JP Morgan has been landed with a massive, $920m (£570m) penalty for allowing a its "London whale" trader to run up multi-billion dollar losses from its City offices.
The affair – at one time dismissed by chief executive Jamie Dimon as "a tempest in a tea cup" – saw a bank which once enjoyed a peerless reputation on Wall Street joining the likes of HSBC, Barclays and Royal Bank of Scotland in the gutter.
Further investigations are ongoing in the US, and it is believed that UK regulators also have unfinished business with the affair, which saw JP making losses of more than $6bn through enormous trades in credit derivatives, a type of insurance taken out on corporate or national debt.
These could see individuals punished. In the US charges have already been filed against two London traders, Javier Martin-Artajo, who oversaw trading strategy at JP's London base, and Julien Grout.
The penalty – which was imposed by four separate regulators including Britain's Financial Conduct Authority (FCA) yesterday – is the second-biggest imposed upon a bank, being eclipsed only by the $1.9bn that US watchdogs made HSBC pay for allowing itself to be used as a conduit for drug money and sanctions busting.
The FCA's portion amounted to £137.6m ($220m) for multiple breaches of its principles of business.
It says these were "fundamental obligations firms have under the regulatory system".
Other penalties were levied by the US Comptroller of the Currency ($300m) for "unsafe and unsound practices", the US Securities & Exchange Commission (SEC) for "misstating financial results and lacking effective internal controls" and the US Federal Reserve for "oversight, management and controls deficiencies".
The SEC demanded an admission of wrongdoing from JP, a highly unusual step for a bank facing legal action on multiple fronts. Despite the bank claiming that the Comptroller of the Currency was aware of what it was up to with the trades, a US senatorial committee found otherwise, leading former presidential candidate John McCain to accuse senior JP executives of "deception".
They avoided direct criticism from the then regulators, but the FCA called out senior management of JP saying: "The firm's senior management gave insufficient weight to inconsistencies raised in the information in its possession, especially in light of the context provided by the scale of the losses in the SCP (synthetic credit portfolio)."
It specifically referenced the "tea cup" comment in a sharply critical final notice.
Andre Spicer, the professor of organisational behaviour at Cass Business School, said:"JP Morgan's mammoth fine hammers home the cost of bad behaviour.
"It reminds banks that they desperately need to change their ways or risk taking a huge hit, not only to their bottom line, but also their reputation.
"With its recent profits, the bank can afford the fine. But the damage to its reputation could be more costly in the long term."
That was echoed by James Carlton, a partner at the law firm Fox Williams, who said that the penalties would "act as a huge shock wave to the industry as a whole".
"Law-enforcement agencies in the US and now in the UK could not be sending out a clearer message if they tried. This case clearly sets out a new benchmark in terms of financial penalties for the industry going forward."
Paying the price: UK regulators' fines
£160m UBS, Libor
£137.6m JP Morgan, London Whale
£87.5m RBS, Libor
£59.5m Barclays, Libor
£33m JP Morgan, Client money
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