Friday, May 11, 2012

Jamie Dimon Needs A Lecture

Dimon, as CEO and very much the face of JPM, was rightfully hit with the brunt of the criticism. But there’s something to be said about the intensity of the heat Dimon is feeling. He’s the CEO so naturally he’s got to answer to the mess but he is also a CEO with a very public image (that is, as far as bank CEO images go). Not only that but Dimon has been dubbed the golden boy of Wall Street so many times that it seemed he and his bank could do no wrong.

Jamie Dimon Needs A Lecture From Goldman CEO Lloyd Blankfein
Jamie Dimon Derivatives Fiasco Highlights Obama Failure
Deals of the Day: Jamie Dimon & The London Whale

Jamie Dimon Needs A Lecture From Goldman CEO Lloyd Blankfein

It’s been an ugly couple of days for JPMorgan Chase CEO Jamie Dimon but it didn’t have to be this brutal.

When news breaks that the strongest bank in the country just lost $2 billion on a bad trade there’s bound to be major fallout and plenty of criticism. Indeed the fallout came in the form of a 9.5% drop in shares today and the criticism came from all corners–regulators, lawmakers, etc.

Dimon, as CEO and very much the face of JPM, was rightfully hit with the brunt of the criticism. But there’s something to be said about the intensity of the heat Dimon is feeling. He’s the CEO so naturally he’s got to answer to the mess but he is also a CEO with a very public image (that is, as far as bank CEO images go). Not only that but Dimon has been dubbed the golden boy of Wall Street so many times that it seemed he and his bank could do no wrong.

What’s really damaging for Dimon is his recent “end the banker bashing” campaign. At Davos in January 2011 Dimon revealed his teeth and defended his industry against regulators who he felt were getting overzealous. “To suggest we’re supposed to just bend down and accept it because we’re banks – that’s not fair,” he said.

Dimon’s defense mode only became more intense after that. His frustrations with the Volcker Rule were loud and clear during the bank’s 3rd quarter earnings call when he said this:

The United States has the best, deepest, widest, and most transparent capital markets in the world which give you, the investor, the ability to buy and sell large amounts at very cheap prices. That is a good thing. I wish Paul Volcker understood that. Okay? Now we understand why there is no proprietary trading. That was fine….[But] we have to be in a position to do proper market-making for our clients…Most of our business is market-making…I hope all of you on this phone understand how important this is, not just for your own business but for future of the United States.”

It’s one thing to make issue of regulations but it’s another to do so repeatedly and very publically. For Dimon’s own sake someone should have warned him about the hubris that comes along with such intense regulation-bashing.

A Wall Street CEO that Dimon can learn something from perhaps is Goldman Sachs’ Lloyd Blankfein. Sure he may come off a bit sinister in a master-of-the-universe type way but his reluctance to voice his issues with regulations (in public at least) work in his favor. In fact Blankfein gave his first interview in over 2 years for the first time in April. Staying out of the spotlight is something Blankfein has mastered considering his firm is generally much more hated than Dimon’s.

Plus, you also have to think that Dimon and JPM have less to lose from regulations like the Volcker Rule compared with Blankfein’s Goldman. In fact it’s Goldman (Morgan Stanley) expected to take the biggest financial hits from the rule but you don’t hear Blankfein or James Gorman lashing out against the rule in any public forum.

Advice to Dimon: Rein in the savior of Wall Street act. It’s officially doing more harm than good.

Jamie Dimon Derivatives Fiasco Highlights Obama Failure

Fun as it may be to beat up on the arrogant Jamie Dimon for the $2 billion-plus derivatives fiasco at JP Morgan Chase, this is like blaming the lion that ate the kid who got too close to its cage at the zoo, rather than going after the guy who allowed such an unsafe cage to be built.

That guy is named Barack Obama. He had assistance from a pair of key advisors, Tim Geithner and Larry Summers, whose ample experience should have enabled them to recognize the dangers of allowing Wall Street to keep trading derivatives free of regulation.

Yes, Dimon's very public humiliation is both well-earned and somewhat delicious, given his ceaseless tirades against regulation and his smug assurances that his institution was above reproach because it supposedly employed the most sophisticated instruments of risk management. But he is the chief executive of the largest financial institution in the land, and he is merely doing what he is paid handsomely to do: maximize profits for shareholders by whatever means available, and never mind the risks to the broader financial system.

Central to Dimon's profit-making model is ensuring that JPMorgan Chase retains its status as Exhibit A on the list of American institutions that are clearly too big to fail, meaning its collapse would threaten the health of the whole financial system. That gives his traders extra space to operate between solid ground and the abyss. They can bet aggressively, knowing that failure comes with a built-in public backstop. The profits roll up to the corner offices, and the losses roll down to the taxpayer and ordinary working people who pay with their livelihoods when the economy suffers.

The fact that Dimon and his coterie of traders would operate this way should surprise no one. What are they supposed to be doing, helping blind people find their way to church? The real villains here are the people who are paid to look out for the public interest, and who failed, leaving us to absorb -- yet again -- a gargantuan hole in the balance sheet of a major institution, with no clear sense of the full size of that hole or who might yet fall into it.

Obama had nothing to do with the creation of the worst financial crisis since the Depression. It was nurtured by decades of reckless financial deregulation overseen by his predecessors, principally Bill Clinton and George W. Bush, and the easy-money credit policies of Fed Chairman Alan Greenspan. Obama did not design the no-strings-attached Wall Street bailouts that were rushed through Congress in the fall of 2008, with the same sort of enlightened deliberation that authorized the war in Iraq. That was the handiwork of Bush's Treasury Secretary Hank Paulson, who before that headed Goldman Sachs.

But once the crisis became Obama's to manage, he brought in Geithner as treasury secretary, despite the fact that he had run the New York Fed while the crisis was building, while doing nothing to arrest its dangers, and then helped Paulson engineer the bailout. Obama brought in Summers as his chief economic advisor, despite the fact that he had been Clinton's Treasury Secretary during a decisive period of financial deregulation. Summers steamrollered Brooksley Born, who, as head of the Commodity Futures and Trading Commission in the late 1990s, had warned of the dangers of unregulated derivatives while calling for a regimen of rules.

By early 2009, with Obama in the White House and the second batch of bailout funds waiting to be delivered to Wall Street, the dangers of unregulated derivatives trading were as conspicuous as a guy without a striped tie in Washington. The near-collapse of AIG had brought home the fact that financial behemoths were trading exotic investments worth trillions of dollars without anyone watching to see if they had real dollars parked somewhere to cover losses.

The Obama administration had substantial leverage that it could have used to impose a sensible regulatory framework. Citigroup and Bank of America could not have survived without public largess, and AIG was a ward of the government. The administration could have attached stiff conditions to the next capital infusion, while threatening to withhold it. It could have demanded serious rules on derivatives. It could have required that too-big-to-fail institutions be broken into smaller pieces. It could have pushed for updated incentive structures at banks, with rules threatening executives with surrendering their compensation when their companies took undue risks and failed.

But the Obama administration didn't do any of these things. It just handed over the money, while buying into the same perverse logic that had allowed the financial crisis to gather force: The guys on Wall Street must always be made happy, or terrible consequences result.

Summers had killed derivatives regulation a decade earlier by warning that rules would sow unease in the markets and send money scurrying from Wall Street to London. As Obama came into office, he and Geithner sold the president on the same basic fear: Regulate and you will freak out the markets and infuriate the big banks, whose cooperation is key to recovery.

Governed by this logic, the Obama administration left for later the crafting of a new set of rules. It left the nitty-gritty to Congress, which is something like handing your tax return and a six-pack of Corona to your 11-year-old. The subsequent orgy of lobbying delivered the grotesque Dodd-Frank reform law, and entrusted the details to a bunch of regulatory agencies. We are still waiting for the details. Anyone who says we are now safer than before is surely paid to say such things.

In short, more than three years after the global financial system nearly imploded because of unregulated, casino-style gambling, nothing of substance has changed. And here we are again, staring at a familiar set of questions: How big are these JP losses, and how much money has been set aside to cover them? Nobody knows. What happens if this turns out to be worse than Jame Dimon is telling us? Ditto.

You can blame the guy who presided over the losses, which is at least entertaining, but he was merely acting in accordance with the incentives at work. The real problem is that the people who could have changed those incentives chose not to, bowing down to the bankers in the hopes that making them richer would somehow improve fortunes for everyone else.

Deals of the Day: Jamie Dimon & The London Whale

J.P. Morgan & The London Whale
Black Eye for JPM: J.P. Morgan has taken $2 billion in trading losses in the past six weeks and could face an additional $1 billion in second-quarter losses due to volatility. [WSJ]

Related: Even banking whales can run aground. That was the stark lesson from J.P. Morgan’s shocking news that it had suffered $2 billion in trading losses so far in the second quarter. [Heard on the Street]

Related: James Dimon, one of the most successful bank executives, has been handed a piece of humble pie. [WSJ]

Related: J.P. Morgan has been holding discussions with U.K. regulators about the roughly $2 billion of trading losses incurred by the giant bank’s investment office. [WSJ]

Mergers & Acquisitions
Coty-Avon: Warren Buffett’s Berkshire Hathaway emerged as a major backer of Coty’s bid for struggling beauty company Avon, but Berkshire’s support had the unexpected effect of signaling the deal might never come together. [WSJ]

AT&T: The telecom giant has held talks to buy smaller rival Leap Wireless International in recent months, according to people familiar with the matter, in the latest sign U.S. carriers are looking at acquisitions as a way to grow in a mature market. [Reuters]

America Movil: The telecommunications company owned by Mexican billionaire Carlos Slim, intends to boost its presence in the United States with the purchase of California-based Simple Mobile, the second planned acquisition it unveiled this week. [Reuters]

Voras Capital: Morgan Stanley asked the hedge fund firm being closed down by the securities firm’s former co-president, Zoe Cruz, for its money back. [WSJ]

Companies & Industries
Chesapeake: Chesapeake Energy has saddled itself with about $1.4 billion of previously unreported liabilities over the next decade through off-balance-sheet financial deals. [WSJ]

Shareholder Springs: The crisis so far has been pretty friendly to corporate bondholders. But shareholders disappointed by poor returns are starting to flex their muscles. Does the shareholder spring mean a colder climate for bondholders? [Heard on the Street]

Obama vs. Romney: Global investors increasingly prefer President Barack Obama to Republican challenger Mitt Romney and most say they believe the incumbent will remain in the White House for another four years. [Bloomberg]

No comments:

Post a Comment

Related Posts Plugin for WordPress, Blogger...