- JPM, along with ACA and HBSC, have been accused by European antitrust regulators of colluding to manipulate the Euribor's interest rates.
- Although all three banks deny wrongdoing, the EU Comission's case is strong and historical precedent exists via the Libor scandal.
- We suggest investors sell JPM, as negative news has snowballed in 2014, along with steep revenue declines and lowered outlook.
Antitrust regulators in Europe have accused three major banks of colluding to manipulate the Euribor's interest rates. JPMorgan Chase (NYSE:JPM), Credit Agricole (OTCPK:CRARY), and HSBC (NYSE:HSBC) were all named in cooperating to fix the benchmark interest rates.
The European Commission's competition authorities took the first formal step to initiate an antitrust investigation on the three banks by issuing a statement of objection. The officials believed the three banks worked together to influence the interest rate derivatives linked to the Euribor, the Euro Interbank Offered Rate.
This preliminary move of issuing an official objection is the most recent effort by European Union officials to hold the banks accountable for trying to fix interest rates. These benchmark rates affect borrowing costs associated with mortgages, credit cards, and bank loans. Changing the interest rates affects assets or financial instruments worth trillions of dollars.
Unfortunately, this type of investigation into billion-dollar banks colluding to set benchmark rates in their own favor is nothing new. As recently as December last year, the European Union successfully cracked down on another group of banks with a global reach, who were also trying to manipulate borrowing costs on money. The financial institutions included in that investigation involved megabanks like Société Générale (OTCPK:SCGLY), Royal Bank of Scotland (NYSE:RBS), Deutsche Bank (NYSE:DB), and Barclays (NYSE:BCS). The combined penalty, the largest of its kind, amounted to $2.3 billion, or 1.7 billion euros.
This was a landmark case for the European competition authorities. Prior to the settlement, the banks that did admit to colluding to fix the Euribor were granted a 10% reduction in fines. Other banks, however, refused to admit any wrongdoing - including JPMorgan Chase - and paid the full penalty. Barclays, who cooperated fully with the British and US regulatory authorities, avoided getting fined.
The Libor Scandal
Previously, when Barclays was involved in the Libor scandal, manipulating the London interbank offer rate, it was fined $450 million. During that scandal, JPMorgan and Citigroup (NYSE:C) together paid a total of $200 million for fixing the Libor in relation to Japan's yen.
The New Euribor Investigation
In the current investigation involving the role JPMorgan Chase, Credit Agricole, and HSBC in fixing the Euribor, the European Commission made a strong statement about how the banks had worked together to deliberately manipulate the normal course of the pricing structure for the Euro's interest rate derivatives.
In response to the official statement of objection, the three banks can review the evidence gathered since 2011 by the European Commission's investigators about the suspected collusion. After reviewing the documentation, they can reply, in writing, to request a fair hearing before the European commissioners and the national competition authorities. If found guilty of violating the antitrust laws of the European Union, the banks can face fines as high as 10% of their annual global revenue - although this level of severity has never been exercised.
All three banks deny any form of wrongdoing. The JPMorgan Chase spokesman referred to the accusations as "without merit", and promised to defend to against them fully. HSBC's spokesman also promised to provide a vigorous defense. Meanwhile, the Crédit Agricole spokeswoman, Louise Tingstrom, promised to take a close look at the statements once the documents were received.
Final Thoughts For JPM Shareholders: Better Options
This is the latest in a series of scandals involving enormous losses in legal fines and fees for Jamie Dimon's JPMorgan. If the EU Commission proves JPM was, indeed, colluding to fix interest rates -- this is blatant disregard for other investors and citizens.
Simultaneously, CEO Jamie Dimon has been awarded a raise - suggesting a strong disconnect between the bank's leadership and its purported mandate to deliver for shareholders.
JPM has performed poorly thus far in 2014, with trading revenues down by nearly 20% in Q1, compared with last year. The bank has announced the decline could continue into Q2.
We strongly suggest investors take profits in JPM before both results and headlines slide further into ignominy.