Rosenthal: Wall Street rules, sells us short

Events underline why public is wary

It's hard to remember now, but it was only a few years ago that Jamie Dimon's name was floated as a possible candidate for Treasury secretary. Those frustrated by the sluggish economic recovery believed the JPMorgan Chase & Co. chief executive, whose star only rose as rival banks staggered and fell in the financial crisis, should be the one to map out a new regulatory framework.

The "what if" scenarios are mind-boggling. Like having a group of Illinois politicians take a whack at rewriting campaign finance laws.

Looking back on the economic upheaval that followed the crash of 2008, there is the nagging suspicion, particularly among those for whom the recovery has been largely a spectator sport, that the whole game was and remains suspect. Those of us whose livelihoods and life savings float with the markets but don't move them fear the prevailing attitude of the Big Boys is that it's a big casino and rules are merely a source of undiscovered loopholes.

Two events Tuesday brought to the surface why people view Wall Street and the economy it drives warily: The Securities and Exchange Commission cited 23 firms, including Chicago-based Peak6 Capital Management, for short-selling violations. And after one violation too many, Dimon warned employees of what's coming next.

There are "legal and regulatory issues facing our company, and in the coming weeks and months we need to be braced for more to come," Dimon wrote in a companywide note in which he outlined plans to improve control and compliance.

"You know why they put big columns in front of financial institutions and banks? It's not to serve some structural need," said Al Gini, Department of Management chair at Loyola University Chicago's Quinlan School of Business. "They're there to remind us that they're solid … and they always will be there for us, so we can depend on them. Except we couldn't. And then we found out they weren't even running their business well."

Once emblematic of someone getting it right, Dimon has been getting it and getting it and getting it of late.

His JPMorgan Chase has run up big profits but also more than $18 billion in legal expenses since 2008. It's operating under four enforcement actions and still faces investigations by the U.S. Department of Justice, the SEC and a variety of other government agencies for everything from possibly fraudulent sales of mortgage securities to its hiring practices in China.

Precipitating Tuesday's letter was the bank's latest public tarring: It's poised to fork over more than $800 million in penalties, while still bracing for possible criminal action, over how it handled the so-called London Whale's roughly $6 billion loss on a too-risky derivatives bet. And The Wall Street Journal reports that a separate action connected to the company's credit card business is expected to be settled in the coming days, costing JPMorgan another $80 million or so.

The London Whale fiasco, a massive foul-up Dimon once dismissed as "a complete tempest in a teapot," has boiled over and the scalding has the usually unapologetically defiant Dimon toning down the aggression.

"If you don't acknowledge mistakes, you can't fix them and learn from them," Dimon wrote. "So now, as in the past, we are recognizing our problems, rolling up our sleeves and fixing them."

Jon Najarian, co-founder of Chicago-based OptionMonster and co-lead analyst for InsideOptions, noted that in the overall financial picture of JPMorgan, even a $10 billion loss wouldn't be "a pimple on the butt of an elephant, but it's small compared to the total portfolio and we don't know what other trades they might have had against it."

When Najarian looks for why people might be suspect of Wall Street, he sees systems crashes at Nasdaq and elsewhere, potential abuses of high-speed trading technology and the since-discontinued practice of selling firms access to Consumer Sentiment Index data before it's officially released. He compared that to the crooked brokerage of "Duke & Duke in the movie 'Trading Places,' where they're buying the crop report early. … Those are more detrimental to the public's perception to how the game is played and whether it's a level playing field and all that."

Peak6 got into trouble over some 2009 dealings involving Valero Energy Corp. on which it made a profit of $58,321, a rounding error in the world of high finance even though it would make a huge difference in many a household.

Because of the inherent potential to manipulate the market, it's against the law for a firm that has shorted a stock within five days of its initial pricing to subsequently buy the stock in its initial public offering. So the SEC is taking back Peak6's profit on the transactions, plus $8,896.89 interest and a $65,000 penalty. The company did not respond to a request for comment.

The cumulative effect of all of this contributes to a sense five years after the collapse of Lehman Brothers — and 140 years to the day since the collapse of Jay Cooke & Co. triggered the Panic of 1873, heralding a long depression — that we shouldn't celebrate survival of the last crash so much as prepare for the next.

Everyone, even those who view him as tarnished, will tell you Dimon is as bright as they come.

So how dumb should we feel for continuing to put our trust in the system as it currently operates?

Twitter @phil_rosenthal

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