May 26, 2015 7:19 pm

Why finance is too much of a good thing

Martin Wolf

It is very costly to police markets riddled with conflicts of interest and asymmetric information

Ingram Pinn illustration©Ingram Pinn
Is it possible to have too much finance? Harmed by the aftermath of financial crises, enraged by bailouts of financial institutions, irritated by the generous remuneration, aghast at repeated malfeasance and infuriated by the impunity of those responsible, most ordinary people would find it all too easy to answer: yes.
They are not alone. Both scholars and staff of influential international institutions, such as the International Monetary Fund and the Bank for International Settlements, agree. It is possible to have too much finance. More importantly, significant economies are in this position, among them Japan and the US.

It is easy to question the role of financial activity. After all, between January 2012 and December 2014, financial institutions paid $139bn in fines to US enforcement agencies. More fundamental is the contrast between the 7 per cent average share of the financial sector in US gross domestic product between 1998 and 2014 and its 29 per cent average share in profits (see chart).
An organised society offers two ways of becoming rich. The normal way has been to exercise monopoly power. Historically, monopoly control over land, usually seized by force, has been the main route to wealth. A competitive market economy offers a socially more desirable alternative: invention and production of goods and services.

Alas, it is also possible to extract rents in markets. The financial sector with its complexity and implicit subsidies is in an excellent position to do so. But such practices do not only shift money from a large number of poorer people to a smaller number of richer ones. It may also gravely damage the economy.

This is the argument of Luigi Zingales of Chicago Booth School, a strong believer in free markets, in his presidential address to the American Finance Association. The harms take two forms. The first is direct damage: an unsustainable credit-fuelled boom, say. Another is indirect damage that results from a breakdown in trust in a financial arrangements, due to crises, pervasive “duping”, or both.

Prof Zingales emphasises the indirect costs. He argues that a vicious circle may emerge between public outrage, rent extraction and back to yet more outrage. When outrage is high, it is difficult to maintain prompt and unbiased settlement of contracts. Without public support, financiers must seek political protection. But only those who enjoy large rents can afford the lobbying. Thus, in the face of public resentment, only rent-extracting finance — above all, the mightiest banks — survive. Inevitably, this further fuels the outrage.

None of this is to deny that finance is essential to any civilised and prosperous society. On the contrary, it is the very importance of finance that makes the abuses so dangerous. Indeed, there is substantial evidence that a rise in credit relative to gross domestic product initially raises economic growth. But this relationship appears to reverse once credit exceeds about 100 per cent of GDP.

Other researchers have shown that rapid credit growth is a significant predictor of a crisis. In a recent note, the IMF uses a more sophisticated indicator of financial development than the credit ratio. This shows that financial development has indeed proceeded apace, notably in advanced countries. It also shows that, after a point, finance damages growth.
Further investigation indicates that this negative effect is concentrated on the growth of “total factor productivity”. This measures the pace of innovation and of improvements in the efficiency with which labour and capital are used. In particular, the IMF suggests, after a point, the allocation of capital and the efficacy of corporate control go awry. Thus, the impact of financial influences on the quality of corporate governance is an important challenge.
Houston, we have a problem. We have a great deal of evidence that too much finance damages economic stability and growth, distorts the distribution of income, undermines confidence in the market economy, corrupts politics and leads to an explosive and, in all probability, ineffective rise in regulation. This ought to worry everybody. But it should be particularly worrying for those who believe most in the moral and economic virtues of competitive markets.

So what is to do be done? Here are a few preliminary answers.

First, morality matters. As Prof Zingales argues, if those who go into finance are encouraged to believe they are entitled to do whatever they can get away with, trust will break down. It is very costly to police markets riddled with conflicts of interest and asymmetric information. We do not, by and large, police doctors in this way because we trust them. We need to be able to trust financiers in much the same way.

Second, reduce incentives for excessive finance. The most important incentive by far is the tax deductibility of interest. This should be ended. In the long run, many debt contracts need to be turned into risk-sharing contracts.

Third, get rid of too big to fail and too big to jail. These two go together. The simplest way to get rid of too big to fail would be to raise the equity capital required of global systemically important financial institutions substantially.

Many would then choose to break themselves up. Once that has happened, fear of the consequences of prosecution should also diminish. Personally, I would go further by separating the monetary from the financial systems, via the introduction of “narrow banking” — that is, backing demand deposits with reserves at the central bank.

Finally, everyone has to understand the incentives at work in all such “markets in promises”. These markets are exposed to corruption by people who do not care whether promises are kept or whether counterparts are even unable to understand what is being promised.

What is needed is not more finance, but better finance. Yes, this might also end up as substantially less finance.

Corruption in football

At last, a challenge to the impunity of FIFA

The arrest of officials should be the first stage in a thorough cleansing of a discredited organisation

May 30th 2015.


FEW arrests can have provoked such Schadenfreude as those of seven senior officials of FIFA, football’s world governing body, early on May 27th at a swish Swiss hotel. The arrests are part of a wide-ranging investigation by America’s FBI into corruption at FIFA, dating back over two decades.

The indictment from the Department of Justice named 14 people on charges including racketeering, wire fraud and paying bribes worth more than $150m. They are likely to face charges in a US federal court. As more people start talking in a bid to sauve qui peut, the investigation will with luck reach into every dark and dank corner of FIFA’s Zurich headquarters.

American extraterritorial jurisdiction is often excessive in its zeal and overbearing in its methods, but in this instance it deserves the gratitude of football fans everywhere. The hope must be that FIFA’s impunity is at last brought to an end and with it the career of the ineffably complacent Sepp Blatter, its 79-year-old president, who was nonetheless expected to be re-elected for a fifth term after The Economist had gone to print.

The evidence of systemic corruption at FIFA has been accumulating for years, but came to a head in 2010 with the bidding for two World Cups. When the right to hold the competition in 2022 was won by tiny, bakingly hot Qatar, against the strong advice of FIFA’s own technical committee, suspicions that votes had been bought were immediately aroused. Thanks to two female whistleblowers and the diligent investigative work of the Sunday Times, a wealth of damning evidence was unearthed involving a Qatari FIFA official, Mohamed bin Hammam, who allegedly wooed football bigwigs in Africa with a $5m slush fund.

Under pressure, Mr Blatter eventually agreed to set up a FIFA “ethics court”. He also appointed Michael Garcia, the American lawyer who helped oust Eliot Spitzer from the position of New York governor, to investigate the allegations of vote-rigging and kickbacks.

Incredibly, Mr Garcia, who spent more than a year looking into the allegations, never interviewed Mr bin Hammam or examined the trove of e-mails acquired by the Sunday Times.

Only a summary version of his report, itself condemned by the investigator as “erroneous representations of the facts and conclusions”, was ever published. Mr Garcia resigned and Mr Blatter sailed serenely on, reneging on a commitment not to stand for election again. The idea that a clearly tainted World Cup bidding process should be reopened was firmly squashed.

The underlying problem at FIFA is that it controls television and marketing rights (worth $4 billion at last year’s World Cup in Brazil), which can be used by those in power to win the loyalty of football federations from poor countries, particularly in Africa. Corruption is tolerated, as long as the money is spread around. Critics of FIFA are dismissed as bad losers and racists.

The language it understands
Even now, there is no certainty that FIFA will embrace reform. The initial test of its willingness to clean house should be the replacement of Mr Blatter with someone who can be trusted with that mission, which must begin with reopening the bidding for the 2018 and 2022 World Cups under conditions of complete transparency. If nothing changes, others must act. UEFA, European football’s umbrella organisation, should leave FIFA and take its teams out of the World Cup. Europe’s broadcasters should decline to bid for rights. And FIFA’s biggest sponsors—the likes of Adidas, Coca-Cola, Visa and Hyundai—should realise that association with it risks damaging their brands.

They must hit the organisation where it hurts most: in its bulging wallet. Until now the stench from FIFA has prompted people to do nothing more than hold their noses. That is no longer an option.

Silver Is Shaping Up To Be The Best Precious Metal Play Of The Decade

  • Despite being caught in a long-term bear market, silver offers considerable long-term potential upside.
  • The gold-to-silver ratio indicates that silver is significantly undervalued in comparison to gold.
  • Supply and demand fundamentals point to an ongoing physical supply deficit that will boost prices.
  • Increasing industrial demand, particularly for solar and hi-tech applications, will exacerbate the supply shortage, driving prices higher.
Silver has been trapped in a severe bear market for the last three years, with it still down by a massive 61% from the ten-year high of $48.70 per ounce hit in April 2011. Recently, silver has rallied, recovering by almost 11% from its 52 week low to now be trading at around $17 per ounce. While this rally increasingly appears to be short-lived, there are a number of catalysts that indicate a favorable long-term outlook for silver.

For these reasons I believe it is significantly undervalued and poised for a massive rally, with its price set to climb higher over the long term, offering investors far better potential returns than gold or other precious metals.

Gold-to-silver ratio

One of the key measures of whether silver is undervalued or overvalued in comparison to gold is the gold-to-silver ratio. This ratio measures the correlation between silver and gold prices, allowing investors to determine when it is the optimal time to invest in silver in preference to gold. The relationship between gold and silver prices, as well as the gold-to-silver ratio for the last two decades, is illustrated below.

(click to enlarge)
Source: Perth Mint.

The gold to silver ratio has widened considerably in recent years. At the height of the gold bull market which peaked in 2011, 38 ounces of silver bought one ounce of gold. This has now more than doubled, with 71 ounces of silver needed to buy an ounce of gold.

The current ratio is also well above the historical average, which over the last century has required somewhere between 50 to 60 ounces of silver to purchase one ounce of gold. Over the last two decades the ratio has averaged 60 ounces of silver to one ounce of gold. While the ratio of silver to gold in the Earth's crust is estimated to be between 17 ounces to 20 ounces of silver to one ounce of gold.

This indicates that silver is heavily undervalued in comparison to gold and that now is the optimal time to invest in silver.

If the ratio were to fall to where it was during the height of the gold bull market, silver based on current prices would need to appreciate by around 86% in value. While if it even returned to the historical average of 50 ounces of silver to one ounce of gold, it would need to appreciate in value by 41%, still offering considerable potential upside to investors.

However, investors should remember that in comparison to gold, silver is far more volatile because of far lower market liquidity coupled with fluctuations in demand for industrial uses, the fabrication of jewelry and as a store of value.

Growing demand

This means there are far more influences on the demand for silver, and hence its price, than with gold, helping to explain the volatility witnessed since the collapse of the bull market in late 2011.

Nonetheless, unlike gold, silver is an industrial metal with a wide range of uses, primarily because of its conductive properties, with it being the most electrically conductive element followed by copper and gold. This sees it in great demand as a component in a range of industrial applications and hi-tech products.

For 2014 alone, industrial demand for silver made up 56% of its total demand and industry has been the primary consumer of silver for some time.

Source: The Silver Institute.

This compares to gold where industrial demand only made up 8% of total gold demand in 2014, with the largest driver of demand being for investment purposes.

In fact, when we look at the next chart it is easy to see that overall industrial demand for silver has been in decline for the last decade and this can be primarily attributed to the virtual extinction of traditional film-based photography.

However, when we take a deeper look at the numbers it can be seen that demand for silver in a range of industrial applications continues to grow.

(click to enlarge)
Source: The Silver Institute.

Silver has become an integral component in a range of hi-tech applications including flexible touch-screens, semi-conductor stackers and light emitting diodes (LEDS). Demand for these components is set to grow exponentially over the coming years as their use in portable consumer electronics, medical and other applications continues to rise.

As we can see, over the last ten years the demand for silver for use in electronic and electrical applications has grown by 15%, and I expect this rate of growth to increase as the demand for hi-tech electronic products soars.

Between now and 2018, annual silver consumption for use in flexible electronics is forecast to grow tenfold, by up to 2 million ounces. Meanwhile, industry insiders expect the demand for silver in the manufacture of LEDs to shoot up to 8 million ounces annually and 10 million ounces for use in semiconductor stackers. This represents a total of an additional 20 million ounces of silver annually being used in the manufacture of these components.

Silver is also a key component in the manufacture of photovoltaic cells (PVs) that are used in solar panels to convert our sun's energy into electricity. The demand for PVs is expected to grow quite strongly between now and 2018.

When manufacturing PVs, around 2.8 million ounces of silver is required to build enough PVs to generate 1 gigawatt (GW) of electricity. For 2014, according to the Silver Institute, this saw 60 million ounces of silver used in their manufacture alone, which equates to 5.6% of the total demand for physical silver during that year.

Furthermore, the demand for silver for use in PVs over the last ten years has grown eightfold, and this trend is expected to continue over the long term. This is because demand for PVs is expected to explode as a number of countries push ahead with instituting green energy targets.

The world's second largest economy, China, has set some aggressive green energy targets because of growing pollution. In 2014 it added 12 GWs of solar power, and in 2015 plans to boost that by 48% to add 17.8 GWs of solar power over the course of the year as it battles to fight pollution.

Based on 2.8 million ounces of silver being required to manufacture sufficient PVs to generate 1 GW, this would see China's demand for silver for use in PVs increase by 16 million ounces or 48% year-over-year.

Even more compelling is that China is targeting to triple its solar power capacity between now and 2020, to 100 GWs. For this to occur, it alone would require 188 million ounces of silver.

But the growing demand for PVs, and thus silver, doesn't end there. A number of other countries are also aggressively targeting to boost the solar power capacity.

Between now and 2018, the European Photovoltaic Industry Association expects Europe to add around 69 GW of additional solar capacity to its energy grid, therefore requiring 193 ounces of silver.

Japan has also established some ambitious solar energy targets in the wake of the Fukushima nuclear disaster, that has already seen it double its solar power capacity since 2011. This trend is expected to continue with plans underway to build more solar power plants. Even Brazil is focused on boosting its solar capacity with plans to build a 350 megawatt (MW) plant on the Amazon's Uatumã River.

This demand for solar energy will see the demand for silver as an integral component in the manufacture of PVs continue to grow exponentially, helping to drive silver prices higher.

Declining silver supplies

The growing demand for silver for use in the manufacture of these hi-tech components will add further pressure to an already constrained supply situation.

According to the Silver Institute, demand for physical silver in 2014 outstripped supply by half a percent, or 4.9 million ounces, and this physical supply deficit can only get worse. For 2015, it has been estimated that supplies of physical silver will decline by around 3.5%, primarily because of falling supplies from mining.

This is because silver miners have sharply decreased investment in exploration and mine development because of markedly weaker silver prices, that have made many ore deposits uneconomical to mine.

If we take a look at a snapshot of the largest primary silver miners, you can see that with the exception of Pan American Silver (NASDAQ:PAAS) and Silver Standard Resources (NASDAQ:SSRI), the other miners have sharply decreased their capital budgets as silver prices have fallen.

(click to enlarge)
Source: Company filings & The Silver Institute.

Such a sharp decline in investment in exploration and mine development will have a long-term impact on silver supply because there is a long lead-in time associated with identifying and exploiting new ore deposits, as well as with ramping up production from existing mines.

As a result I expect the physical supply deficit for silver to continue into 2015 and 2016. A physical supply deficit also suggests a reduction in global silver inventories, further reducing the amount of silver available for investors, the fabrication of jewelry and industrial uses.

I expect this constrained supply situation coupled with growing demand to drive silver prices higher over the long term, while placing a floor under existing prices.

Risks to the investment thesis

Any precious metals investment does not come without risk, particularly with the growing short-term volatility of gold, and in particular silver, prices that we are now witnessing.

These risks include:
  • There is the potential that silver ETFs may make sizable liquidations of their positions as silver rallies, and this would see a considerable amount of bullion entering the physical market over a short time frame, applying considerable downward pressure to silver prices.
  • Declining industrial activity in China, which would see the demand for silver for use in industrial applications decline sharply, with it being among the largest manufacturing markets for the metal.
  • If the U.S. dollar continues to rally strongly, then this will have a sharp impact on silver prices with them being negatively correlated. Nonetheless, the U.S. dollar has already rallied, and strongly, and the consensus view is that it is due for a pullback, thereby mitigating this risk.
  • Any significant rally of silver would see a mad scramble by miners to rapidly boost production in order to take advantage of higher prices, thereby boosting silver supply and forcing down prices. However, this risk is offset by the long lead in times needed to develop silver mining assets and ramp up production.
  • Silver has far lower liquidity than gold and this means it is subject to higher volatility and wider price movements.

Clearly, the fundamentals are in place to support a solid rebound in silver, although it will take time for this rally to occur with short-term volatility set to remain a characteristic of silver prices for the foreseeable future.

Speculative paper trading coupled with higher illiquidity than gold continues to have a negative impact on silver, while significantly increasing the overall volatility of the metal. This means that in the short term it will continue to experience wild price swings and its recent rally will more than likely retrace.

As a result, I certainly wouldn't be "betting the farm" on silver, but it is an investment worthy of consideration, with it offering investors the benefit of solid long-term potential upside coupled with the ability to hedge against further global geopolitical and economic uncertainty because of its status as a safe-haven investment.

The Fed Considers a More Seasoned Approach

By: Peter Schiff

Tuesday, May 26, 2015

Just as the steady torrent of awful economic data, which began in the First Quarter and continued well into April and May, had forced many market analysts to grudgingly concede that 2015 would not see the robust economic growth that most had expected, the statisticians arrived on the scene like a cavalry charge and routed the forces of pessimism with a wave of their spreadsheets.

The campaign began in late April with some seemingly groundbreaking analysis by CNBC's Steve Liesman showing that over a 30 year time frame GDP data had consistently measured first quarter growth at 1.87%, which was far lower than the 2.7% rate averaged in the following three quarters of the year. He pointed out that the trend had gotten even more pronounced since 2010, when first quarter growth averaged just .62% and the remaining three quarters averaged 2.3%. The disparity caused Liesman, and others, to question whether first quarter data should be regarded as reliable.

The problem hinges on the efficacy of the 'seasonal' adjustments that are baked into the GDP methodology. These filters are designed to smooth out the changes in spending, production, and consumption that occur over the course of the year. After all, business and consumers behave differently in December than they do in July.

When Liesman pressed the Bureau of Economic Analysis (the government entity that supplies the data) to explain his findings, the agency responded "BEA is currently examining possible residual seasonality in several series, which may lead to improvements in...the regular annual revision to GDP." We should understand "improvements" to mean changes that make first quarter GDP higher.

A few weeks later the BEA provided some specifics saying methods for counting government defense spending and "certain inventory investment series" could be improved to help address the distortion. It promised to correct these deficiencies by July 30. It promised to correct these deficiencies by July 30. But to make sure that everyone understood that the help was definitely on the way, the BEA issued a blog post on May 22 in which it specified a number of areas in which it will eliminate what it calls "residual seasonality." This term should be accurately defined as "areas that we think should be higher."

As if on cue, the Federal Reserve itself waded into the debate with its own new study (released by the San Francisco Fed - Janet Yellen's former stomping grounds) that seemed to confirm and expand on Liesman's analysis and the BEA's concessions (makes one wonder if these campaigns are coordinated). Fed economists took a hard look at the disappointing .2% annualized first quarter 2015 growth, and determined that the seasonal adjustments that have been in use for years were insufficient to fully reveal the true health of the economy. When the San Francisco Fed added a second level of seasonal adjustments, it determined that Q1 growth should have been measured at 1.8% annualized. While that growth rate would not be considered strong, it is much closer to the 2.7%-3.0% that most forecasters had predicted at the end of 2014. No matter that the Atlanta Fed's "GDP Now," which was designed to be a more objective and contemporaneous measurement tool, was confirming near zero growth in Q1, many economists and media outlets jumped on the Fed study as proof positive that the economy is stronger than the pessimists portray.

In reality, few people actually understand how the complex and opaque seasonal adjustments really work (I know I don't). Fewer still have the patience to wade through the formulas to determine inefficiencies and potential remedies. This provides the statisticians with a good deal of convenient refuge against critics. But it's important to realize that unlike straight GDP measurement, which is ideally a strict accounting of spending, these adjustments can introduce an element of subjective institutional bias.

Government entities (and to a lesser extent media outlets) have many reasons to suggest that the economy is better than it really is. The Fed wants us to believe that its policies are effective; the Federal government wants us to believe that the economy is healthy, and financial media outlets depend on confident investors. I'm not saying that these biases are insidious or conspiratorial, but it does produce an environment where there is more emphasis placed on finding reasons to explain why GDP measurements are low, than there is to find reasons why it is too high. The subjectivity of the seasonal adjustments gives these biases room to run.

People understand that holiday spending juices GDP at the end of the year, and that post-holiday depletion and cold winters cause consumers to retrench. This causes them to try to compensate for the weakness in the first quarter. But there is no pressure for them to find reasons that GDP may be too high in December and May (when Christmas lists and pleasant weather should be encouraging shopping).

Given that, why do we really need seasonal adjustments in the first place? Yes December is different from July, but those differences persist every year. If we are looking at full year GDP, which is the measure that everyone is really after, why not keep a cumulative tally that we compare to prior years rather than prior quarters? Wouldn't this strip out a needless and opaque system of adjustments from a measurement system that is already overly complex to begin with? I believe the truth is the system is getting more complex because we want it that way. We prefer the ability to manipulate figures rather than allowing the figures to tell us things that we don't want to hear.

The real disconnect lies in the failure of the economy to grow, as most people assumed that it would, after the Fed's quantitative easing and zero interest rates had supposedly worked their magic. But as I have said many times before, these policies act more as economic depressants than they do as stimulants. As long as these monetary policies persist, our economy will never return to the growth rates that would be considered healthy.

In any event, many market watchers are grabbing at the San Francisco Fed report to conclude that Janet Yellen will raise rates this year, despite the weakness that the unadjusted GDP reports indicate. Such a conclusion is premature. I believe that the Fed wants us to think that the economy is strong, in the hopes that perception may one day soon become reality. If people think the economy is strong their optimism could influence their spending, hiring, and investing decision. As a result, optimistic Fed pronouncements should be considered just another policy tool; call it "open mouth operations."

But I do not believe the Fed has any actual intention of delivering the rate increases that it may expect will damage our already weak economy.

JPMorgan’s Guilty Plea Puts Wealth Unit in Spot With Regulators

by Neil Weinberg

4:00 AM COT May 26, 2015

JPMorgan Chase & Co. put allegations of currency-fixing largely behind it with a guilty plea, but it’s not out of the woods yet.

With its new felony record, America’s biggest bank needs to seek the Department of Labor’s permission to keep managing money in the $8 trillion private pension market. At the same time, there’s a cloud over the JPMorgan unit where pensions are managed: The Securities and Exchange Commission is well along in an investigation into conflicts of interest in the bank’s wealth-management unit, whose products include individual retirement accounts.

That puts the bank in a sticky position -- arguing that a criminal conviction shouldn’t keep it from managing Americans’ retirement savings, while the SEC is investigating possible wrongdoing in the same división.
“When a bank has enforcement action after enforcement action, it becomes hard to argue that it won’t happen again,” says Urska Velikonja, an assistant law professor at Emory University whose research focuses on securities law.

JPMorgan spokesman Darin Oduyoye declined to comment “on Bloomberg speculation over future events.”

The May 20 guilty pleas by America’s biggest bank and four others -- Citigroup Inc., Barclays Plc, Royal Bank of Scotland Plc and UBS Group AG -- required each to apply for regulatory exemptions from the SEC, as well as from the Labor Department, to carry on business as usual.
The SEC issued the necessary approvals for the banks, but Democrats on Capitol Hill, as well as on the SEC Commission, have criticized rubber-stamping of waiver requests.

Extensive Review

Bank of America Corp. lost its ability late last year to issue certain securities without first seeking SEC permission. Credit Suisse Group AG is operating its $2 billion pension business under a temporary, one-year waiver while the Labor Department conducts an extensive review of whether to grant the Swiss bank’s request for permanent relief.

The stakes are higher for JPMorgan Asset Management, the quickly growing business unit that includes mutual funds, private wealth management and some trusts. Its assets under management included $319 billion in U.S. pension funds at the end of 2014, according to Pensions & Investments.

On the day last week when JPMorgan pleaded guilty to antitrust violations for manipulating currency rates, the bank applied to the Labor Department for an exemption to continue managing pensions as a Qualified Professional Asset Manager.

Banks rely on their QPAM status to carry out key transactions for pension clients, and a plea by any bank affiliate anywhere in the world triggers the need for it to apply for an exemption to maintain that business. JPMorgan needs to secure the waiver before it is sentenced.

SEC Investigation

The Labor Department has taken several months or more, in most cases, to carry out similar reviews. Michael Trupo, a Labor Department spokesman, declined to comment.

The May 20 application came just two weeks after JPMorgan disclosed in a regulatory filing that its wealth-management unit, part of the Asset Management division, is under investigation by the SEC, other government authorities and a self-regulatory organization. The unit was being probed for the sale and use of its own mutual funds and other proprietary product, the bank said.

The investigation is focused on whether JPMorgan employees have been putting customer money into the bank’s own funds and other products, such as structured notes and hedge funds -- not because they are necessarily the best choices for clients, but because those options generate fees for JPMorgan, according to people familiar with the matter.

Executives Deposed

As part of that probe, bank executives have been deposed and thousands of pages of internal documents subpoenaed, Bloomberg reported in March, citing people familiar with the situation. The Office of the Comptroller of the Currency, a primary banking regulator, is assisting the SEC in its investigation, added a person familiar with the matter.

The SEC’s investigation into JPMorgan’s money-management practices has been under way for at least two years, people familiar with the probe have said. Companies often disclose such investigations when they become material for shareholders.

That raises the possibility that the SEC and the other government authorities will reach a conclusion about potential wrongdoing inside the asset-management unit, as the Labor Department continues to review the bank’s waiver for activities by the same group.

JPMorgan faces another potential hurdle at the SEC. Its commissioners last week approved issuing the necessary waivers for JPMorgan and the four other banks, agreeing that their felony records shouldn’t stop them from managing mutual-fund money, among other things.

Enforcement Action

Any civil enforcement action from the SEC that includes injunctions or cease-and-desist orders -- as many do -- would force the bank to appeal for a fresh round of some of the same SEC waivers it has just been granted.

The SEC’s commissioners voted to approve last week’s waivers, with Chairman Mary Jo White, an independent, casting the deciding vote on some of the waivers. Commissioner Kara Stein, one of the two Democrats who voted against several of the waivers, issued a scathing dissent on May 21.

“Allowing these institutions to continue business as usual, after multiple and serious regulatory and criminal violations, poses risks to investors and the American public that are being ignored,” Stein said. “It is not sufficient to look at each waiver request in a vacuum.”

Bankers, lawyers and professors have said it would be hard to imagine that regulators would withhold waivers. Still, said Emory University’s Velikonja, that doesn’t mean these officials couldn’t give banks a few more hoops to jump through.

“I’d be surprised if the SEC didn’t come out with more than the usual compliance programs and independent monitors,” she said. “I’d be very curious to see if instead, it is something new and more invasive than in the past.”