If you regularly insult and belittle your teacher, argue over whether to hand in homework and flunk the midterm exam, what grade do you expect to get? If you say "a gentleman's C," then congratulations: You are JPMorgan Chase.
Last July, the Office of the Comptroller of the Currency cut the rating for JPMorgan's management on a scale meant to measure a bank's safety and soundness to a level that means the biggest U.S. bank "needs improvement," the Wall Street Journal reported on Wednesday.
The OCC cut JPMorgan's management rating on what is known as the CAMELS scale to 3 from 2. The scale goes from 1 to 5, with 1 being the best and 5 the worst. The rating system has nothing to do with cigarettes, but stands for "capital, asset quality, management, earnings, liquidity and sensitivity to market risk."
The ratings are kept a secret in order not to embarrass banks. However, JPMorgan's downgrade was disclosed in the recent report by the Senate Permanent Subcommittee on Investigations into the bank's "London Whale" trading debacle -- in which JPMorgan lost about $6 billion after its supposedly staid portfolio-hedging office placed huge bets on credit derivatives, bets that went horribly wrong. The downgrade was first reported last week by MarketWatch.
A JPMorgan spokesman told the WSJ, "We are working hard to strengthen all of our processes and have already remediated many significant issues." The bank declined to comment on the downgrade when reached by HuffPost.
JPMorgan's disastrous "London Whale" bet alone would seem to be enough to put JPMorgan's CAMELS rating at risk of a downgrade. And then there are the allegations in that Senate report -- that bank managers at the very least were clueless about the risks they were piling on, and at worst were actively trying to hide those risks from investors and regulators.
And then there are the allegations of the bank's perpetually lousy treatment of OCC regulators, which seems like an open plea to get your CAMELS rating cut. The OCC claims that Jamie Dimon questioned why regulators needed regular reports on the health of JPMorgan's investment bank. According to the Senate report, bank officials regularly berated and clashed with the OCC, including calling OCC regulators "stupid" at one point.
The bank has repeatedly denied allegations that it tried to hide the London Whale losses or mistreated OCC regulators.
But wait, there is more! While all of this was going on, JPMorgan has also been getting itself into one regulatory pickle after another, as bank analyst Josh Rosner detailed last week.
This morning brought the news that the bank had agreed to pay $546 million to former clients of the failed brokerage firm MF Global, beginning to bring an end to a long tussle between the bank and investors over some $1.6 billion in missing customer money, some of which had been held by JPMorgan. Though it was not sanctioned by regulators over the MF Global money, the bank has been repeatedly sanctioned in the past for failing to keep a clear line between its money and money belonging to its customers, Rosner wrote last week. In each of those cases, the bank neither admitted nor denied wrongdoing.
JPMorgan is also one of more than a dozen banks in the U.S. and Europe still under investigation on charges of manipulating the key short-term interest rate known as Libor. The bank has said it is cooperating.
In January, the Federal Reserve and the OCC wrote JPMorgan a ticket over less-than-sterling compliance with anti-money laundering laws. The bank pledged to do better.
Last November, JPMorgan's power-trading unit was suspended by the Federal Energy Regulatory Commission for failing to provide information to regulators. The bank is fighting that one in court.
Last week, the Fed told JPMorgan that its capital plan wasn't quite up to snuff and told it to re-submit a plan by September, or forfeit its ability to give more cash to shareholders.
At the same time, the bank is racking up record earnings, helping to keep at least part of its CAMELS rating above water.
But the "management" part of the bank's rating is finally getting some serious and deserved scrutiny, after being considered to have papal levels of infallibility for most of the years since the crisis.
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