J.P. Morgan Chase Gets Schooled
Many of us held our breath in astonishment at the collapse of Silicon Valley Bank (SVB), wondering how the banking managers could make such rookie mistakes as buying long term bond investments as the Fed raised interest rates. Or not recognizing the danger of having too many risky start up tech and venture capitalist depositors instead of a more diverse base of customers. The bank operated without a risk management officer for eight months in 2022. The FDIC and Fed had to swoop in and guarantee the depositors would be made whole above and beyond the $250,000 FDIC limit. The bank’s CEO, Greg Becker, sold 3.6 million in SVB stock two weeks before the FDIC took control of the bank. The ongoing investigation shows that multiple warnings from the FDIC were heard, but not heeded.
A platform for students seeking Federal aid
Frank, a college financial planning platform founded in 2017, by another Silicon Valley wunderkind, Charlie Javice , its then 24-year-old Chief Executive Officer. Frank is an application that takes the burden out of filing for Federal Student Aid Programs via the Free Application for Federal Student Aid (FAFSA) form. Completing the form can be tricky and it takes quite a bit of time to fill out. Frank allows the applicant to fill out the form in minutes. On the surface this seems to be a very noble and necessary service. A member of the board of Frank also worked for Chase and approached the bank about acquiring the company. The application was purported to have millions of users by Ms. Javice. JP Morgan Chase bought the service for $175 million with the promise of 5 million potential customers to market their debt products to. Ms. Javice would join the bank as head of student solutions on the digital products team. JP Morgan Chase acquired Frank on September 21, 2021 as reported by Reuters. Frank’s 5 million student customers would give the bank a large market for their credit cards, car loans, mortgages, etc.
As bad luck would have it, Ms. Javice’s millions of users were a fiction. The story was reported on Breaking Points, January 24, 2023, months before the news broke in major media that Chase was suing Ms. Javice. Her corporate origin story was well developed and clever, but also false. It was one about her family’s financial struggle to put their daughter through college. She spun a tale of how she and her mother would huddle over the kitchen table trying to make sense of the financial aid forms. A little digging on the part of Chase would have revealed that her father worked for Merrill Lynch and Goldman Sachs for decades on Wall Street. Both parents had masters’ degrees. It is hard to imagine her family stressed over financial aid forms to put their daughter through college. Her story went unchallenged. Her start-up began making various lists like Forbes’ “Thirty Under Thirty” and write ups began appearing in publications like Crains Business. However, academics and others in the student loan space became suspicious of the organization and its claims. Apparently, JP Morgan Chase did not speak with any of the entities and went on with its pursuit of the promise of 5 million potential customers to market their debt products to.
Where was the due diligence of one of the most powerful banking institutions in this country? Is it that simple to gaslight such an institution by getting your story in the right, prestigious publications and having them say positive things about you and your company? You can only be sold something that you believe you need or believe you lack. Chase appears to have been careless and greedy to have been taken advantage of so easily. The bank’s intent was to take advantage of the millions of potential students and convert them to customers for their debt products. Chavise has an advantage of a $30 million payout upon purchase by Chase and a sign on bonus of $20 million. Chase is trying to hold on to this money, but that remains to be determined by a judge. Ms. Chavise was crowned a tech genius and had the right marketing and connections, so she was considered of little risk.
Exposure
Problems became apparent when Chase was ready to market to the Frank list. Ms. Javice had a few hundred thousand legitimate email addresses, but not the 5 million she promised to the bank. Working with a data scientist she was able to create enough addresses to get through the Chase vetting process. She also bought some college lists to increase the number of accounts. Chase engineers noticed an anomaly in the length of the number of rows which matched the maximum number of rows allowed in an Excel spread sheet. When Chase began marketing to a subset of the provided lists, seventy percent of the emails bounced as undeliverable. Few of the emails were opened and even fewer links were clicked on. JP Morgan Chase had bought the Frank email servers when they purchased the company, so they had access to email threads that revealed discussions of the scam to create false accounts. I don’t feel too sorry for the bank. No one deserves to be misled, but they have the money to pay the lawyers to get to the bottom of the story. They could have avoided this expense if they had investigated Ms. Chavise’s business a little more vigorously as they do when you come to them for a business loan, car loan or a mortgage.
The public is told not to worry. The experts have things well in hand. Our banking and financial system is strong and secure. Many of these experts are the same ones who brought us the financial crisis in 2008. The taxpayers had to come to the rescue and keep the system from total collapse. The people responsible for the crash weren’t really held accountable beyond a hearing before congress. The financial system is too complex and opaque for the average person to navigate, so you are advised to put your hard-earned dollars in the hands of “experts” who will make sound investments with the money you give them. That is the hope.
Corruption breeds apathy
America, we are told, is a country where if you work hard, you will be rewarded. However, that has not been the case for many, many years. The country seems to be in the thrall of easy money. Finance has replaced production. The country makes very little by way of goods anymore. Manufacturing is mostly done abroad because it is cheaper and allows for bigger returns for the shareholders. We have the fakes and fraudsters operating huge schemes a la Bernie Madoff. Recent names in the news are: Gary Wang, Sam Bankman-Fried, Elizabeth Holmes, who are accused, and in some cases convicted, of corrupt business practices. Big tech corruption has also added to public distrust. Facebook allowed the presidential 2016 election to be compromised. Amazon has been accused of price gouging during the pandemic. Google has been accused of manipulating search engine results, monopoly, and anti-trust. The system is rigged, and these people know it. They are determined to take advantage, no matter the cost. These cases of corruption breed political apathy among the public. People begin to feel like, ‘Oh, that is just the way things work and there is nothing you can do about it. Everybody does it.’ The public becomes disengaged and don’t believe that there is any point in trying to challenge the corruption they see. It becomes a cycle of corruption and then further apathy. However, I believe that technology and the 24-hour news cycle are exposing incidents of corruption at a more frequent rate and the public can’t ignore or excuse it as easily anymore. The awareness that something is not right and requires change is a point to start addressing the problem. Corruption degrades democracy.