Wednesday, November 4, 2009

JPM, Derivatives and Criminal Central…

Jefferson County, Alabama, was nearly bankrupt by derivatives sold to them by JPMorgan. JPM just agreed to a $75 million dollar fine and to terminate the swaps without the contracted $647 million in “termination fees.” Why would JPM agree to this arrangement apparently brokered by the SEC (an arm of the 4th branch of government that JPM heads)? They would agree to keep it out of the courts where their methods would be exposed to the light of day – that’s why.

And their paltry $75 million fine represents only 1.3% of the $5.8 billion in derivatives sold.

What this article does illuminate, however, is the graft and corruption that is occurring in the world of politics and derivatives:

JPMorgan Pays $75 Million to End Alabama Swap Probe

By Martin Z. Braun and William Selway

Nov. 4 (Bloomberg) -- JPMorgan Chase & Co. agreed to pay $75 million and forfeit another $647 million in interest-rate swap termination fees to settle a U.S. Securities and Exchange Commission probe into the sale of derivatives that helped push Alabama’s most populous county to the brink of bankruptcy.

JPMorgan will give Jefferson County, Alabama, $50 million and pay a $25 million penalty, according to an SEC news release. In addition, the agency charged two former JPMorgan employees for their roles in an “unlawful payment scheme” that allowed them to win bond and interest-rate swap business with the county, officials said in the e-mailed release.

The settlement comes a week after Larry Langford, the former president of the Jefferson County Commission and Birmingham mayor, was convicted for accepting $235,000 in expensive clothes, Rolex watches and cash from an Alabama banker who JPMorgan paid almost $3 million to help arrange the swaps associated with a refinancing of the county’s sewer debt.

Jefferson County, which includes Birmingham, the state’s largest city with more than 240,000 residents, has faced bankruptcy since February 2008, when a $3 billion refinancing of its sewer system collapsed during the credit crisis.

SEC Allegations
The SEC alleged that JPMorgan, Charles LeCroy, the banker who pitched the refinancing to Jefferson County, and Douglas MacFaddin, the former head of the New York-based bank’s municipal derivatives desk, made more than $8 million in undisclosed payments to close friends of county commissioners. The associates owned or worked at local-broker dealer firms that didn’t do any work on the deals, the SEC said.

In exchange, the county commissioners voted to select JPMorgan to underwrite the floating-rate sewer bond deals and provide interest-rate swaps, which were meant to lower the county’s borrowing costs, the SEC said. JPMorgan passed along the costs of the illegal payments by charging higher interest rates on the swaps, the SEC said.

“This self-serving strategy of paying hefty secret fees to local firms with ties to county commissioners assured JPMorgan Securities the largest municipal auction rate securities and swap agreement transactions in its history,” said Glenn Gordon, associate director of the SEC’s Miami office, said in a statement.
Payment to Banks

The county paid JPMorgan and a group of banks $120.2 million in fees for $5.8 billion of derivatives, according to a series of stories published by Bloomberg News in 2005. The payments were about $100 million more than they should have been based on prevailing rates, according to estimates in 2007 by James White, an adviser the county hired after the SEC said it was investigating the deals.
“JPMorgan is pleased to have reached a settlement with the SEC in connection with its investigation of Jefferson County,’ said JPMorgan spokesman Brian Marchiony in a statement.

The bank concluded the case without admitting or denying the allegations. LeCroy, 55, and MacFaddin, 48, didn’t agree to settle.

JPMorgan’s plan to pay politically connected firms to win the financing business from the Jefferson County commission began in 2002, according to the complaint. JPMorgan banker Charles LeCroy told his bosses they would pay $5,000 to $25,000 to Mobile, Alabama-based Gardnyr Michael Capital Inc. and ABI Capital, which both can be “helpful to us in Jefferson.”

Aiding Firms
The sums wound up running into the millions of dollars, according to the SEC. In July 2002, LeCroy told MacFaddin about how his plan paid off for the bank, which was selected that month to lead a $1.4billion bond deal.

According to LeCroy, Commissioner Jeff Germany and another unnamed commissioner told him JPMorgan would “have to take care of our two firms” in return for their support. The composition of the Jefferson County commission was poised to change in November.

“I said, ‘Whatever you want -- if that’s what you need, that’s what you get, just tell us how much,” according to the complaint, which cites tape recordings of the conversation. “They want it done before they lose control, because they want to help all their friends.”

New York-based JPMorgan, which disbanded the unit selling debt derivatives to municipalities in September 2008, is the first Wall Street bank regulators probed for the sale of unregulated contracts such as interest-rate swaps to states and local governments.

At least seven of the New York-based firm’s bankers are under scrutiny in a Justice Department criminal antitrust investigation of the sale of unregulated derivatives to local governments across the U.S., federal regulatory records show.

These are the actions of dirty politicians and mobster banksters whose false and destructive products have infested the world. No rule of law, the SEC is but a token, the entire financial system is corrupt. We need to separate corporations and their money from state, there’s really not a lot more to say.

Those who think the economy is going to go roaring off into a bright and shiny new future here based in LEI bunk, have their eyes closed. Get ready, because like Enron, Madoff, and like Ponzi, the reaper is hearing the cow bells, they are getting louder and louder, this is one. No need to fear this reaper, unless you are a central banker… or have a fever. What we really need are more cow bells, lol (ht Joe):

SNL Don’t Fear the Reaper – More Cow Bells: