About two-thirds the way through JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon’s stunning May 10 conference call, in which he announced that the hedging strategy originating in the firm’s vaunted “chief investment office” had cost the firm $2 billion, he seemed to hit his stride.
“It is very unfortunate,” he said, “this plays right into the hands of pundits out there. But we have to deal with it.”
Photographer: Ben Baker/Bloomberg
Well, Jamie, as a former JPMorgan Chase managing director turned Wall Street pundit, here you go: The problem with the unexpected loss and its hasty announcement was not so much the sheer magnitude of the losses -- a firm with a trillion-dollar balance sheet can withstand them -- but that for weeks you and your fellow senior executives have been pooh-poohing the risks posed by the huge proprietary bets being made by your bank’s Bruno Michel Iksil (aka. the London Whale).
After Bloomberg News revealed the extent of the gambling that was going on in JPMorgan’s London office on April 5, Dimon called it a “complete tempest in a teapot” and heaped scorn on the journalists who revealed the extent of the bet and how it was roiling debt markets throughout the world. The firm’s chief financial officer, Doug Braunstein -- my onetime boss, who fired me in 2004 -- told the press on April 13 that the chief investment office “balances our risks. They hedge against downside risk, that’s the nature of protecting that balance sheet.” Braunstein added that he was “very comfortable with the positions we have” and that all of the positions are “very long term in nature.”
What’s worse, in February, during the company’s annual investor day, Dimon further belittled the journalists in attendance by mocking their questions about Wall Street’s inordinately high compensation structure, whereby -- generally speaking -- 40 percent to 50 percent of every dollar of revenue generated goes to the employees who work there. At JPMorganChase, the compensation expense ratio in 2011 was around 35 percent, while at Goldman Sachs Group Inc. (GS) and Morgan Stanley it was higher -- in the 50 percent range -- and at Lazard Ltd. (LAZ), it was 63 percent.
Why Wall Street feels the need to pay the people who work there so much money is the question of the moment. Whom do these firms serve? The shareholders who own them, or the employees who work there? For far too long, the answer has been -- sadly -- the bankers. Why don’t Dimon and his fellow industry leaders understand that the less that gets paid out to employees, the more that goes to the bottom line?
But Dimon would have none of it, at least during the investor day conference on Feb. 29. He even thought it would be funny to dig out a comparable statistic from a newspaper company and found one that showed that journalists’ compensation had eaten up 42 percent of the paper’s revenue. That’s “damned outrageous,” he said. “Worse than that, you don’t even make any money! We pay 35 percent. We make a lot of money.” He’s right about that. In 2011, JPMorgan made $19 billion in profit. Dimon received compensation of $23 million.
Dimon at least had the good sense to sound a note of contrition yesterday. He said the firm’s new “value-at-risk” model had proved inadequate and the company was going back to using an older model. He said the money-losing trade was “flawed, complex, poorly reviewed, poorly executed and poorly monitored.” He said it was “sloppy” and that “all appropriate” measures would be taken. He said there were “egregious mistakes” made and that the wound “was self-inflicted.” Before he answered questions, he said, “We will admit it, we will learn from it, we will fix it and move on.”
In answer to a question about whether the hedge, or the bet, violated the so-called Volcker rule -- which if it ever gets put in place will limit the amount of proprietary trading Wall Street firms can do -- Dimon said, “This doesn’t violate the Volker Rule, but it violates the Dimon Principle.” To whether he knew of any other big banks with a similar loss, he said, “Just because we were stupid doesn’t mean everybody else was.” He was asked by Mike Mayo, a respected banking analyst, what, in hindsight, he should have watched more closely. “Trading losses,” he replied, before adding, “newspapers.”
Until this moment, Jamie Dimon has been Teflon. He has boasted about his firm’s “fortress balance sheet” and about how his skills as a risk-manager were far superior to those at other Wall Street firms. He has no doubt enjoyed Goldman Sachs and its chief executive officer, Lloyd Blankfein, becoming the objects of public scorn -- even though this incident proves that Goldman Sachs is the far superior risk manager. Dimon has been quick to remind people that the federal government chose his firm to rescue both Bear Stearns Cos. and Washington Mutual Inc. He has criticized the new, post-financial-crisis regulations -- Basel III, Dodd-Frank, the Volcker rule and the new rules governing derivatives -- as being Draconian. He has whined that the time to criticize Wall Street has come and gone.
Now he has been proven right about one thing: He has given the pundits (and politicians) a gift. “The enormous loss JPMorgan announced today is just the latest evidence that what banks call ‘hedges’ are often risky bets that so-called too-big- to-fail banks have no business making,” Senator Carl Levin, a Democrat of Michigan, told Bloomberg News after Dimon’s press conference. “Today’s announcement is a stark reminder of the need for regulators to establish tough, effective standards.”
Not a moment too soon.
(William D. Cohan , a former investment banker and the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. The opinions expressed are his own.)
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To contact the writer of this article: William D. Cohan at wdcohan@yahoo.com.
To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.
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