Jamie Dimon Archives - Bankers Anonymous

September 19, 2013September 19, 2013

Last Words on the London Whale

This is a shark, not a whale. But cool picture, no?

The last thing this world needs is another comment on the London Whale, but I’ve been silent on the topic for over a year, and today’s announcement that JP Morgan will pay $920 million in penalties, plus offer an apology, inspired a few quick thoughts.

The settlement is meaningless, as punishment

All along, the London Whale narrative of the past 1.5 years has been a scarcely concealed proxy fight over the so-called Volcker Rule, namely the idea that investment banks may, or may not, have to get out of the proprietary trading business, as a result of Dodd-Frank.

To the extent the London Whale position started out as a risk-reducing hedge, later became a profitable proprietary position, and then still later an unprofitable proprietary trade, it serves as a nice specific example for critics of proprietary trading to embarrass the pro-proprietary trading side of the argument.

Prop trading losses are self-correcting

What should not require explanation, but I think does, is that fact that proprietary trading losses already offer efficient argument against bad risk management in proprietary trading. When a bank loses money in prop trading, you really don’t need to fine the bank for losing its own money.

Proprietary trading losses are a self-correcting thing.

JP Morgan reportedly took a $6.2 Billion write-down against the position. The traders were fired, the risk managers were fired.[1]

As the SEC, you really don’t need to pile on an extra $920 million in fines to rub JP Morgan’s little doggy nose in the mess it made. They got the message already, a year ago.[2]

All that happens when Wall Street folks see this kind of gratuitous SEC enforcement action is that they roll their eyes and think to themselves, “the regulators don’t get it.”

“But JP Morgan admitted wrongdoing, so there must have been bad behavior, right?”

Wrong. JP Morgan admitted to an “SEC violation.”

In a new precedent set within the past year, banks now have to admit wrongdoing when they settle something like this, because that’s the new SEC mode. But the admission itself is silly as an SEC violation.

Their admission was that senior management didn’t tell members of the audit committee of the board of JP Morgan about the extent of losses from the trade in a timely fashion. Seriously, that’s the admission.[3]

So let’s think about that SEC violation. That’s also a self-correcting mechanism. If the board is bent out of shape about senior management’s ‘failure to timely inform them,’ its pretty easy to correct that problem. They can just fire the CEO. That’s the board’s job and the board’s right, and they haven’t exercised that right at this time. Which means they are fine with management, and Jamie Dimon in particular.

Protecting not widows and orphans, but JP Morgan’s audit committee of the board

The SEC’s role in protecting the board audit committee is really a silly kind of ‘SEC violation’ that isn’t necessary. The SEC was not talking about protecting widows and orphans from bad banks. The SEC was talking about protecting JP Morgan’s board members from the bank’s senior management.[4]

The senior management, incidentally, serves at the board’s pleasure. So in essence the SEC was protecting the bosses (the audit committee of the board) from their employees (Dimon and his team).

“But ‘banks = bad,’ so I like it whenever the government sticks it to The Bad Man”

Grrr.

Banks need to be regulated of course, but banks need to be regulated in ways that aren’t gratuitous or done for excessively symbolic reasons.

This SEC enforcement action is nothing but a big, unnecessary proxy action for the Volcker Rule fight.

Wall Street knows this, JP Morgan knows this, and they’re willing to lose this battle in order to win the larger war regarding proprietary trading.

Ultimately it’s about respect for the rule of law

In the long run, symbolic and gratuitous enforcement actions[5] weaken respect for the rule of law.

As in: We (the government) pretend to have found something wrong and you (the bank) pretend to be contrite for doing something that you do in the ordinary course of business. With each of these pretend enforcement actions, over time you whittle away at any respect the bank may have had for its regulators.

With each of these pretend enforcement actions the question in bank management’s mind is less “How can we be better stewards of our industry?” and more “Ok, just tell me how much this is going to cost me, to make this regulator temporarily go away?”

At some level regulators know this, and they know they can make a big high-dollar score against the finance industry. Elected officials certainly know this, and can work the delicate game of being useful, in the right circumstances and with the right industry support, at key moments. All of this is not a move in the right direction.

The London Whale penalty, in the long run, is a victory for nobody.

[1] Jamie Dimon of course was not fired, because he’s Jamie Freaking Dimon.

[2] And incidentally, while the headlines losses are nominally big, they are immaterial to the operation of JP Morgan overall. At no point has anyone even remotely believed that the London Whale losses matter existentially to JP Morgan. The bank is fine.

[3] And frankly there’s a good-to-overwhelming probability that senior management themselves had no way of knowing the extent of the losses at the time. The position was still on, and markets move, and losses may get bigger or smaller. You don’t know until you completely unwind the position.

[4] Just for fun, who exactly is the SEC protecting, on the audit committee of the board? James Bell, former Boeing executive, and board member also of Dow Chemical; Crandall Bowles, Chairman and former CEO of Spring Industries and member of the board of the Brookings Institution, The Wilderness Society, and the Packard Center for ALS Research at Johns Hopkins; and Laban Jackson, the Chairman of Clear Creek Properties, Inc., director of Markey Cancer Foundation, director of the Federal Reserve Bank of Cleveland, and former director of The Home Depot. I think these people can defend themselves.

[5] something Eliot Spitzer made a career of and rode all the way to the NY Governor’s office

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June 13, 2012February 5, 2013

What The Dimon Hearings Today Are Really About

The Senate Banking Committee long-ago proved itself to be not a truth-seeking body, but more of a combination woodshed and green room, in which distinguished financial guests get paddled mercilessly by one Party, while coiffed and flattered by the other. Senators play at Congressional inquiry in the interest of the public good, while keeping a keen eye on the opportunity for scoring points in their internecine battles. Today’s distinguished guest Jamie Dimon, JP Morgan Chase’s chairman and chief executive, got his chance to receive the paddle and the flatter.

In a perfect world, it’s nobody’s business whether a bank makes a mistake in risk management and loses a nominally large, but clearly manageable, amount of money. The JP Morgan losses from the London Whale, compared to the magnitude of its balance sheet[1] as well as the magnitude of 2008-era banking write-downs[2], amount to a tiny hiccup. In a risk management sense nobody should care[3]. In a public welfare sense as well, regardless of what the Senators say, nobody should care about the London Whale losses.

We live in a far from perfect world, however, and recent history (i.e. 2008) teaches us that large, private banks’ losses can become massive public liabilities pretty quickly. Nevertheless, the London Whale losses are largely irrelevant.

Do not be confused by the real issues at stake here. Nominally, Dimon was invited to respond to his bank’s recent trading losses attributed to the London Whale, which he did. In truth, the topic is to what extent the so-called Volcker Rule, intended to limit proprietary trading by regulated banks, will be put into effect.

That debate matters, and it harks back to the central issue facing bank regulators today. Namely, should deposit-taking banks be in the business of securities trading? It’s a front-burner, Top 3-most-pressing-financial-issues-of-the-day question.

In other words, can we return to a Glass-Steagall Act era, in which deposit-taking banks are not also acting like hedge funds? Those are the stakes, and they deserve serious discussion, such as we did not get today from the Senate Banking Committee. We got lecturing and posturing but we did not get serious discussion.

Two other thoughts.

As a betting man, and as one with a view on where Senators’ bread is buttered, I think there’s no chance they have the foresight, financial independence or cojones to really roll back the union of deposit taking banks and proprietary trading banks. We’re just not returning to the regulatory environment of the mid-1990s.[4] It wasn’t that long ago, but the Clinton-era unleashing of these Too Big To Fail behemoths has created too many deep-pocketed interest groups. So don’t hold your breath on that one.

Second, while it may not be obvious to everyone, Congress has a funny way of rewarding relatively positive risk management. I don’t know Jamie Dimon and I have no reason to flatter him[5], but the firm has performed far better than most. The London Whale losses stand out precisely because JP Morgan navigated the Credit Crisis much better than almost anyone.

I know it’s hard to ask the public in this environment of “Banking CEO = Greedy Vampire Deserving of Public Stake-Burning” to distinguish between good and bad actors, but the Senators should at least make the attempt. The Senators do, after all, accept their campaign contributions.

So many other CEOs besides Dimon deserve the woodshed treatment. In my opinion the most reprehensible banking CEOs (or any financial executive for that matter) are the ones who receive extraordinary personal pay before leaving massive public liabilities in his wake. Ken Lewis at Bank of America, Sandy Weill and Vikram Pandit at Citigroup, Stanley O’Neal at Merrill Lynch, Franklin Raines at Fannie Mae, Joe Cassano at AIG, and Angelo Mozilo at Countrywide are easy examples, although there are many more.

If you can wrap your mind around good guys in the banking world, compared to that rogue’s gallery, Jamie Dimon would be one of the good guys.

[1] To give an idea of size, the approximately $2Billion loss from the London Whale trades represent less than 7% of their loan-loss reserves, 1% of their equity, and 0.5% of their investment portfoio

[2] During the Credit Crisis of 2008 many of the TBTF banks reported losses 10X this size, multiple times!

[3] Except obviously the risk management folks at JP Morgan. When I say ‘nobody’ I mean the rest of us.

[4] that separated deposit-taking banks from securities trading banks

[5] In fact I kind of enjoyed making fun of him here.

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June 7, 2012November 14, 2013

Book Review: The House of Morgan

Since the beginning of the Great Recession, JP Morgan’s Jamie Dimon has played the role of the United States’ Alpha Banker: snatching Bear Stearns’ franchise at bargain basement prices, modeling superior risk management,[1] and publically pushing back against government regulation of his industry, all the while acting as Obama’s BFF when it suits him.

So it takes a great book like The House of Morgan to see Dimon’s Mini-me status compared to the original John Pierpont Morgan. In sweep of history, stretching from the original J. P. Morgan to Jamie Dimon, the former looms like the Atlas statue outside of Rockefeller Center over Dimon’s diminuitive Oscar statuette.

Size matters in this story. Even in paperback form, The House of Morgan arrives bigger than a breadbox. And Ron Chernow can write big. The one-hundred-year epic sweep of the bank’s rise and evolution tracks the United States’ rise as the world financial center, a position wrestled from the Brits in the first half of the 20^th Century.

J.P. Morgan himself, a giant of a man with his 19^th Century prejudices and a horrifyingly bulbous, pockmarked nose, shaped the entire world through force of will and unerring capital deployment. In contrast to today’s mega-banks, saved from the brink by massive government intervention, the House of Morgan intervened to prevent government collapse. In 1907, one hundred years before our own 2008 Credit Crunch, Morgan single-handedly engineered a market-saving trust merger.

Here are a few more essential reasons to read The House of Morgan.

First, if you work on Wall Street and don’t understand the original deep divide between Jewish and Gentile banking worlds, start here. JP Morgan, the ultimate white-shoe firm[2], fought bitterly and ultimately unsuccessfully to keep the likes of Kuhn, Loeb; Lehman Brothers; and Goldman, Sachs from competing on equal footing for banking assignments.

In the latter half of the 20^th Century, cozy relationship banking gave way to a competitive world that required top intellectual talent and drive. Morgan and its (predominantly) Protestant brethren often chose family pedigree over talent, a choice that put them at a disadvantage when sons didn’t exhibit the same drive as their fathers. The traditional Jewish Wall Street firms, by contrast, tended to welcome a variety of backgrounds into their ranks, based on intellectual and personal qualities, rather than limiting their employees to those of Jewish heritage. By the 1980s, Goldman Sachs, Salomon, Bear, and Lehman began to out-compete Chase, PaineWebber, Merrill Lynch, Morgan Stanley and First Boston. The white shoe firms reluctantly adopted a meritocracy approach to talent acquisition, by necessity.

Second, although Chernow’s story ends in 1989,[3] he captures the evolution from wholesale merchant banking of the early 20^th Century to the aggressive M&A takeover and trading culture with which we associate Wall Street now. Wall Street’s reputation as a rapacious casino, in which profits accrue privately to the few while the public picks up the unlimited liabilities after the bust, is a relatively new phenomenon.

Third, it’s fascinating in the age of TBTF[4], to contemplate a single banking behemoth so much bigger in importance than any one bank today. The original JP Morgan, split forcibly in 1933 to comply with the Glass-Segall Act, lives on in its descendants Morgan Stanley (originally for investment banking) Deutsche Bank[5] (originally the UK Branch) and JP Morgan (originally for commercial banking). Imagine those three banks re-merged[6] and even then you probably don’t get the sense of the scope of the original JP Morgan Bank’s influence, nor of the man himself.

Jamie Dimon, you’re pretty huge. Does it bug you that there’s always someone bigger?

Please also see related post, All Bankers-Anonymous Book Reviews in one place.

[1] With the obvious notable exception of missing the London Whale’s trades until it was too late to save a few $billion. But really, in my mind, that episode highlighted Dimon’s solid reputation. We’ve come to expect BNP Paribas or UBS to periodically blow giant holes in their balance sheets via rogue trading positions. It was quite another thing – and quite a surprise, when it happened on Dimon’s watch.

[2] Along with its successor firm Morgan Stanley

[3] Wall Street’s image frozen in time with the image of Michael Douglas’ Gordon Gekko suspenders!

[4] Again, Too Big To Fail.

[5] The UK bank Morgan Grenfell became Deutsche’s investment bank in London.

[6] As they contemplated doing in the 1970s

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