Jamie Dimon: From Saint to Villain

Since news about the trading loss in JP Morgan's Chief Investment Office broke in April there has been any number of commentators who vilify Jamie Dimon, JP Morgan's CEO. But most of them forget that investment is never a sure-fire bet. One has to take losses from time to time, there is no one-way street otherwise we would all be millionaires. I would guess that there has not been a single commentator who really has seen the full history of these trades and as a consequence no one is really qualified to pass judgement. For a large institution like JPM the only thing that counts at the end of the day, quarter and year is the overall P&L. If positions were under water during any period that is a professional hazard and needs to be managed properly. But many years, decades even, of investing have taught me that the really skilled investor shines when he has to nurse a loss-making position back to profit. Those who unleashed the attack dogs in the Media and in Politics are to a large extent the same ones who fell for the cult of the imperial CEO - and thought he could walk on water.

JP Morgan 'loss' - too much ado about nothing?

The reported 'loss' that JP Morgan took on its investment account may appear to be large but in the context of a portfolio size of $ 300+ billion and a total balance sheet of more than $ 2000 billion it really is small beer. Every investor or trader worth his salt will know that no investment goes up in a straight line. Daily fluctuations of one percent are the norm. That would mean that the investment book could be up or down three billion dollars on any given day. Hedging is no panacea. If you fully hedge all risk out of a portfolio you may as well stay in treasury bills as the cost of the hedge will eat up all the expected profit. I am sure that some aspects of the portfolio could probably have been handled better but loan books - even surrogate ones - are usually meant to be held to maturity so the mark-to-market loss should not have been of any consideration. That various busy-bodies (media, various officials like the department of justice or the New York Auditor) should feel competent to be backseat drivers for JP Morgan's investment department adds a twist of absurdity to the whole affair. Jamie Dimon also made a mistake to preemptively excuse himself in front of a baying media crowd rather than calmly explain the realities of the investment game.

Poor start for Monsieur Hollande

Hollande has done surprisingly poorly in the second round of the French Presidential elections. Given the unpopularity of Sarkozy (due to his somewhat abrasive and erratic behaviour) and the strong headwinds due to the fallout from the ongoing financial crisis, one would have expected nothing but a landslide victory by the socialist contender. Now he uses the first days after his vapid victory to hit out (Daily Mail) at the Financial Sector, and in particular at the City of London. We have a simple switch to suggest to this party apparatchik: Give up all the costly subsidies that your farmers receive and we might think about protecting the City of London less vigorously. The cost of the subsidies that hundreds of millions of consumers have to bear is readily quantifiable while the damage that the financial sector is causing - if there is any at all! - is mostly based on smoke and mirrors (even the backing of 'Star' economists from Harvard etal is less than convincing, they only achievement they can be proud of is to get too much shelf space by the media).

Defer bonuses for 10 years?

Andrew Haldane, an otherwise sane Bank of England official, has suggested that bonus deferral and claw-back periods should be extended to 10 years or more for (senior?) bank executives. While we have sympathy for those who think that bank regulation is not up to the task we would consider this proposal to be unworkable and counterproductive. Who in his right mind would be willing to work on that basis? 10 years is an awfully long time - just think of the young banker aged 25 who would have to wait until he is 35 to enjoy the benefits of his effort! You might as well work in a communist system. One has to suspect that the Bank of England officials - typically for the caste of government employees all over the world - simply have lost touch with reality. We have pointed out repeatedly that proper banking reform has still not really been enacted. Stalinist 'command-and-control' systems are no appropriate substitute.

Reply from M. Philippe Lamberts - MEP (Green)

while I agree with you that we have to incentivize banks to go back to their basic mission of collecting savings and using those to fund the real economy, I totally disagree with your statements on pay.

1. There is absolutely no factual or scientific evidence of a correlation between eight-figure salaries and real value creation; in this business, banking executives have basically (up until very recently, see CitiGroup case) been left to determine their own pay, getting away with whatever they dared asking for. The hypothesis of self-interest (greed if you will) driving pay schemes is I believe much more credible than one that purportedly would relate them to value creation.

2. Your statement that a 1/1 relationship between fixed and max variable pay would lead to a hike in fixed salaries remains to be proven; maybe a way for banking executives to have shareholders approve what ended up as absurdly high salary packages was precisely to have the fixed part relatively modest, so as to make size of the real total package less obvious. Those executives might have a tougher sales act to perform in front of their boards and their shareholders should they want to convert a significant part of what used to be variable into fixed pay. I definitely would like to see how they manage before I decide whether or not I agree with your statement.

3. The pay rules that are being proposed are in fact very simple : 1/1 ratio between fixed and variable; 20-fold ratio between average and maximum pay; 40-fold ratio between minimum and maximum pay. I do not believe the adjective "onerous" to reflect that simplicity and I see these ratios as more than reasonable. Administering those limits would not impose an extra administrative burden on firms; as far as I know, they do manage their payroll (with the help of effective and efficient IT systems, I would venture). It would just need them to adapt and publish their existing pay rules, which are hopefully documented. Enforcing legislation would be left to existing supervising bodies; no new ones need be created. Your mentioning of "expensive bureaucracies" gives me the opportunity of questioning whether decently equipped and paid supervising authorities would, in terms of absolute cost, come anywhere near the total impact of financial sector irresponsibility to our societies, which runs into the trillions. That said, I do not see this as an excuse not to tackle the issue of the cost-effectiveness of government as a whole and I do agree that there is still room for improvement in that area.

4. I'd also like to discuss your statement as to "the conviction that unequal incomes are somewhat suspect". On that, I would refer you to Wilkinson & Pickett's "The Spirit Level", which demonstrates a statistical correlation between many key indicators of societal wellbeing (incl. life expectancy, crime, education...) and the level of revenue equality in society. Those who claim that more inequality is beneficial to society as a whole have yet to come up with anything coming close to similar evidence proving what is, I'm afraid to say, belief rather than fact. Everything indicates on the contrary that more equal societies perform better. So I my view, what is suspect is that drive towards absurd - and self-serving - pay packages in an industry that has run amok.

5. Finally, a word on "the Chimera that any problem can be fixed by rules set down by an 'enlightened' technocrat". Beyond that statement, assuming that you agree that problems - at least non trivial ones such as the climate/resource equation or the closely interlinked private and public debt issues - need to be fixed, I do not know exactly how you would suggest to do that. As a citizen, as a democrat and as a lawmaker, I agree that trusting one's future to "enlightened technocrats" is an option that would simply lead us to disaster. I might also say that having seen how unregulated (financial) markets drive the planet and its societies towards collapse, I would not trust our future to them either. What is then left is public, open, fact-based debates leading to decisions to be made by democratically-elected people.

Now, as an author of amendments on banking industry pay, I do not see myself as an "enlightened bureaucrat". I am a politically-aware citizen, who, after a 22-year career in business, got elected and I remain accountable for my work. As you may know, I will need to face my voters in 2014 and I definitely have skin in the game, much more than any banking executive has at the moment. You will therefore understand that have little desire or interest for being lectured by such people on my societal responsibilities. It is not clear to me in what capacity you are writing to me - as a citizen or as a service provider to an industry that has a lot to account for and who stands to lose revenue if pay packages would go down. I will therefore leave the argument at that.

Pay regulation not addressing the real problem

What really drives financial market regulation is not logical thinking but a mishmash of misguided ideology as well as a reversion to good old authoritarian attitudes. The former is derived from the conviction that unequal incomes are somewhat suspect, the latter is the Chimera that any problem can be fixed by rules set down by an 'enlightened' technocrat. This leads to absurd outcomes such as the current proposal to limit any discretionary bonus payment to a maximum level equal to the amount of annual base salary. Not much thought is given to the fact that this will lead to an upward move in basic pay which in turn will mean that the financial institution that pays these higher salaries will become less, not more, stable. Making compensation more sensitive to the time horizon of risks incurred in a bank is another can of worms that regulators seem to be intent on opening. While one has to admit that remuneration policies in many banks and other financial institutions have been found wanting during the past few years this situation is not being helped by the way that politicians and regulators fall over themselves in order to help out the same institutions with public support once they reap the fruits of their profligacy. Proper financial reform - especially the introduction of limited purpose banking - would ensure that the shareholders of the banks - and not the taxpayers - would pick up the bill for any poor management decisions. The need for onerous pay regulation - and an expensive bureaucracy to monitor compliance - would be avoided.

Europe's banks face gaping capital hole says EBA

When the EBA states that many banks would have insufficient core capital under the rules that will come into force we are not surprised. As we repeatedly said, no amount of capital will ever make banks 100 percent bulletproof. One just has to make more and more pessimistic assumptions and come to the conclusion that a bank is not 'safe' enough. The only way to get the taxpayer off the hook once and for all would be the introduction of limited purpose banking as suggested by Larry Kotlikoff.

Not all publicity is good publicity

How much longer can the image of Goldman Sachs get knocks such as these? It is time that someone minded the house again.

UBS boss hires old friend for senior role

When one reads that the recently appointed CEO of UBS hires a former colleague from his days at Merrill Lynch as Co-Head of Global Investment Banking one has to assume that the hiring old an (business) friend may give a certain amount of comfort and hope that relationships in the top management team will work smoothly. But there is always the danger that sentimental aspects cloud the judgement or that conflicts of interest impede rational decision making or sour the morale of the other team members. The big question is also why a global (?) player like UBS cannot grow its own senior managers. Once you had to be an officer in the Swiss Army to climb the management ladder at the old UBS (before it was taken over by local rival Swiss Bank Corporation) and that surely was not providing an adaequate talent pool (and led to the sorry demise of the 'old' UBS) but has the bank really drawn the right conclusion and found the right formula? The track record over the past 10 plus years speaks a clear verdict.

Stress tests - same (sad) old story

The publication of the results of the latest stress test performed on US banks does little to inspire longterm confidence in the ability of the financial system to be protected from another (near) meltdown. We repeat our contention that only a limited purpose banking system will give near certainty that taxpayers will never again have to be called upon to bail out insolvent banks.