Has JPMorgan Lost Its Way?

Jul.22.12 | About: JPMorgan Chase (JPM)

[See Disclosure at bottom.]

John Pierpont Morgan must be spinning in his grave.

In the wake of revelations about billions of dollars in high-risk trading losses and brokers pushing proprietary mutual funds, the preeminent bank old JP created seems more like an out of control "boiler room" than a venerable institution.

Indeed, JPMorgan Chase (NYSE:JPM), the beacon of stability that fared better than its peers in the 2008 financial crisis, along with its respected steward and CEO Jamie Dimon, now looks no better than the rest of the selfish, moneyed crowd preening up and down Wall Street.

We now know that what Mr. Dimon in April called a "tempest in a teapot" and then later, a "manageable" $2-billion loss, could now grow to at least a $7 billion loss.

Mr. Dimon told Congress in June that there was no "malfeasance" regarding the London Whale's loss. Confidence in that claim is quickly eroding. Last Friday, the banks said the London Whale's group, known as the Chief Investment Office, "may have been seeking to avoid showing the full amount of losses" during the first quarter by placing inaccurate prices on their position, the Wall Street Journal reported.

The Journal report, by Dan Fitzpatrick and Gregory Zuckerman, said that the Whale's boss may have "pressured" him to hide the trading losses. The bank also had "material weakness" in its internal controls and announced that it would be restating last quarter's earnings.

Just what the American investing public needs right now: another cover-up scandal starring one of Wall Street's biggest firms.

This sensational news for a time has distracted investors from another brewing scandal. The New York Times revealed earlier this month that JPMorgan senior management was "pressuring" financial advisers to push billions of its lower performing "in-house" mutual funds to customers instead of selling better performing funds run by money managers outside the firm.

Why did management push its advisers to put the firm's interest before the interest of its clients? Why, to reap enormous fees, of course!

"I was selling JPMorgan funds that often had weak performance records, and I was doing it for no other reason than to enrich the firm," one former JPMorgan broker told Times reporters Susanne Craig and Jessica Silver-Greenberg. "I couldn't call myself objective."

"It said financial adviser on my business card, but that's not what JPMorgan actually let me be," another ex-JPMorgan broker said. "I had to be a salesman even if what I was selling wasn't that great."

"We always place our clients first in every decision," a JPMorgan spokeswoman responded.

On top of the billions of dollars of losses due to derivative trades and the in-house mutual fund scandal, JPMorgan's potential role in the obscene Libor-fixing scandal could have a devastating impact on the firm's once stellar reputation.

Mr. Dimon says that, notwithstanding these messes, the bank is "solidly profitable" and that we must put all this stuff behind us.

If John Pierpont was still at the bank, he would find the current culture of focusing on short-term profits to boost bankers' compensation repellent. Old JP would clean house, and he would probably start at the top, with Mr. Dimon.

Disclosure: Zamansky & Associates are securities attorneys representing investors in federal and state litigation and arbitration against financial institutions, including JPMorgan Chase.