Securities lending is a great deal for banks like JPMorgan Chase, but not so good for the pension funds that handled the future retirements of private and public employees.

 

Pension funds turned over millions of dollars to JPMorgan and other financial institutions for investment purposes. If the deals made money, JPMorgan took 40% of the profits. If they failed, JPMorgan walked away and the pension funds absorbed all of the losses. In the words of Louise Story of The New York Times, “Heads, we win together. Tails, you lose—alone.”

 

In some cases, the banks made side bets against the investments, “putting the banks’ interests at odds with those of their customers,” according to the Times  

 

Some of these customers—the public or corporate pension funds of IBM, New York State and the American Federation of Television and Radio Artists—wound up owing JPMorgan more than $500 million to cover the losses.

-Noel Brinkerhoff

 

Banks Shared Clients’ Profits, but Not Losses (by Louise Story, New York Times)