A few weeks ago, I was pitched a seemingly irresistible story about an investor who had been wronged by JPMorgan Chase during the financial crisis. The investor, Len Blavatnik, was now fighting in court to get back some of the money he had lost because of the bank’s alleged negligence.
Leonard Blavatnik
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Mr. Blavatnik is not, admittedly, someone for whom one’s heart instinctively bleeds. An American citizen who emigrated from Russia as a teenager, Mr. Blavatnik became a billionaire by shrewdly investing in the privatization of the Russian economy. In the latest issue of Forbes, his net worth is estimated at $7.5 billion.
Still, Mr. Blavatnik’s tale of investing woe is, on the face of it, a compelling one. For years, his holding company, Access Industries, kept its cash in money market funds run by JPMorgan. The returns were minuscule. In an effort to increase those returns, JPMorgan persuaded Mr. Blavatnik to allow it to set up an account, which it would manage, to invest Access’s cash.
In spring 2006, the bank and Mr. Blavatnik’s executives negotiated a set of detailed investment guidelines. “The account had to be liquid, and it had to be no-risk,” Mr. Blavatnik told me when I spoke to him a few days ago.
Access’s investment goal for the fund was just a quarter of a percent more than a typical money market fund returns; when I described those goals to Peter Crane, a money fund expert, he chuckled at how unambitious they were. “They were tip-toeing towards extra yield,” he said.
With the documents signed, Access began handing over cash to JPMorgan, giving the bank “complete discretion and authority” over the money — consistent with the guidelines, of course. The total soon reached $1 billion.
You can guess what happened next: JPMorgan invested part of the $1 billion in triple A tranches of mortgage-backed securities. It also invested some of the money in triple-A tranches of securities backed by home equity loans. Sure enough, beginning in July 2007, those securities began to decline in value. The Access executives began to call the investment manager at JPMorgan, worried about the mounting losses.
“Our research team still is extremely confident that AAA Home Equity asset-backed securities are money good, meaning that over time you will get the entire amount of your principal back,” responded a JPMorgan executive in an e-mail, according to a complaint later filed by Access.
This, of course, is not exactly how things turned out. In April 2008, when Access finally withdrew its money from JPMorgan, the account had lost around $100 million. After trying — and failing — to negotiate a settlement, Mr. Blavatnik sued.
Mr. Blavatnik and Access Industries are hardly the only ones who lost money by investing in what they thought were no-risk accounts in the run-up to the financial crisis. Thousands of investors lost money in auction rate securities, which had been sold to them as risk-free places to park their cash. Institutional investors and pension funds across the country lost billions of dollars because they foolishly believed Wall Street when they were told that triple-A tranches of mortgage-backed securities were nearly as safe as Treasury bonds. The price investors have paid has been enormous.
And yet the price Wall Street has paid — Wall Street which created these securities, peddled them to investors, and then shrugged when those investors lost money — has been minimal. A little opprobrium, perhaps, but nothing that might actually hurt the bottom line. On the contrary: all the big banks have been minting money, taking advantage of the Federal Reserve’s low interest rate policies, which seem aimed at helping them first and foremost.
Which is also why one is instinctively inclined to root for lawsuits like Mr. Blavatnik’s. How else to make the banks own up to the harm they caused during the financial crisis? “Nobody ever apologized,” said Mr. Blavatnik, sounding as if that bothered him almost as much as the losses themselves. “The reason they wouldn’t settle is that they said it would set a bad precedent with other investors.” If he won his suit, he added, he hoped it would help pave the way for other investors who had fewer resources than he did.
“The small guy can’t get anywhere with suits like this,” he added. “I am a wealthy man. I will spend whatever it takes.”
He’s probably going to have to.
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One of the great advantages of being a big, sophisticated bank like JPMorgan — in addition to having the finest lawyers in the land at your disposal — is that most of your big clients are also enormously sophisticated institutions. Thus, when something goes awry, the bank has a built-in defense: the investors are the ones to blame for the buying the securities. The bank was simply providing them with what they sought.
That was the Goldman Sachs defense in the infamous Abacus deal, in which several big investors bought triple-A securities that contained mortgages that had been hand-picked by John Paulson, the hedge fund manager who was shorting those very same securities. And that is the defense JPMorgan is using in this case.
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