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JPMorgan Ordered to Improve Controls After 'Whale' Loss

U.S. banking regulators on Monday ordered JPMorgan Chase & Co to tighten its risk controls after the bank lost billions of dollars due to bad bets from a trader known as the "London Whale."

U.S. banking regulators on Monday ordered JPMorgan Chase & Co to tighten its risk controls after the bank lost billions of dollars due to bad bets from a trader known as the "London Whale."

The Federal Reserve and the Office of the Comptroller of the Currency issued the consent orders which levy no monetary penalties and place no specific blame on any individuals.

Instead, JPMorgan and its board agreed to submit an improvement plan to the Fed within 60 days, including taking risk outcomes into account when considering top executives' pay packages.

In a separate action, the banking regulators also ordered JPMorgan to improve its compliance with the Bank Secrecy Act and anti-money laundering requirements.

The OCC began asking JPMorgan last April about its derivatives trades after press reports described contracts arranged by a London-based bank trader, nicknamed the London Whale by hedge funds for the size of the positions he took.

The company, which reports its fourth-quarter earnings on Wednesday, ultimately lost $6.2 billion on the trades, saw its reputation and stock price badly damaged, and for six months lost government approval to buy back its own stock.

Monday's enforcement actions remove one small cloud hanging over the bank, but it still faces probes from the U.S. Department of Justice and the Securities and Exchange Commission, among others.

The UK Financial Services Authority issued a statement on Monday saying it is also continuing to investigate the trading losses.

JPMorgan neither admitted nor denied the findings. Spokesman Joe Evangelisti said the company "has been working hard to fully remediate the issues" cited by the regulators over the losses.

Evangelisti added that complying with anti-money laundering responsibilities "is a top priority."

"We have already made progress addressing the issues cited in the consent orders, which contain no allegations of intentional misconduct by the firm or any of its employees," Evangelisti said.

IMPROVING PAY PACKAGES

The public filings from the two regulators do not include names of bank officials or details of who the investigators believe did what wrong to lose the money.

The Fed order, besides concluding that there were deficiencies in risk controls, said broadly that senior management had failed to bring problems with the trades to the attention of members of the company's board of directors.

While JPMorgan pay contracts include so-called "clawback" provisions to take back compensation from executives after losses, the Fed order requires JPMorgan directors to consider "further enhancements to the firm's compensation processes for senior executives," including ones that factor in poor risk controls.

The Fed also puts new reporting requirements on the company, including quarterly progress reports on compliance with the order.

Jaret Seiberg, senior policy analyst at Guggenheim Securities, said despite the lack of monetary penalties, the enforcement action still shows that regulators are turning up the heat on risk management systems.

"I don't think that detracts from the overall message here," Seiberg said about absence of any fine.

MONEY-LAUNDERING

U.S. regulators have also been cracking down recently on lapses at banks on their anti money-laundering controls. Banks are supposed to flag suspect transactions from sanctioned countries or those from customers with ties to drug trafficking or terrorism.

Britain's Standard Chartered Plc last year agreed to pay a total of $667 million to U.S. and state regulators to resolve anti-money laundering probes, while HSBC Holdings Plc , also headquartered in Britain, agreed in December to pay $1.9 billion to settle a U.S. inquiry.

In April, the OCC identified major lapses in compliance systems at U.S. bank Citigroup Inc, which did not pay a monetary penalty.

The anti-money laundering inquiry of JPMorgan, the biggest U.S. bank by assets, dates back several months, Reuters reported last week in a story that said an enforcement action was expected.

As the regulators continue to comb through JPMorgan's anti-money laundering system, they could find additional lapses and issue a monetary penalty, said Peter Djinis, a former Treasury official who helped develop some U.S. anti-money laundering regulations.

Even if the bank does not face a monetary penalty, it is likely to be forced to spend millions of dollars on bolstering its anti-money laundering program.

"They can't do this on the cheap," Djinis said.

Copyright 2010 by Reuters. All rights reserved.

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