JP Morgan Chase will pay $100 million to settle charges from the Commodity Futures Trading Commission (CFTC) tied to the so-called “London whale” trading fiasco. The banks actions violated financial industry rules that were toughened by the Dodd-Frank reform package passed in 2010. The CFTC settlement pushes the legal costs from the “London Whale” affair to just over a billion dollars and features a similar admission of wrongdoing to that won by Securities and Exchange Commission (SEC) regulators in their own settlement with the bank.
The bank will “admit its traders acted recklessly” in an escalating series of bad financial bets that ended up costing JP Morgan over $6 billion. Whereas previous settlements with the SEC and other regulators stemmed from the bank’s attempts to cover up the “London Whale” losses and from violations of a rule against proprietary trading, the CFTC penalty comes from a Dodd-Frank rule against market manipulation. The settlement confirms that JP Morgan sought to reduce its losses from the “London Whale” trades by manipulating the price of the financial derivatives on which its employees had lost so much money. Such price rigging behavior is common across a variety of different financial markets, and the Dodd-Frank law reduced the burden of proof the CFTC faces when alleging manipulation.
The bank’s decision to admit wrongdoing is important. According to the New York Times, JP Morgan negotiated the scope of that admission down from what CFTC initially proposed. But given the common practice of allowing financial firms to “neither admit nor deny” allegations against them in legal settlements, any such concession in this case is significant. The bank’s previous admission of guilt in the initial “Whale” trades and this week’s admission of market rigging in the wake of those initial trades make for a high-profile break from a years-long pattern of guiltless payoffs that led one judge to label financial fines “a cost of doing business” rather than an effective deterrent to industry abuses. The SEC has pledged to stop providing “neither admit nor deny” language in settlements after coming under fire for the practice.
Another 100 million dollars does little to change the overall picture of financial industry enforcement in recent years, however. Prosecutions for financial fraud hit a 20-year low in 2011. The Department of Justice has vastly overstated its accomplishments in punishing financial wrongdoing since the Wall Street collapse that sparked the Great Recession. The highest profile legal settlements with banks over foreclosure abuses have failed to accomplish even the relatively modest goals set out for them. The biggest banks’ total legal expenses relating to the crisis are barely 1 percent of what the crisis cost the U.S. economy.