The ghost of the financial crisis, Lehman Brothers Inc., has yet
again returned to haunt
JPMorgan Chase & Co.
). 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
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
) 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.
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