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JPMorgan Chase (JPM) will pay $920 million in regulatory fines. What did the bank do wrong?

This goes back to the first quarter of last year. Remember a trader called the London Whale? He got in over his head on a credit derivatives trading strategy that ultimately led $6.2 billion in trading losses. The media initially got wind of the losses, but Jamie Dimon infamously called them a "tempest in a teapot."

$6.2B is a lot of money, but don't banks have trading losses all the time?

Traders failed to mark positions accurately. At least one junior trader -- following instructions from a more senior one -- kept a spreadsheet with different sets of numbers -- rosier ones he reported to management and more realistic ones he kept to himself.

What's more, JPMorgan's Chief Investment Office (CIO) -- the unit responsible for the losses -- wasn't accountable to anyone. An independent executive in another department should have been checking on the traders to make sure their marks were accurate, but the person who had that job reported to the Ina Drew, who headed the CIO.

There were other problems tied to how JPMorgan reported the losses sitting on its books and the amount of risk it was taking, both internally and to the public.

They admitted wrongdoing to the SEC. What are the implications of that?

It's highly unusual. Big banks never do that because they fear it will expose them to private lawsuits. But the Securities and Exchange Commission has received lots of criticism for not pursuing admission of wrongdoing, so under a new Chairman -- former Federal Prosecutor Mary Jo White -- the market regulator is responding.

So does JPMorgan now have big exposure to liability?

It doesn't look like it. The admissions appear to have been fairly limited. Though one regulator -- the Commodity Futures Trading Commission -- isn't part of this settlement and is reportedly trying to nail JPMorgan for market manipulation.

So overall, what's the potential damage to JPM? Why hasn't the stock tanked?

No one really knows the liability, but I think despite all of this the market kind of assumes that despite some obviously bad behavior by JPMorgan, the bank to some extent is being made an example of. It's still seen as a healthy, successful, well-managed institution. After all, it didn't suffer nearly as many losses during the crisis as




Bank of America



I think the general feeling among investors is that most of the regulatory fallout is done. As far as class action or the CFTC go, neither a judge nor the CFTC will feel justified in assigning significantly more -- like over $10B more -- in damages to the bank over this. A $10 billion figure would obviously be a huge surprise and it would hit the stock very hard, but the bank could handle it fairly easily over time.

Will anyone go to jail over this?

Two midlevel traders are facing criminal charges. One is in France and the other is in Spain. First, those countries would have to give them up. If that happens, its very tough to handicap. This is a complex case, and so far, it doesn't look like there's a smoking gun, such as an email from a senior manager clearly telling someone to lie about how a trading position is marked. Accounting rules give lots of leeway about how to mark trading positions, especially in something like credit derivatives.


Written by Dan Freed in New York


Follow @dan_freed

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.