Too big to manage? Too big to regulate?
Both criticisms of JP Morgan should ring loud and true for readers of the various regulatory postmortems on the bank's "London Whale" trade. From chief executive Jamie Dimon's initial dismissal of the affair as a "tempest in a teapot" to the various botched internal investigations, this was a corporate calamity. And the worst part was JP Morgan's high-handed attempt to deceive regulators. The UK's Financial Conduct Authority says it was "deliberately misled" by London-based executives on one occasion.
Total fines of $920m (£574m), to add to the $6bn loss from the trading activities themselves, will destroy any lingering notion that JP Morgan was the smartest manager of risk on Wall Street. The FCA's report reveals the bank's almost comical inability to get a handle on its credit derivative exposures even after senior management realised there was a crisis.
For example, in May 2012, the controller's office, in charge of one investigation, estimated there was a $275m difference between two sets of prices given for losses. Then it identified a "signage error" in one set of spreadsheets – "meaning that certain cells had a plus rather than a minus number," explains the FCA report. The recalculation meant the difference grew to $512m.
Did the controller's office then go back and check all the numbers? No. "The error, identified late in proceedings, gave the controller's office pause for thought," reports the FCA, but the ultimate conclusion was that "no further work was necessary".
Worse, JP Morgan's senior managers – having commissioned a blizzard of reports from various units – failed to make sure that they joined the dots or informed their superiors. "The firm's senior management should have taken additional steps to ensure that all crucial information reached the appropriate decision-makers," said the FCA.
Incompetence is one thing, of course. Misleading regulators is the serious part of this scandal. JP Morgan's behaviour was brazen and extraordinary. In a discussion with the UK regulator in March 2012, JP Morgan staff in London didn't mention that traders on the synthetic credit portfolio – the source of all the problems – had been told to stop trading. That was a basic piece of information to reveal.
The following month, on a conference call, London executives said there had been no material changes to the portfolio since the March meeting. In fact, the portfolio was expected to lose a significant amount of money that very day, pushing losses for the year beyond $1bn, as London management had been told by their traders prior to the call with the regulator. Thus the FCA's damning assessment that it had been deliberately misled.
In a rational world, JP Morgan's incompetence and attempts to mislead would prompt the instant resignation of the bank's chief. Dimon was not singled out for personal criticism, but the buck should surely stop at the top when the control systems of one of the world's largest financial institutions have been shown to be full of holes.
Dimon, though, seems determined to stay. He thinks JP Morgan has acknowledged its flaws and apologised and he wants to lead the process of "simplifying" the firm. In the UK, one suspects, the regulators would usher him to the door, as they did with Bob Diamond after Barclays' Libor revelations. In the US, it seems, Dimon's star status survives and shareholders want him to continue as both chairman and chief executive.
It is hard to understand why Dimon is still regarded as bulletproof. It is true that JP Morgan, as well as clocking up billions of dollars in legal bills and the $6bn Whale loss, has made a lot of profit in recent years. But the standard of governance at the bank looks as if it has been appalling and, when cultural change is required, it's usually best to appoint a new leader.
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