The management of JPMorgan Chase was raising red flags about a troubled investment vehicle called Sigma, which was based in London, in the summer of 2007, only 2 months after they had placed 500 million in customers’ assets into the vehicle. But the bank chose not to move out $500 million and just left their customers assets at risk in what they felt was a doomed investment vehicle.
As Sigma began to deteriorate, JPM lent them billions in capital in exchange for quality assets. Then when Sigma collapsed a year later (fall 2008), those same assets what backed JPM’s influx were moved to the banks ledger and eventually appreciated in value, giving them an increase of nearly 1.9 billion dollars.
JPM did not use that money to pay back their investors who had lost 500 million in the investment the JPM had put them in and had plenty of time to remove them from, instead, those investors lost virtually all of the 500 million that was placed in the SPV Sigma. In the other words, JPM did cherry pick of the remaining assets to cover their loans to the Sigma while again leaving the original investors hanging in the wind.
I thought investment vehicle is like those special entities under investment banks that are used to segment some special assets separately. It turns out this term means everything that is investable, such as bonds, mutual funds.
In this case, Sigma is a company that JPM invested their clients' assets and expected to generate return from it.
Big banks were accused of preventing full access of infomation from their customers. For instance, Citi was accused by SEC of not fully informing their clients of the true exposure of risk during the financial crisis.
Firstly, Innocent until proven guilty. Off course JPM's image is tarnished and confidence amongst their clients will be low. However, the real affects will occur when the verdict comes out and I am going to be watching this very closely. Moreover, I think its going to affect wall street in general. Fortunately, I think consumer confidence is high and hence, we have lost our memories of the last... whats the word... oh yeah market crash... and im sure this will not effect the market Major as every one will be cruising the highs of more jobs and more consumer spending, treating this episode less remorsefully.
1. I think there needs to be more transparency available for clients on their investments. This will raise concerns amongst clients in their investments. For instance, the client was not aware of that the investment was going to go bad.
2. The other issue is that of the Chinese wall that separates investment banking decisions from research to ensure that the research team is not affected or influenced by the investment bankers. I believe there should be more stringent rules on mediating these process. For instance, even though the issue was raised all the way to Jamie Dimon, the bank chose to take advantage of the opportunity to make more money.
3. In addition, since pension funds are geared towards long-term investment, there needs to be more caution exercised by banks.
4. This incident raises questions on the duty of the bank towards its clients - who is at benefit?
Clearly JPM stood to benefit regardless of the fact that Sigma would fall or survive. Just as any other company would do, they want to amplify their reputation through showing greater earnings and profits rather than telling their clients that their investments didn't come to fruition. Mark Crawley, an Executive of JPM, mentioned that providing additional loans to Sigma could tarnish the reputation of JPM, but other JPM Executives were probably concentrated on the $9.3 billion in assets vs. the $8.4 billion which it had lent to Sigma. JPM had to have known that their investment into Sigma would be HIGHLY risky, but they also knew that regardless of the fact if Sigma failed, JPM would come out on top...even if their clients suffered.