot of people at JPM, including their CEO, knew about both sides of this deal. According to a New York Times story, JPM’s top credit officer pointed out the dilemma only to be told by the bank’s top risk guy, “JPMorgan needed to protect its own position and not worry about what its clients were invested in.”

And in those words lies the key to what’s wrong with the investment bank sector. The same kind of conflict was at the core of the financial collapse that is still inflicting suffering across our land and most of the rest of the planet. Investment Banks (who are fine, completely recovered thank you) should be focused on helping their clients grow capital, not running trading desks with their own bucks. It leads to actions and behaviors that may legally pass muster, but morally and ethically are disgusting. Chinese Walls don’t work, these banks need serious adult supervision.