18 May 2012

It appears that some merchant bankers are losing the lucky streak which for years made their large profits. When things go bad, they continue to do so in a spectacular way. The US$ 16 bn loss by a Merrill Lynch dealer in 2008 however makes this month’s US$ 2 bn loss by JP Morgan look of less significance.

The reaction of the chief executive at JP Morgan seems to confirm that banking is about gambling – and that sometimes the economic hedge doesn’t work. He was prepared to apologise for embarrassing errors and bad judgment, but seemed to rationalise the loss as sloppiness. It was not a matter of ethics. He said that “….it is something the bank will admit, …learn from, …fix…and move on…”

The SEC which is now investigating, may be less charitable. Penalties will inevitably be added to JP Morgan’s losses. So far this year the SEC has levied penalties of up to US$10 million. But any penalty may well be seen as little more than a licence fee.

In an unrelated matter, the Financial Services Authority,  U.K.’s financial regulator, has fined a Swiss bank and its manager responsible for controls on money-laundering. The bank maintained lax control at its 12 branches in the U.K despite about half of deposits coming from doubtful jurisdictions. Its high risk control list excluded many countries where the bank had offices. It didn’t conduct due dilience on many at-risk customers, and excluded them from expected controls.

The bank was fined GBP525,000 and the employee GBP 25,000. The employee has retired from the bank, unlike the trader at JP Morgan.

Unsurprisingly banks rate in the lower quartile of most surveys assessing the ethics of, or public confidence in, national institutions. However in the 2011 survey of the world’s 110 most ethical companies, five are banks – of which four operate in New Zealand – ANZ Bank, National Australia Bank, Westpac and Robobank. JP Morgan was not on the list!

In the New Zealand UMR Mood of the Nation report for 2012, confidence in banks rates ahead of unions, Parliament and the media but below other surveyed institutions.