May 18, 2012 7:29 pm
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Banking: Back to the wall
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By Tom Braithwaite .
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JPMorgan Chase’s $2bn loss has tarnished the reputation of chief executive Jamie Dimon
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Standing bolt upright and with his trademark direct manner, the banker needlessly introduced himself. “Mr Chairman,” he respectfully addressed Ben Bernanke of the US Federal Reserve. “Jamie Dimon, JPMorgan Chase.”
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The chief executive of one of Wall Street’s grandest institutions – the descendant of the fabled “House of Morgan” – then rattled off a list of recent financial regulations, followed by a change in tone: “Has anyone bothered to study the cumulative effect of all these things?” With a wry smile, Mr Bernanke, who, like everyone else, addressed him as “Jamie”, acknowledged that, no, nobody had.
That moment of confrontation at a conference last year showed something of the star appeal of Mr Dimon, something of his uncompromising nature in arguing that some regulations are crimping credit and something, his critics say, of his hubris.
.Now, Mr Dimon has found himself the unwelcome focal point of a story that is the talk of Wall Street and the City. London-based traders in JPMorgan’s chief investment office – one of them dubbed “the London whale” – made disastrous derivatives trades, which have wiped more than $20bn from the market capitalisation of a bank famed for its risk controls, its “fortress balance sheet” and its chief executive’s obsession with detail.
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The losses have engulfed one of the big beasts of banking, someone who commanded almost rock-star status. But any sense of schadenfreude is tempered by the realisation of the possible wider consequences of the case for the rest of the industry. “We’re screwed,” was the immediate response of one competitor. While some may have resented his bravura, rivals needed Mr Dimon. The 56-year-old, who took up boxing in early middle age, was the industry’s prizefighter – one of the few survivors of the 2008 crisis – who still had the credibility to take on politicians and regulators as they finalise rules that are likely to curb Wall Street’s profits.
Now there are fears in the industry that policy makers will use the trading losses as a reason to tighten the screws. The outsized trading of the CIO, which invests deposits the bank takes but does not lend, has prompted questions over whether Mr Dimon has been circumventing the spirit of the regulation he has been so keen to shape.
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For Mr Dimon himself the losses have posed a question of his credibility – fuelled in part by his initial handling of the affair. On April 13 he bluntly dismissed news reports about the big trading positions held by the CIO as “a complete tempest in a teapot”. Less than four weeks later, he was forced to reveal that the unit’s “terrible, stupid, egregious” errors had caused $2bn losses.
This jars with his image as the self-assured, charming and, at times, disarmingly frank Wall Street veteran who had successfully steered JPMorgan through the crisis, avoiding the losses that had crippled his rivals.
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For some in Washington, though, his star had already dimmed. “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”.
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However, in a series of interviews of top executives, a handful of whom are likely successors when Mr Dimon does step down, there is unwavering hostility towards the idea that these losses could force his departure. “Ludicrous,” says one. “Crazy,” says another.
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“People will throw rocks at the boat,” says Mike Cavanagh, head of treasury and securities services, who was appointed by Mr Dimon to lead an internal probe into the losses. “It doesn’t change the work we have to do.”
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Regulators, who are working to understand what actually happened, will be pressing to know how it was that the chief executive could not have known about the losses when he dismissed the CIO’s trading positions as insignificant during a conference call with investors.
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A woman who lives in a large house in New Jersey, with a tennis court, swimming pool defended by tall oaks, white pillars and – more recently – security guards, may have the answer.
Ina Drew, who resigned as head of the CIO this week, has not replied to requests for comment. However, senior executives blame her for not getting to grips with her wayward trading unit and not passing bad news up the chain quickly enough.
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Four executives are adamant Mr Dimon did not deliberately misrepresent the bank’s exposure on a first-quarter earnings call on April 13. “As the guy who signs the books and records of this place for the last six years I know how seriously he takes what we tell the market,” says Mr Cavanagh. “He had senior people saying we’ve got the all clear.”
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The executives agree that it was only after the first-quarter earnings, with losses becoming larger and more sustained that it became obvious the CIO’s estimate of the size of the problems was not credible.
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“Losses that had occurred had been explained in a variety of ways and those losses continued to mount and they picked up pace,” says one, who adds the company was then justified in waiting until its next big regulatory filing on May 10. “There was no obligation that when losses get to ‘x’ we say something. This wasn’t putting the company in harm’s way.”
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With a balance sheet of $2.3tn and capital levels among the best in the business, it seems unlikely to prove a serious financial blow – though hedge funds believe the bank’s losses are growing as they bet against its position.
Still people close to the bank are surprised that a man with such a grasp of detail could miss the warning signs. A renowned cost-cutter, Mr Dimon recently expressed alarm that fancy potato chips in clear cellophane tied with a ribbon were available in the JPMorgan dining room. His colleague Frank Bisignano launched an investigation, triumphantly reporting back that the chips were cheaper than alternatives bought from local stores.
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Mr Dimon still prowls the corridors with a sheet of paper in his pocket – an “owe me” list of people who need to provide a report. “I used to have nightmares that my name would be on the list,” says one former employee.
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The fear he can inspire gives a hint of his pugnacious temperament. It was on being fired from Citigroup in the late 1990s that he took up boxing. At Citi he helped Sandy Weill build the world’s biggest financial services group in a series of mergers. It was a strategy he was to repeat at Chicago-based Bank One, where he embarked on his own acquisition campaign that led to today’s JPMorgan Chase.
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But the executives who surround him today are adamant that he fosters, not batters, talent. “There’s a particularly deep team here up on 48,” says Jimmy Lee, a veteran investment banker, whose office is next to Mr Dimon’s on the 48th floor of 270 Park Avenue, the bank’s headquarters. “The team is crazy deep. Pulled Mike [Cavanagh] off the bench to run this. How many people have a guy like Mike available?”
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The loyalty from senior executives, whom Mr Dimon has kept dangling with his imprecise thoughts on retirement, can be matched by his loyalty to them. Some insiders say that can be damaging and that he delayed too long in accepting the resignation of Ms Drew, a 30-year bank veteran.
Others question whether as a charismatic, headstrong leader, he has enough people to stand up to him – particularly after removing rivals such as Bill Winters, co-head of the investment bank, two years ago.
“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.
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His executives insist they do say “no” to him. Mr Lee argues that Mr Dimon may seem an outsized presence in a world of lower-key peers, but not compared with historical forebears or contemporaries in other sectors.
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“Look in our industry at different times: obviously Pierpont Morgan was a big, larger-than-life leader. If you look at other industries, you get your Larry Ellison and Steve Jobs.”
Mr Lee, who was on Thursday toasting the pricing of Facebook’s initial public offering, on which JPMorgan acted as underwriter, says his boss has been involved in the social networking company’s flotation. “I’ll go into his office and ask him a question and he just immediately locks into my question and is completely zoned in on it, focused on it.”
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But in Tampa for the bank’s annual meeting with shareholders on Tuesday, Mr Dimon looked tired. His usual rapid-fire delivery accelerated to such a pace that investors present seemed to struggle to make out the words.
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The meeting was held at the Florida headquarters of TSS, Mr Cavanagh’s business and the unit responsible for the “plumbing” that moves tens of billions of dollars around the world every week. Unusually flat for most of the performance, after little sleep for days, Mr Dimon perked up after the formalities when a junior employee came to shake his hand. “You better not mess up,” Mr Dimon told him with a smile, “then we really would lose billions.”
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Additional reporting by Gillian Tett, Ajay Makan and Dan McCrum
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Copyright The Financial Times Limited 2012.
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