Sure the economy is still a mess, unemployment is high, civil services and pensions are being slashed, a record number of people are on food stamps, and families are losing homes. But Jamie Dimon, Chairman and CEO of JPMorgan Chase, does his best to distract the United States from these unpleasant realities.
After losing $2.2 billion (and rapidly rising1) in mark-to-market losses in credit derivatives, the multi-trillion dollar global product JPMorgan created and claims it manages well. Everyone is guessing about JPMorgan’s ultimate losses. The Wall Street Journal reported on May 18 losses could potentially be as much as $5 billion, or more than 25% of JPMorgan’s profits last year, but no one knows for certain, and ultimate losses could be smaller or much greater.
Dimon had the perfect response on May 13th’s Meet the Press to straight man David Gregory’s question: “How did this happen?”
“First of all, there was one warning signal — if you look back from today, there were other red flags. That particular red flag — you know, we made a mistake, we got very defensive and people started justifying everything we did. You know, the benefit in life is to say, ‘Maybe you made a mistake, let’s dig deep.’ And the mistake had been brewing for a while, so it wasn’t just any one thing.”2
That’s so funny I’ll bet President Obama blew coffee out of his nose.
The Pay Joke
In 2011, Jamie Dimon got a total pay package of $23 million. Of course, those earnings came on the back of a global financial bailout, Fed enabled mergers that created an insanely big balance sheet, and ongoing cheap financing from the Fed. Meanwhile, U.S. savers get paid virtually no interest on low-risk investments to subsidise the banking system.
Dimon’s pay partly depended on reported profitability of the division with the troubled credit derivatives, JPMorgan’s Chief Investment Office (CIO). Dimon reportedly paid its chief investment officer, Ina Drew, $14.5 million in 2011. Dimon just allowed Drew to retire. Dimon handsomely paid Bruno Iksil, the unit’s trader that other market traders dubbed “the London Whale,” because among other things, he boasted he can walk on water. 3
The Model Joke
The thing about credit derivatives is that the models are very vulnerable to the assumptions one uses in the model. So you wouldn’t want to say, push your people to make more money for JPMorgan and then let the people whose multi-million dollar bonuses depend on the outcome influence the assumptions. But that’s only if you don’t have Dimon’s flair for comedy.
At JPMorgan, the CIO abandoned an old model it had used for several years. It started using a new model in 2012 and apparently grew its trading positions in size and complexity. Rather than rigorously question the reports submitted by the people whose pay depended on making themselves look good, Dimon did what every good comedian does. In response to concerns raised in April about news reports that JPMorgan’s positions were too big, Dimon set up his big joke. After announcing first quarter earnings on an April conference call on Friday the 13th, he called it “a tempest in a teapot.”
On Thursday, May 10, just five days before JPMorgan’s annual shareholders’ meeting, he announced the losses and said they are likely to grow. He also said the CIO went back to the old model, because the new one had been inadequate. He let listeners question in their own minds whether 2011 assumption-based earnings for the unit could be trusted any more than 2012’s numbers.
The Yes-Men Joke
Jamie has his internal so-called experts looking at the situation, and Jamie can be trusted to choose the right yes-men for the job:
” ‘The Jamie I first met was not the arrogant Jamie that he has become,’ says a senior congressional aide. Mr Dimon, he says, ‘morphed into some combination of Goldman Sachs and Ken Lewis’ – the former chief executive of Bank of America – ‘gratuitously full of himself, unnecessarily angry.'”…
“‘One of Dimon’s great weaknesses is that he has not created any succession plan – he has kicked out anyone who really might challenge him,’ said one person who knows him.” 4
The world’s largest systemically dangerous bank had no treasurer for several months. Joseph Bonocore, the treasurer who reported to chief financial officer Doug Braunstein, raised concerns about the London-based CIO unit’s risk. Bonocore had been the chief financial officer for the CIO unit for eleven years prior to becoming the treasurer. But it would have spoiled the joke if anyone listened to him. Besides, he was gone by October 2011. You wouldn’t have known that though, because JPMorgan didn’t disclose his departure, and now JPMorgan says he “left abruptly for personal reasons.” 5
The Brother-in-Law Joke
Hey, it’s the Great Recession! Everyone has a relative who needs a job. Barry Zubrow, JPMorgan’s former chief risk officer and current head of corporate regulatory affairs (as of early 2012) has this brother-in-law, Irvin Goldman. Goldman left Cantor Fitzgerald after the unit he oversaw racked up mounting losses in 2007, and he has little experience in risk management. Who better for JPMorgan to install in the CIO unit in 2010 and then announce on February 13, 2012 as the new risk manager for the unit? Of course, Goldman never reported to Zubrow, and anyway, he’s been replaced already. He’s now advising the new guy who replaced him just months after he got his risk management gig. 6
As for the management controls7 Dimon was paid so highly to put in place, he deadpanned:
“In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored.”
That’s really funny to U.S. taxpayers, since we bailed out the banking system and continue to subsidise JPMorgan with loans at near zero interest rates. Meanwhile, Dimon has bashed the reputation of esteemed former Fed Chairman Paul Volcker. He’s whined that criticism of bankers is unfair. Dimon refuses to acknowledge there’s merit to the idea of the return of Glass-Steagall, yet he has again proved JPMorgan is Too Big to Manage:
“We’ll do what we’ll always do. We’ll admit it [because you caught on], we’ll learn from it [next time you may not catch on], we’ll fix it [the fix is in], and we’ll move on.” [Then, as we’ve done in the recent past, 5 we’ll do it again.]
New JPMorgan shareholders, who watched the share price plummet after Jamie Dimon’s announcement, must be laughing so hard it hurts.
The Stuff I Didn’t Tell You Joke
Jamie’s no stranger to surprise trading losses. One of the reasons he was ousted from Citigroup was due to $1.3 billion in trading losses in the Salomon unit that internal people at the time said were greater. Just two years ago, JPMorgan’s commodities division lost hundreds of millions of dollars after it took positions that were outsized relative to the global coal market, made a “rookie” error and got caught in a short squeeze. Dimon even blew off an early warning about AIG’s losses. So why stop a streak?
Despite news reports by Bloomberg and the Wall Street Journal that raised red flags about the size of the trades, Dimon claims he took his underling’s word that everything would be OK on April 9. Although this unit reported to him, and although he’s hyped as a great risk manager, he didn’t even ask to see the positions.9
Dimon apparently had better things to do in the first quarter of this year than review trading positions of the unit he pushed to take risk and generate income. The CIO unit reported to Dimon, had a new inexperienced risk manager as of February, but it was a busy quarter for Dimon. He was doing stand-up comedy in the media, pushing back against regulators and trying to reverse rules.
As losses mounted, he decided to delay the scheduled April 27th release of JPMorgan’s required filing of a key financial statement, its 10-Q. The Wall Street Journal reported the claim of insiders that Dimon didn’t even ask to see the positions until April 30 despite intervening loss reports of $100 million or more a day and the pending 10-Q filing. 10
Dimon will have you believe he relied on his underling, the now-retired Ina Drew, when he made his April, Friday 13th “teapot” remark. Shareholders were kept in the dark until Thursday, May 10, just five days before the shareholders’ annual meeting and with a weekend sandwiched between. As it was, 40% of the shareholders voted against Dimon keeping his seat as Chairman of the board. Had shareholders had more advance notice, the voting might have gone against Dimon. But timing is everything for a joke.
You know what else is funny? At least one shareholder told me he didn’t recall hearing Dimon inform shareholders at the annual meeting about the timing of his knowledge of the mounting losses, his delay in reviewing the positions, and that the unit reported directly to Dimon. Instead, it seemed along the lines of the generalities he gave on the May 10 conference call.
JPMorgan’s stock has seen a lot of volatility since Dimon took the helm in July 2004. It’s currently priced near where it was when he took charge. (The adjusted closing prices ranged from $29.33-$31.33 the month of July 2004.) New investors, especially those who bought near the end of the first quarter of 2012 (closing price: $45.68)–after Dimon was strutting around the media–and those who bought when he made his April the 13th earnings announcement with the complimentary teapot (adjusted closing price for April 13: $43.21) have taken a big hit. On May 10, the stock closed at $40.74 and rapidly dropped in value in after-hours trading when Dimon announced the surprise losses, and the price has continued to fall. The stock closed on Friday, May 18, at the lowest price this year: $33.49. JPMorgan’s market value is more than $25 billion lower than it was before Dimon disclosed the losses after trading hours on May 10.11
This post has been extensively updated with new information and quotes as of May 19, 2012.
1 On May 16, 2012, NY Times’s Dealbook reported “JPMorgan’s Trading Loss Is Said to Rise at Least 50%.” If true, JPMorgan already blew through its already upwardly adjusted daily value-at-risk estimates.
2 Punctuation is from Michael Hiltzik’s transcription in his May 14, 2012 L.A. Times commentary, “What Jamie Dimon didn’t tell you on ‘Meet the Press’.”
3 The original version of this post stated Dimon paid Iksil $100 million, but that was apparently the at-risk income generated by Iksil.
4 “Back to the Wall,” by Tom Braithwaite, Financial Times, May 19, 2012.
5 “Key Void at Top for J.P. Morgan,” by Dan Fitzpatrick and Julie Steinberg, WSJ, May 17, 2012.
7 The CIO Unit reported directly to Dimon, had lower risk assessment standards and was free of oversight within the bank according to Reuters: “JPMorgan investment unit played by different high-risk rules.” by Matt Schuffham and Edward Taylor, May 16, 2012.
8 “Jamie Dimon’s SNAFU: JPMorgan’s Other Derivatives’ Losses.” May 12, 2012.
9 “Inside J.P. Morgan’s Blunder,” by Monica Langley, WSJ, May 18, 2012.
Endnote: Jane Wollman Rusoff interviewed me for Research Magazine’s May cover story, “Finding the Culprits of the Crisis,” about the deep monetary connections of Wall Street and Washington and the corrosive effect it has had on the economy and the Republic.Read more posts on Tavakoli Structured Finance »
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