No one says star gazing is easy but let’s be brave. JP Morgan Chase (JPM) is a preventable surprise in the making. By the time you read this the current furore – regarding the potential splitting of the roles of chairman and CEO, both currently held by Jamie Dimon – will have passed. But that doesn’t change much. Even if there is a vote in favour of an independent chairman, it would only be advisory, it might not happen quickly and the person made chairman may be weak. The bigger question is, do investors care about the risks increasingly obvious under the waterline of companies like JPM – and will those risks be tackled before it’s too late?
In our preventable-surprises model, there are six key drivers and by going through each, we show why a vote to maintain the status quo would only strengthen our assessment of JPM as a likely candidate for the next preventable surprise – and why a vote in favour of splitting the role would be just the start of what is needed.
• Weak risk management: This is a fait accompli given that one trader was able to lose the bank $6.2bn (€4.8bn) (his book amounted to $157bn). If you then consider that the JPM risk policy committee previously consisted of just three (now four) people, the position becomes unarguable: JPM has a wholly inadequate risk-management system.
• Disregard for negative externalities: The Senate report into the ‘London Whale’ scandal found that JPM reported inaccurate information, misleading investors and regulators about their growing losses. As Neil Barofsky, the former watchdog for the government’s financial crisis bailout programme, has claimed, JPM’s accounting process appeared “entirely consistent with fraud”.
• Regulatory capture: Jamie Dimon has been quoted as referring to his development and maintenance of governmental relations as a “seventh line of business”. The close ties between JPM and the US government were underlined in 2009 when the White House chief of staff, Rahm Emanuel, was a special guest at a JPM board meeting.
• Wilful blindness or organisational learning disabilities: The ‘London Whale’ was described by one top official as merely “an embarrassing incident”, while Dimon himself explained it as a “hedging” rather than “trading” error. This reluctance to admit that the incident flagged serious systemic problems is a perfect example of JPM’s wilful blindness.
• Over-dominant CEO with imperial right to be above challenge: When questioned by a Wall Street analyst (Mike Mayo) about the bank’s capital ratio in September 2012 (when the bank’s assets measured $1.85trn and their derivatives exposure exceeded $71trn), Dimon simply responded “that’s why I am richer than you”. He faced no repercussions.
• Shareholder value fundamentalism: Despite the ‘London Whale’, Dimon was re-elected as both chairman and CEO and kept his renumeration package of more than
$23m, despite bank losses of over $2bn.
The obvious conclusion is that he was voted back in so as to avoid any temporary disruption in management, in order to reinvigorate short-term profits as quickly as possible.
Supporters of the status quo could say our data is old and heavily related to the ‘London Whale’ incident. True, and if we had good reporting from banks through the front screen, we might not be so bearish. Others might say that much of what we say is true for other banks. Also true. However, what is clear is that the risks are there. What should also be clear is that JPM shareholders and the wider community have far more to fear than a unified chairman and CEO. Diminishing Dimon’s powers would be the ideal start. But that is all it would be.
Raj Thamotheram is an independent strategic adviser, co-founder of PreventableSurprises.com and president of the Network for Sustainable Financial Markets and Henry Campbell-Smith is a solicitor at Janes, a London-based law firm