About two-thirds the way through JPMorgan Chase chief executive Jamie Dimon’s stunning conference call last week, in which he announced that the hedging strategy originating in the firm’s vaunted “chief investment office” had cost the firm $2 billion (R16bn), he seemed to hit his stride.
“It is very unfortunate, this plays right into the hands of pundits out there. But we have to deal with it,” he said.
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, 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 (London Whale).
After Bloomberg 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, 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 by mocking their questions about Wall Street’s inordinately high compensation structure, whereby, generally speaking, 40 to 50 percent of every dollar of revenue goes to the employees who work there. At JPMorgan Chase, the compensation expense ratio last year was about 35 percent, at Goldman Sachs and Morgan Stanley it was about 50 percent, at Lazard 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. Why don’t Dimon and his fellow industry leaders understand that the less that gets paid out to employees, the more goes to the bottom line?
But Dimon would have none of it, at least during the investor day conference on February 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. Last year, JPMorgan made $19bn in profit. Dimon received $23 million.
Dimon at least had the good sense to sound a note of contrition. 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”. 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.” He said: “We will admit it, we will learn from it, we will fix it and move on.”
Asked if the hedge violated the so-called Volcker rule, which if it 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”.
He has been proven right about one thing: He has given the pundits (and politicians) a gift. “The enormous loss JPMorgan announced… 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, said. “(The) announcement is a stark reminder of the need for regulators to establish tough, effective standards. page 21
William Cohan is a Bloomberg columnist.