The question of whether JPMorgan Chase & Co. CEO Jamie Dimon should have been fired after the bank lost several billion dollars last May in an ill-advised derivatives trading strategy reminds me of a story. In the late 1980s, when I was a writer at Institutional Investor magazine, I did a piece on former NCNB Corp. CEO Hugh McColl Jr. that was somewhat (but not altogether) critical of the bank’s ambitious mergers and acquisitions strategy and McColl’s tendency to publically criticize other bankers who didn’t want to sell out to his bank.
A few weeks after the story was published, my editor received a tersely worded letter from McColl’s predecessor as CEO, Thomas Storrs, who started the NCNB expansion strategy that would ultimately begat today’s Bank of America Corp. The letter started out something like this: Milligan wrote a story about my old company. He spelled my last name as Stoors. The correct spelling is S-t-o-r-r-s. Unfortunately that’s not the only mistake he made. What followed was stiff defense of McColl and the bank. And while I believe I was right on the main points, my editor pointed out that I lost some of my own credibility when I misspelled the man’s name.
The lesson: If you can’t get the little things right, who will trust your judgment about the really big things?
Which brings us to Jamie Dimon and JPMorgan’s big trading loss on credit derivatives. For some time now, Dimon has been a strident and highly vocal critic of financial reform in Washington, including the Dodd-Frank Act and the law’s so-called Volcker Rule, which seeks to prohibit banks from engaging in proprietary trading and is still being written by the regulators. (There is still some disagreement about whether Morgan’s London-based investment operation was hedging, as the bank has claimed, or speculating as its critics have charged.) And then, after voicing his opposition to any curbs on proprietary trading, Dimon announced (somewhat sheepishly I thought) a $2 billion trading loss, although news reports in late June speculated that the loss could be much higher.
If there’s an argument to be made that proprietary trading doesn’t pose the systemic risk to the financial system that the Volcker Rule’s proponents say it does, Dimon is no longer the best person to make it. His credibility is now shot, at least on this particular issue. Throughout his storied career, Dimon has consistently shown, to use a golfing metaphor, that he can reach the green in two. But Dimon’s last tee shot went into the deep rough and he’s still trying to get back to the fairway.
The thing that disturbs me the most about this escapade is the feeling that banking—and especially anything that might be associated with Wall Street—has become so highly politicized that we’ve stepped into the theater of the absurd. The loss never threatened JPMorgan’s financial stability. With nearly $2.3 trillion in assets, and $138 billion in market capitalization as of late June, JPMorgan was never in danger. Nor, for that matter, was the U.S. financial system ever at risk. Certainly the bank needs to understand why it occurred and strengthen its risk management procedures accordingly. These are business issues for the bank to work out under the supervision of its regulators, including the Federal Reserve. But in the current environment, JPMorgan’s trading loss was treated as a serious public policy issue worthy of two Congressional hearings in which Dimon was required to appear for questioning.
Many will argue that a megabank’s trading activities are an important public policy issue in light of the 2008 capital markets crisis, which was caused in part by the speculative trading activities of dead Wall Street firms like Bear Stearns and Lehman Brothers. But what if JPMorgan announces a similarly big loss on loans to troubled countries in the European Union? Will there end up being a Congressionally mandated ban on sovereign lending? Will Dimon (or any other bank CEO for that matter) be hauled in front of Congress every time his bank announces any big loss?
It’s hard to feel too much sympathy for Jamie Dimon. Fairly or not, that big trading loss undercut his argument against the Volcker Rule. If anyone should be giving him the third degree, it’s JPMorgan’s board and shareholders. If they want to fire him, that’s their business. But if lawmakers in Washington start exercising the oversight privilege of owners every time some big bank does something they don’t like, it will only prolong the industry’s recovery.