Much has been written about the trading—not hedging—debacle at JPMorgan. Jamie Dimon’s mea culpa is intended to head off deeper questions. No cover-up on his watch—get out in front, be direct, deal with it, move on. Right? Not so fast.
JPMorgan’s board has a responsibility to probe more thoughtfully into the uncomfortable truth about the firm they are charged to oversee. Here are ten questions I’d want answers to if I were on JPMorgan’s board:
- What else don’t we know? How do you know what you don’t know? Do we have a strategy to detect sociopaths in our midst? I’m actually serious.
- How come you talk about the trading profits of the Chief Investment Office if its purpose is to hedge our overall portfolio risks? Are we not caught up in a lie?
- Why would someone even suggest that selling Credit Default Swaps (CDS) is a hedge for a bank? How could your judgment be so poor that we just paid someone $15mm a year to use the CIO as a now massive proprietary hedge fund regardless of whether the trades were smart or reckless at the same time we are trying to convince regulators that the Volcker Rule needs portfolio-hedging loopholes?
- Certainly this trade violates the spirit of Dodd-Frank, if not the letter. Time will tell on that. How is it that our culture, compensation system, and risk controls, after all our mistakes—and let’s not kid ourselves, our track record under your watch has been poor by any of the absolute standards this firm has stood for in the past—enables our traders in the CIO to even consider a transaction such as this? Why was the CIO authorized to sell CDS? When did you learn that the CIO sold CDS?
- We all understood the limitations of VaR reporting when our predecessor firm introduced it in the 1990s. One of us, Lee Raymond, was there for the presentations. Long Term Capital’s spectacular collapse in 1998 proved the inadequacy of the tool, but that was not a surprise to anyone in the know. Yet based on your reference to our new VaR system you appear to still use it as your primary risk metric. Are you pointing to risk models as an excuse just the way Long Term Capital did over a decade ago, and the way the fools running some of our competitor firms that are no longer with us did during the recent financial collapse? Are your subordinates getting paid based on a return on equity that uses VaR in the equity calculation? Which of our businesses would be uneconomic if we properly allocated what I’d call “economic equity” to them?
- The scale of our firm is already grotesque and evidently unmanageable, even by you. Yet your arms race strategy calls for us to expand significantly in the decade ahead, into ever more uncertain markets like China, making it even more unmanageable. Long Term Capital Management’s positions were too big for the market in 1998, we were too big for the coal and silver markets in the recent past, and now certainly too big for the CDS market. How is such scale, leaving aside the risk we pose to the financial system and the global economy, a sustainable strategy?
- How can you continue to say on television that you support ending too big to fail? We all know there is no way the government would or could let this firm fail because of the knock-on effects to the system. Why do you continue to embarrass us in this way?
- Given the well-documented subsidy we now extract from taxpayers, is there not a meaningful risk that someone in the government will get smart and extract a windfall profit tax on our firm’s earnings above, say, a ten percent return on equity in exchange for the downside protection we enjoy unless we make ourselves not too big to fail? What do we do then?
- When can we expect our stock price to again approach the level at which it was trading when Chase acquired JPMorgan in 2001? Have you seen the nice steady appreciation of Triodos Bank’s stock price over the last decade which consistently wins awards for being the leading sustainability bank, making productive loans to serve the transition to a sustainable economy? How come you are not even aware that our firm has an impact investment initiative? Perhaps if we spent less time speculating in the CIO, you could focus on this critical component of our economy’s future?
- Does this firm any longer have a purpose? Is our purpose consistent with our practice? Have we lost sight of the profession of banking? Is risk taking and generating bonuses for bankers a purpose commensurate with the largest bank in America and the legacy of JPMorgan?
In The Great Work, Thomas Berry wrote: “Each period of history has a great work to do. The nobility of the lives of the people has to do with their identity with the great work…”
What exactly is the Great Work you and this firm identify with Mr. Dimon?