This article originally appeared in Bloomberg View on April 3rd, 2013.
JPMorgan Chase & Co. and its chief executive officer, Jamie Dimon, have been dealing with a blitz of bad news of late, but you wouldn’t know it from the accolades that keep getting heaped on them.
There was the $6.2 billion trading loss best known as the London Whale debacle that Dimon dismissed as a “tempest in a teapot”; the humiliating hearing before Senator Carl Levin’s Permanent Subcommittee on Investigations, where we learned that Dimon had played a role in managing the wrong-way trades; and, to top it off, the New York Times on March 26 reported that eight federal agencies were circling the bank with various probes.
Then there are the costs to settle regulatory cases and litigation. Joshua Rosner, an analyst at Graham Fisher & Co. in New York, estimated these have totaled as much as $8.5 billion since 2009 — and that doesn’t count any of the mortgage-related givebacks that came after the financial crisis.
That’s all serious stuff, you might be thinking. So why are investors and sycophantic media types still under the spell of JPMorgan and its top guy?
Even as the grim news was piling up for Dimon and his bank, Barron’s magazine last month honored him as one of the “World’s Best CEOs” — a short list of 30 international superstars.
Feeling Loved
JPMorgan, meanwhile, is feeling the love when it comes to its stakeholders. Steel City Re, a Pittsburgh-based firm that measures corporate reputations, ranks the bank in the 90th percentile among 50 financial conglomerates. Nir Kossovsky, a Steel City co-founder, says he calculates how stakeholders reward or punish companies through such things as sales volume, vendor terms and credit costs.
Little wonder, I suppose, that earlier this year, JPMorgan topped the Fortune magazine list of most-admired banks in the world for the second year in a row. Are the bank’s admirers living in some parallel universe where black marks just don’t register?
Joe Evangelisti, a spokesman for JPMorgan, declined to comment.
At least some of the goodwill toward JPMorgan exists because when it comes to controversy, the bank is a master at spin. At a black-tie gala at New York’s over-the-top restaurant Cipriani Wall Street on March 19, Dimon landed first prize for “Best IR by a CEO or chairman” at the IR Magazine Awards, aka “the industry’s most prestigious and coveted awards that honor leading companies and professionals in investor relations.” A second award to JPMorgan specifically cited the bank for its bang-up job at crisis management.
To win a prize for crisis management, of course, you need to be in a crisis, but that doesn’t seem to sway supporters of the bank or its CEO, who make what sounds like a reasonable argument: JPMorgan is making money, which makes shareholders happy and keeps the board off Dimon’s back. So what’s not to like?
Amar Bhide, a professor of international business at Tufts University’s Fletcher School of Law and Diplomacy, has done some thinking about that question, and said JPMorgan and its competitors are making too much of their money with taxpayer support.
“From the point of view of shareholders, Dimon is not doing a terrible job,” Bhide said. “One could take the extreme point of view and say that you want these people to gamble because they are gambling with the public’s money. If you are a stockholder, you get a nearly free ride, so why not?”
Taxpayer Backing
Banks and their investors know that there’s an implicit backstop — a taxpayer bailout — that will kick in during the worst-case scenario of a financial-system meltdown. Dimon actually endorses the idea of a resolution authority that would wind down failing banks, which sounds great as far as it goes.
But the “savvy leader of the world’s most important bank,” as Barron’s calls him, wants JPMorgan to be able to get bigger and to serve more global clients. How do you force countries outside of the U.S. to comply with another country’s resolution authority? In his letter to shareholders last year, Dimon said that close cooperation would be “required by multiple regulators.”
Sydney Finkelstein, a management professor at the Tuck School of Business at Dartmouth College, says a resolution plan isn’t enough and that banks need to be broken up. The U.S.’s biggest banks are too unwieldy for anyone to manage, he said.
Which takes us back to that $6.2 billion loss springing from the London Whale trades.
Some of JPMorgan’s problems are a lot like the problems of its competitors. Banks are peddling products that sometimes are only understood by a small club of physicists who used to work at places such as NASA before rocket science became the new profit driver at banks.
But I digress. Our banks are selling stuff that top management can’t keep tabs on, and it’s putting the financial system at risk. Even Dimon showed he was at a loss to explain the Whale blowup when he made his reference to a tempest in a teapot.
JPMorgan’s CEO has another problem: that enormous tab the bank has run up to settle cases with regulators and litigants. In a March 12 report titled “JPMorgan Chase: Out of Control,” Rosner, the Graham Fisher analyst, wrote that he couldn’t find another U.S. bank with such big settlement outlays.
JPMorgan is a master at racking up PR points when it’s boasting about things such as its “fortress balance sheet.” But it has been able to dodge setbacks when it breaks the rules. You have to wonder whether, at some point, it might catch up with the world’s most-admired bank and its magazine-cover CEO.