Jamie Dimon Faces Unfamiliar Heat in Washington
JPMorgan CEO’s complaints about financial regulation will fall on deafer ears in the nation’s capital, following the bank’s big loss on derivatives.
Jamie Dimon is in for a long, hot summer. After JPMorgan Chase & Co.’s May 10 announcement of a $2 billion (and counting) loss from hedging activities, Dimon, the bank’s chairman and CEO, hastily revamped his investment office. And what he no doubt saw as a great achievement — the bank’s $15 billion share repurchase program, restored after the crisis and before any of his rivals were able to do likewise — well, he had no choice but to suspend that for a while. Shareholders are hopping mad at Dimon, arguably the most renowned financier on Wall Street and, up until a few weeks ago, the one bank CEO who could seemingly do no wrong. Two investors in particular, James Baker, a private shareholder from California, and investment services firm Saratoga Advantage Trust, have each filed a lawsuit against the too-big-to-fail bank’s chairman and JPMorgan itself. At the bank’s annual meeting last month, less than a week after Dimon disclosed the trading loss, 40 percent of shareholders voted to split the CEO and chairman positions, the idea being that doing so would curb his power and strengthen board oversight of management and Dimon. The California Public Employees’ Retirement System, California State Teachers’ Retirement System, New York State Comptroller’s office and Florida State Board of Administration all voted for the split. What shareholders haven’t done en masse has been to call for Dimon to resign as CEO. Still, they have a reason to feel aggrieved: The bank’s stock plummeted 18 percent, to $33.15, on May 31, from $40.64 on May 9.
Even so, the trouble for Dimon isn’t with valuations. It’s with Washington. The huge trading loss suggests a flurry of regulations currently being drafted as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act — in particular, the Volcker rule against proprietary trading — will be written stringently to enforce tighter constraints on banks’ activities. The controversial rule allows banks to hold inventory for market-making purposes but not for proprietary trading. Distinguishing the former from the latter is inherently difficult, which is why the rule-writing process has dragged on.
Former bank regulator Sheila Bair said at a Commodity Futures Trading Commission hearing on May 31 that if banks receive government support, they shouldn’t make risky trades. A week earlier, at a hearing for derivatives regulators, Senator Tim Johnson, chairman of the Committee on Banking, Housing and Urban Affairs, said, “This trading loss has been a wake-up call for many opponents of Wall Street reform and the need to fully fund the agencies responsible for overseeing the swap trades that appear to be at the core of the firm’s hedging strategy.”
To make matters worse, hedge funds aren’t exactly making life easy for JPMorgan. Says one hedge fund manager who spoke on condition of anonymity: “JPMorgan is under huge pressure. Everyone knows their position, so everyone wants to short it.” The bank still plans on paying a dividend.
The brouhaha has prompted some to wonder about how deep the problems are in JPMorgan’s investment office. A New York–based senior managing director at Tangent Capital Partners, Christopher Whalen, claims the bank knew it had a problem in the CIO two years ago because executives discussed internally creating a multibillion-dollar reserve for the office. “If you look at the evolution of the strategy, it was always about trying to generate principle returns,” says Whalen. “The lesson for regulators is that when someone tells you they are hedging and they are not, you need to go find out what the hell is going on.” He says he thinks new regulators should be called in; not more in number but more in competence.
The Securities and Exchange Commission is reviewing the bank’s first-quarter filing for accuracy, and Dimon must appear before the Senate Banking Committee this summer. He will be required to provide details on the complex derivatives trades in the bank’s chief investment office that resulted in the loss. Dimon acted decisively in a bid to contain the damage. He’s dispatched a trusted lieutenant, Matt Zames, to become the new CIO, replacing Ina Drew, who retired. Zames, 41, not only is well versed in the credit markets, but he also knows about failure: He was a trader at Long-Term Capital Management when the hedge fund firm blew up, in 1998. He also served as point man for JPMorgan’s acquisition of Bear Stearns Cos. in 2008 and has since been on the short list to succeed Dimon someday.
Although Dimon’s reputation has been tarnished by the trading loss, he tends to get the benefit of the doubt when it comes to certain big-name money managers. Says Marty Mosby, a Memphis-based analyst at Guggenheim Partners, “None of this affects next year’s outlook.”