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JPMorgan Chase's terrible, horrible, no good, very bad 2013 is about to reach a crescendo.  According to this morning's New York Times, Chase is due to reach a potentially landmark settlement for its failure to stop Bernie Madoff's Ponzi scheme.  According to sources close to what has been a relatively quiet investigation, Chase is reportedly due to cough up $2 billion in fines and penalties.  It will also have to accept an unprecedented deferred-prosecution agreement--only the third ever imposed on a major American bank, and the first against a major New York bank--under which it will admit to failing to report Madoff's activities as required by law.

A settlement with federal prosecutors in Manhattan, the people said, would include a so-called deferred-prosecution agreement and more than $1 billion in penalties to resolve the criminal case. The rest of the fines would be imposed by Washington regulators investigating broader gaps in the bank’s money-laundering safeguards.

The agreement to deferred prosecution would also list the bank’s criminal violations in a court filing but stop short of an indictment as long as JPMorgan pays the penalties and acknowledges the facts of the government’s case. In the negotiations, the prosecutors discussed the idea of extracting a guilty plea from JPMorgan, the people said, but ultimately chose the steep fine and deferred-prosecution agreement, which could come by the end of the year.

Until now, no big Wall Street bank has ever been subjected to such an agreement, which is typically deployed only when misconduct is severe. JPMorgan, the authorities suspect, continued to serve as Mr. Madoff’s primary bank even as questions mounted about his operation, with one bank executive acknowledging before the arrest that Mr. Madoff’s “Oz-like signals” were “too difficult to ignore,” according to a private lawsuit.

The agreement is expected to fault Chase for violating the Bank Secrecy Act, which requires banks to report suspicious transactions to regulators.  For those who don't know, Madoff ran his scheme by depositing his clients' money in his business account at Chase--and before 1996, Chemical Bank (which merged with Chase in 1996 and took the Chase name before merging with JPMorgan in 2000).  He never invested a penny of his clients' money--instead, he simply paid them out of his Chase account.  According to the trustee who is responsible for cleaning up the Madoff mess, Irving Picard, Chase's retail banking arm failed to exercise even rudimentary oversight of Madoff's banking activities.  Had Chase done so, Picard charges in a 2010 lawsuit, it would have discovered evidence that would have made it obvious Madoff's operation wasn't legitimate.  Also, despite telling UK regulators (but not American ones) that Madoff's returns were "too good to be true," Chase allowed Madoff to conduct normal banking activities until his arrest.

As part of the deal, Chase is expected to pay $1 million to the Office of the Comptroller of the Currency and the Treasury Department, who are conducting a broader probe into holes in the bank's money-laundering safeguards.  The OCC had originally indicated it wouldn't stand in the way had St. Andrews Plaza tried to demand that Chase plead guilty to Bank Secrecy Act violations, but prosecutors ultimately decided on a deferred-prosecution agreement.

While this sounds like some pretty severe medicine, I had hoped that the feds would demand that Chase CEO Jamie Dimon leave the firm as a condition of any agreement.  While the London Whale affair and the mortgage securities scandal can be chalked up to dishonest traders and salesmen, this involved some very senior people at Chase knowing that the bank had a criminal customer and doing nothing.   It would seem to me that if the White House essentially fired GM's Rick Wagoner for doing a crappy job, there would be nothing wrong with pushing out Dimon.  And if the feds don't get rid of him, hopefully Chase's shareholders will.  After all, by my math Chase has now had to cough up several billion dollars in the last year after admitting to illegal activities.  At some point, the CEO has to be held responsible.  Hopefully failing to stop the biggest financial crime in world history will be the last straw.


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