JPMorgan Fined for Lehman Collapse - Analyst Blog


Shutterstock photo

The ghost of the financial crisis, Lehman Brothers Inc., has yet again returned to haunt JPMorgan Chase & Co. ( JPM ). JPMorgan has been penalized for over-extending credit to Lehman for almost two years (November 2006-September 2008). Consequently, JPMorgan will be paying a fine of $20 million to the U.S. Commodity Futures Trading Commission (CFTC).

As the main clearing bank of Lehman, JPMorgan had two accounts that contained the funds of Lehman's customers. CFTC accused JPMorgan of considering one of the account's funds as the firm's own belonging while calculating the amount of credit that can be extended to Lehman on the daily basis. This led to a higher loan amount, which has been given to Lehman for its own trades, than it was eligible for.

As per the law, if any financial institution considers the customers' funds as funds of any other organization or if it provides loan to a firm by taking in those funds in calculation, it will be fined/penalized.

JPMorgan has been also indicted for not releasing customers' money for nearly two weeks after Lehman filed for bankruptcy in late 2008, thereby preventing lawful transfer of money to the customers at the time of the financial crisis. Later, JPMorgan released the amount, only on the insistence of CTFC.  At any given point of  time Lehman held $250 million to $1 billion of customer money with JPMorgan.

However, JPMorgan neither admitted nor denied the unlawful activity. Further, as a part of the settlement deal, the company will be taking steps to ensure proper handling of the customers' money. On being asked, the company will release the funds to the customers.

This is the third time that JPMorgan has been indicted on similar charges. In 2010, UK's Financial Services Authority had penalized JPMorgan £33.32 million for failing to keep aside $23 billion of client money.

Similarly in 2009, JPMorgan had to pay $300,000 to settle CTFC's charges. CTFC had accused the company of creating a shortfall in customer funds of about $750 million. Though the deficit was cleared the very next day, the CTFC fined the company for not informing the regulators about this.

Earlier this week, CTFC had filed a complaint against Royal Bank of Canada ( RY ) accusing it of utilizing illegal futures trades to reap lucrative tax benefits. CTFC alleged that the firm along with its two subsidiaries made a chain of transactions that involved no risk for the firm, but generated Canadian tax breaks in 2007-2008.

The present Lehman case has gained importance as similar thing has happened with the customers of MF Global Holdings Ltd., which filed for bankruptcy last year. Here also, JPMorgan was handling the funds. In MF Global case, the customers money (nearly $1.6 billion) simply vanished a week before MF Global went insolvent. This loss is a subject of investigation by the regulators. However, JPMorgan is not accused for any offense in this case.

Currently, JPMorgan retains its Zacks #3 Rank, which translates to a short-term 'Hold' rating. Moreover, in the absence of any significant positive or negative catalyst, we maintain a long-term "Neutral" recommendation on the stock.

JPMORGAN CHASE ( JPM ): Free Stock Analysis Report
ROYAL BANK CDA ( RY ): Free Stock Analysis Report
To read this article on click here.
Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
More Headlines for: JPM , RY

More from


Equity Research
Follow on:

Find a Credit Card

Select a credit card product by:
Select an offer:
Data Provided by