In the debate over past misconduct at JP Morgan Chase and billions of dollars of settlements, the blurring of the boundary between making money and how it is made sends a worrying message. My latest column for Financial News.
At least Jamie Dimon’s shirts are whiter than white…
Something worrying is happening at the top of JP Morgan Chase. The debate over the barrage of multibillion-dollar legal issues it faces has been hijacked by the bank’s capacity to make very large amounts of money.
At the very least, these profits are being used as a distraction from serious questions about accountability and responsibility. At worst, making money is being used by some as a form of mitigation – or even justification – for past misbehaviour.
This is storing up trouble from the top down at JP Morgan, and potentially puts the bank on a dangerously slippery slope. Bad things can happen at companies when they and their shareholders appear to put making money ahead of how they make it.
Over the past year, JP Morgan Chase has taken Goldman Sachs’ place as the preferred Wall Street punchbag for regulators and politicians. Its likely $13 billion settlement with US authorities over the alleged mis-selling of mortgage-backed securities, which would be the biggest settlement with a single company in US history, is only the latest in its legal woes.
In the past few months it has paid out about $1 billion in fines over the $6 billion London Whale trading fiasco from last year, taken a $9 billion legal hit in its latest quarterly results, and revealed that it has set aside $23 billion (and counting) in legal reserves against dozens of future potential settlements.
Not unreasonably, these problems have raised the question of what the bank would have to do and how big the settlements would have to be before Jamie Dimon, its Teflon-coated chief executive and chairman, would do the decent thing and resign (or be forced to by his board). Others have fallen on their swords for far less.
Feel the money
Over the past few weeks, supporters of Dimon have argued that you would have to be crazy to put all that he has achieved for his shareholders and the US economy at risk by forcing him to step down. JP Morgan Chase breezed through the financial crisis, they say. It has made record profits for three years in a row, and its shares have outperformed every other bank since Dimon took over in 2005 and are at near 10-year highs.
They argue that regulators are picking on him, that most of the settlements relate to misbehaviour at banks before JP Morgan Chase acquired them at the request of the US government, and that all the people who matter – that is, shareholders, analysts, and regulators – don’t think he should go anywhere.
In other words, never mind the lapses in compliance and risk management, the alleged mis-selling of securities, the apparent manipulation of markets, or even the potential misleading of regulators, policymakers and shareholders alike. Feel the money.
JP Morgan Chase wouldn’t be so vulgar as to argue that its profits or share price performance should be used in any way to mitigate any misbehaviour that might have helped generate them. Dimon has repeatedly said that he takes the blame for what has gone wrong (his pay was halved last year to just $11 million). The bank recognises that bad things happened but it is working hard to put things right.
And yet, the bank has muddied the waters in the debate. It has frequently pointed out over the past few years how well the underlying businesses have performed at JP Morgan Chase (none more so than its investment bank), that nobody is forcing clients to do business with the bank, and that the financials and share price are merely a happy side effect of the house that Dimon built.
To be clear: Dimon has done a remarkable job in transforming JP Morgan Chase from a bank that under his predecessor Bill Harrison seemed to throw banana skins in its own path to become the dominant financial institution in the US. He is probably the most talented and charismatic banker of his generation, and under him, JP Morgan Chase has won a hard-earned reputation among its peers as being the best run bank on the Street (although with every settlement it become less clear what that means and at what cost it has been achieved).
It is testament to his achievement that it is presumed that the legal issues not only won’t cost Dimon his job but shouldn’t. This presumption is particularly striking given how other bank chief executives have fared: Barclays lost its chairman, chief executive, and a raft of senior executives over the Libor scandal. At UBS, rogue trading in 2011 cost the group chief executive and head of the investment bank their jobs.
At JP Morgan Chase, deputy heads have rolled and half the operating committee has left since the beginning of last year. The board has been spruced up, and the famously outspoken Dimon has adopted a more humble line in public and with regulators. But the office of the chief executive and chairman has so far proved as impregnable as the bank’s balance sheet.
If you flip this assumption round – and make the starting point that Dimon should lose his job – then his supporters need to explain why he deserves to keep it.
Because he has been great for shareholders and his departure would hit the stock price? That smacks of justifying misconduct with good numbers. Because he’s the only person who could run a bank as big and complex as JP Morgan Chase? Then why hasn’t he groomed a suitable successor? And why doesn’t he make the bank smaller and less complex? Because he’s a great leader and wants to put things right? So how come things were allowed to get so wrong on his watch in the first place?
Whether you agree that he should go or not, there is a valid debate to be had. And it is essential to keep the issues of responsibility or accountability entirely separate from issues around performance.
Pushing the envelope
There is a paradox here. On the one hand, JP Morgan Chase has thrown itself vigorously into fixing its compliance procedures and oversight, hiring thousands of staff and spending billions of dollars. Yet on the other, the fact that Dimon is still in charge risks sending a very different message: it’s OK to push the envelope because ultimately it’s all about the numbers.
Nothing defines a chief executive’s tenure as much as the manner of their departure. Resigning or being fired tomorrow would achieve little. But Dimon still has an opportunity to organise an elegant exit, perhaps by flagging that he will step down on a defined date once he has fixed these problems and groomed a successor. Perhaps he might even give up any bonus between now and then.
But I suspect that he might have missed his last chance to bow out elegantly in a time and manner of his own choosing.
- This article first appeared in the print edition of Financial News dated October 28, 2013