When first the speculation and subsequently the confirmation that in addition to suffering massive losses on its IG-9 position, JPM had engaged in massive, reckless and criminal CDS mismarking with the intent to defraud and to boost the appearance of profit for selfish reasons, we promptly concluded that "Jamie Dimon's "tempest in a teapot" just became a fully-formed, perfect storm which suddenly threatens his very position, and could potentially lead to billions more in losses for his firm." So far, the regulators which are currently on page two of "CDS for Absolutely Corrupt Criminal Morons", are only slowly catching up. And while the stench will eventually lead to Jamie, as what happened in the over the counter, unregulated CDS market has most certainly happened at the tens of trillions in other OTC products traded by JPM, most of which are IR swaps, tying it all back nicely to the Libor scandal of which JPM is also a part, the first person who will certainly experience some major pain as the JPM scapegoating plays out, is none other than the London Whale himself Bruno Iksil, who was loved by all at JPM when he was making money, and is now being hung out to dry, once the bank is in the prosecution's cross hairs.
Bruno Iksil, a French citizen and a former London-based trader in JPMorgan Chase & Co's Chief Investment office, is under scrutiny for trades he made in an illiquid market for credit products that resulted in the bank's losses. Iksil became known in the derivatives market as the "London Whale" for the size of the positions he took.
U.S. federal investigators are looking at whether Iksil, who was fired in July, and his superiors deliberately mismarked the value of some of the trading positions to try to cover up the losses. JPMorgan is also conducting an internal probe.
The sources, who did not want to be identified because they were not authorized to talk about the investigation, said Iksil has also hired criminal defence lawyers in New York and Washington, D.C.
Bruno is not alone:
At least six people have retained lawyers in connection with the investigation. Iksil's supervisors, Javier Martin-Artajo and Achilles Macris, who were also fired by the bank in the wake of the losses, have attorneys in London and New York.
In addition to the CIO traders, the former head of the CIO office, Ina Drew, and two former risk officers, Peter Weiland and Irvin Goldman, have also hired lawyers.
And for all those wondering why all recent major crimes have London as a tipping point: Lehman, AIG, MF Global, UBS, JPM, the answer is very simple: jurisdiction.
Credit Suisse discovered that traders managing a portfolio of mortgage-backed securities had been inflating their numbers to make their group's profits look bigger and to hide losses in 2007, as the subprime mortgage crisis deepened.
In February, federal prosecutors announced charges against three people from Credit Suisse, two of whom pleaded guilty to conspiring to falsify the bank's accounts.
The third, Kareem Serageldin, a U.S. citizen living in London, was indicted in federal court in New York but has yet to come to the United States to face the charges. In recorded conversations he leaned on more junior traders to overstate the value of their securities, the indictment alleged.
If the Federal Bureau of Investigation, which is reviewing emails, phone records and witness statements about the CIO losses, finds evidence of fraud and criminal charges are brought, prosecutors could face some of the same hurdles in the JPMorgan case as they did with Credit Suisse traders.
Iksil's French citizenship complicates potential efforts to bring him to the U.S. for a trial. Witnesses whose cooperation may be crucial to the case will also have to come to New York to testify in the event of a trial.
Of course, even if he were to come to the US, Iksil hardly has much to worry about: after all that other Frenchman, Goldman's Fabrice Tourre who was found to magically be solely responsible for the firm's CDO fiasco, is not only still free, but technically receiving a Goldman salary.
In the meantime, if there is even one reputable regulator or enforcer left in the this banana republic, here is the bottom line: ignore JPM's CDS, and focus on its LIBOR-derived Interest Rate swaps, which too trade Over The Counter, and which like CDS will never trade on an exchange for one simple reason: it allows JPM to mark them at whatever prices it desires. Furthermore, with the objective pricing arbiter of all OTC products, MarkIt, being owned by the same banks that (ab)use it every day, the logical conclusion is that the $400+ million mismarking in JPM's CDS is orders of magnitude lower compared to what JPM is undoubtedly engaging in in other product verticals, namely IR swaps, where the bank has total exposure of $71 TRILLION in the OTC derivative market.
If regulators indeed care about restoring confidence to the market, and choose to be be proactive for once, instead of always reactive, forget Bruno, forget JPM's CDS exposure, and bust the firm where it indeed hurts - in tens of trillions in mismarked Futures, Options, Forwards and Swaps.