A JP Morgan Chase shareholder insurrection threatens to split the roles of Chairman and CEO, stripping Jamie Dimon of the chairmanship. People with reputations for wisdom and good judgment like Rupert Murdoch and Hank Paulson have rushed to defend the dapper and aggressive Dimon claiming that he is unworthy of such cruel and unusual punishment. They argue that JP Morgan Chase fared better than other large US banks in the financial crisis and has been admirably profitable in the ensuing 4 ½ years.
But they all ignore the real reason that shareholders are concerned about Mr. Dimon’s affect on the value of their investments. The Book of Proverbs tells us that “pride goeth before the fall.” And signs of a fall for JP Morgan Chase are everywhere. The shareholders are rationally intent on acting before the fall occurs.
Yes, hubris is the concern of the troubled shareholders. Mr. Dimon’s bank is awash in regulatory proceedings ranging from collection policies for credit card debt, to lax tolerance of Bernie Madoff’s Ponzi scheme to manipulation of prices for electricity. The electricity scandal even involves Blythe Masters, who has been lionized by the bank as the creator of credit default swaps, a dubious credential in some circles. The Federal Energy Regulatory Commission has asserted her “knowledge and approval of schemes” implemented by JP Morgan Chase traders that are reminiscent of the shenanigans of Enron and others that brought the State of California to its knees in 2000 and 2001. FERC claims that Ms. Masters and others “falsely” denied under oath her awareness of the circumstances and that the bank had made “scores of false and misleading statements and material omissions” to officials.
Shareholders are concerned that these and other scandals grow out of a culture propagated by Mr. Dimon that views regulatory agencies as enemies to be defeated when they threaten what the bank wants to do. This combative and arrogant culture is clearly illustrated in the 300 pages of the Senate Permanent Subcommittee on Investigations report on the London Whale fiasco and the 500 pages of e-mails and other exhibits that are attached. The bank management’s first reaction was to bury the problematic credit default swap trading rather than to face up to it. The management was intent on avoiding rules that governed how much capital it must maintain against risk. A large part of the episode was the result of efforts to manipulate the calculation of this amount.
The bipartisan Committee Report made the following finding:
JPMorgan Chase dodged OCC oversight of its Synthetic Credit Portfolio by not alerting the OCC to the nature and extent of the portfolio; failing to inform the OCC when the SCP grew tenfold in 2011 and tripled in 2012; omitting SCP specific data from routine reports sent to the OCC; omitting mention of the SCP’s growing size, complexity, risk profile, and losses; responding to OCC information requests with blanket assurances and unhelpful aggregate portfolio data; and initially denying portfolio valuation problems.
The PSI report recounts an event that is very telling. It seems that in, August 2011 Mr. Dimon had become concerned about leaks of trading information related to the JP Morgan Chase’s Investment Bank division. He personally terminated daily Profit and Loss Reports to the Office of the Comptroller of the Currency, even though there was no evidence that the regulators had leaked any information. (One is reminded that hubris and paranoia are related conditions.) When Dimon discovered that then-Chief Financial Officer Douglas Braunstein sensibly had reinstated the reporting, he admonished Mr. Braunstein angrily.
It remains to be seen whether the Justice Department will take any action against the largest US bank or its management as a result of the London Whale episode. We all know that DOJ is fearful of the market consequences of prosecuting big banks, regardless of the seriousness of their behavior. It is also unclear whether the SEC staff has the stuffing to conduct a meaningful inquiry into the effort to cover over the mounting losses from the London Whale trades. Senator Elizabeth Warren has today asked DOJ, the SEC and the Fed whether their timid approach to pursuing bank wrongdoing is, in the end, costly.
But it abundantly apparent that the bank’s management had a dismissive and combative attitude toward its regulators and that this emanated from the combined office of Chairman and CEO.
Mr. Dimon has intentionally been at the vanguard of resistance to robust regulation implementing the Dodd-Frank Act. But it is now obvious that his opposition to any regulator that stands in the way of what JP Morgan Chase wants to do has become a way of life at the bank.
That corporate culture can lead to short-term success. But shareholders can very reasonably conclude that such a strategy can only injure the bank in the long run.