JP Morgan shareholders are convened today for a meeting in Tampa, Florida. The vote is on the separation of the positions of president and CEO centralized in the sole hands of the boss Jamie Dimon. A crucial vote that could lead to the appointment of a new president who increases oversight of Administrator Dimon himself, under pressure from recent scandals and investigations. A scenario that in recent days seems to have managed to collect over 40% of the votes. Rather than accepting the renunciation of an office, the vote is not binding but would be a crushing defeat for the boss, Dimon reported that he could resign. However, record profits and a 19% stock market performance since the beginning of the year play in his favor. The outcome of the vote is not so obvious. The unions' pension funds, which together own six million shares, are pushing the separation of offices above all else.
The circle around Dimon's seat has tightened over the past two years as JPMorgan has faced growing criticism of its risk management. A powerful leader of JPMorgan since 2005, Dimon also became chairman in 2006 and has seen his leadership grow after he steered the investment bank unscathed out of the subprime crisis. With lots of bailouts from Bear Stearns and Washington Mutual. But today the banker has more than one problem that embarrasses him in front of that financial community and those same authorities to which he has always claimed JPMorgan's risk management skills by opposing the post-crisis regulatory wave.
To throw embarrassment on the US giant was above all the scandal of the “Whale of London”, i.e. the trader Bruno Michel Iksil who has generated a hole of more than 6 billion dollars with operations on CDS and who has put under the spotlight precisely that risk management that was once considered the best on Wall Street (the only able to survive the subprime financial tsunami unscathed). Not only. A recent report by the US Senate Permanent Subcommittee on Investigations accused the superbank of misleading regulators and investors about the size of losses on derivatives. The report, the result of more than 50 interviews and the analysis of 90.000 documents, also highlighted that Jp Morgan has not given some information to the regulatory authorities and has ignored the alarms. According to Democratic Senator Carl Levin, investigators "uncovered risk-based trading operations that ignored limits on risk-taking, hid losses, evaded oversight, and misinformed the public." "While we have repeatedly acknowledged the mistakes, our senior management acted in good faith and never intended to deceive anyone," JP Morgan said in a statement.
Then came the allegations of manipulation of the energy sector which could now cost Dimon his job permanently. In particular, the bank is accused of having orchestrated "manipulative schemes" to transform "loss-making energy plants into powerful profit generators", with the help of a high-level executive who allegedly "gave false and misleading testimony" under oath. And these are the most obvious problems. On May 9, California sued the bank accusing it of "abusing the debt collection of tens of thousands of Californian consumers." According to some supervisory bodies, in fact, JPMorgan would make use of techniques that are not entirely lawful for the recovery of credit card debts. In addition, other investigations into the bank lead to the Madoff case in connection with possible omissions of suspicious activity. According to the New York Times, 8 federal agencies are investigating the bank's activities on various fronts (including the Libor scandal). The bank's New York headquarters reject all accusations.
THE THREE LESSONS OF THE WHALE OF LONDON IN A SYSTEMIC KEY
But JPMorgan's is not just a story of possible wrongdoing, its problems have a systemic significance, they call into question the management of the big banks on which regulation does not seem to be at the turning point. A theme that is clearly analyzed in an interesting study by the economist Jan Kregel, senior scholar at the Levy Economics Institute of Bard College (New York), a nonprofit, independent, apolitical public policy research organization founded in 1986. In the study, titled “More swimming lessons from the london whale”, Kregel delves into and analyzes the conclusions of the Senate subcommittee report by expanding the lessons that can be drawn from the case of the London whale. These are the main steps of the study:
1) If the Subcommittee's report suggests that the company and management acted in bad faith, a more likely explanation for the misinformation is that the bank was so grown in size and complexity as to be too large for management to have a clear idea of the actual condition of the Synthetic credit portfolio;
2) while the report indicates that the chief investment officer (CIO) acted without a clear mandate, Kregel points out that the hedging business worked well until 2009. Only after that, the changed market conditions prompted the chief investment officer (CIO ) to change mandate, or rather to act according to several mandates with incompatible objectives. Up to creating a sort of Ponzi scheme against which the market has begun to bet and which has led to the explosion of the size of the losses. In other words, proprietary trading is not a problem in itself but the crux of the matter is a financial system that allows banks to operate in all fields of finance;
3) the Senate report criticizes the elevated remuneration of the IOC as one of the aspects that guided the choices of the IOC. For Kregel, the problem is not so much the size of the remuneration, rather the fact that it is linked to the profitability of a division which by its nature should generate losses in most cases.
Interviewed by Firstonline, Kregel notes that the Wall Street reform known as Dodd Frank "it only puts plasters but does not eliminate the great difficulties on the banks' ability to manage risk and the regulatory system to understand what the bank does". The Dodd-Frank was signed by President Barack Obama in July 2010 and represents a complex intervention to promote a tighter and more complete regulation of US finance while at the same time providing incentives to protect US consumers and the US economic system. Within the reform is expected the Volcker rule, which drastically limits the speculative activity of banks by prohibiting them from investing their own capital in stock exchange transactions, investments in derivatives and holdings in hedge funds above 3%. However, the law has not yet been adopted and has been strongly opposed by banking lobbies.
JPMORGAN IS THE PLAYING GROUND FOR THE VOLCKER RULE CHALLENGE
But for Kregel this is not the crux of the problem and the Volcker rule is not the right solution. Rather, a regulation is needed that changes the structure of the financial system: “it is necessary to divide the operations of banks, trading, M&A, insurance (etc..) into separate units with separate capital – explains Kregel – which makes supervision easier. Keep in mind that if banks can't do certain things, they find another way to do it, which is usually even riskier. We can't prevent banks from taking risk, but we can reduce the size and volumes that managers can manage”. Not only. The JPMorgan case has become the playground on which the close confrontation on the Volcker rule is being disputed between the US Senate and the financial community. For Kregel, in fact, the Senate Subcommittee, determined to defend the goodness of the Volker rule, does not take into account in its report that even proprietary trading, up to a certain point, has been positive for JPMorgan's stability.
