The JPMorgan Chase CEO deserves every dollar of his recent pay raise.  That statement places us at odds with most commentators. Marketwatch’s David Weidner just published a piece whose headline uses the phrase “mocks accountability” to describe the raise. Forbes bashed not only the CEO but also an “ineffective board” in its article a few days prior to Weidner’s. Other negative opinions were expressed in such disparate places as The Wall Street Journal and The New York Times.

Few of these headlines point out that the board had previously, almost a year ago, halved Mr. Dimon’s compensation to $11.5 million from about $22 million in the “London Whale’s” wake. So while his recent raise looks enormous, he is still making less than he was before. But whether we call it a pay raise or a smaller pay cut from his highest compensation, I believe this current increase was deserved for the following reasons.

First, as noted in a post on this blog at the time the “Whale” surfaced, Mr. Dimon tackled the problem of his rogue London trader within days. He very quickly dismissed both the individual trader and the head of the London hedging operation, went public without excuses on the $6 Billion loss, and tightened the reins of that operation.

Other problems that faced JPMorgan Chase were problems that crossed multiple banks: Libor rate setting, foreign currency exchange rates and mortgage packages. You can be sure that the Libor and foreign exchange rate fixing, the collusion of personnel across multiple banks in multiple countries, was not out in the open for their respective CEOs to observe. As for the mortgage securities, we have all too easily forgotten that at the peak of the financial meltdown in September 2008, the federal government seized Washington Mutual and sold it to JPMorgan Chase. These were not securities that Dimon’s operation created.

Following the exposure of the “Whale,” Mr. Dimon acted swiftly on each of these problems, cooperated fully with all investigations, worked to settle with the government and initiated programs to develop and implement additional controls. The same was true when one of his department’s involvement in the Madoff scandal came to light.

As for the board, they acted quickly and publicly to slam Mr. Dimon’s compensation last year. They reportedly argued strongly over this most recent compensation adjustment. I find those to be healthy signs of an involved board.

Contrast this with Aubrey McClendon and the board of Chesapeake Energy, the company who gave us fracking. Mr. McClendon treated the company as his own fiefdom long after it went public. He leveraged his operation as much as he could and when gas prices came down he was caught short. The board did nothing until it was too late, primarily because the board had been filled with McClendon’s friends.

Over a ten month period Mr. Dimon has settled each of the issues for the bank, while still making healthy profits and delivering shareholders a strong improvement in share price. In every case Dimon has directed his team to examine internal processes and strengthen them. He has not hesitated to remove personnel, which is a key to strengthening internal corporate culture.

In short, Mr. Dimon is exactly what you want in a professional executive and he deserves every dollar. His board also deserves more credit than they have been getting.

A year ago we posted a number of predictions for 2013 and many proved accurate. One area in particular may be taking a significant turn for the better.

Our predictions for 2013 were:

Rebekah Brooks will go to trial. JPMorgan will further increase its reserve for bad trades by “The Whale.” No one in the investment banking industry will go to jail for anything other than insider trading. Goldman Sachs will continue to be bad. The global economy will continue to improve. Slowly. More dirt will come out regarding Walmart’s non-US operations. Somewhere in the US a bank will go under.

And there will be at least one big sex scandal.

What Did We See In 2013?

Ms. Brooks is on trial, JPMorgan did have greater Whale damage (along with several other huge financial settlements related to its business practices and flawed oversight), and several people are going to jail or being strongly pursued over insider trading. I won’t comment on the moral state of GS. The global economy has survived and is improving. Slowly. And without doing the research I am quite certain that at least one US bank somewhere was taken over by the FDIC.

I missed on Walmart’s non-US operations and a big sex scandal.

Yet the most significant change by far in terms of the financial industry is that the SEC, under new leadership, appears to have become more dedicated to putting some people in jail.

At the end of November 2012, SEC chairwoman Mary Schapiro left that office and was replaced in mid December 2012 by Elisse Walter, an SEC commissioner. Walter was an appointment by the president, who then nominated Mary Jo White as the chair. White was confirmed by the Senate and was sworn in on April 10, 2013.

Chairwoman White lost no time in tackling the challenge of prosecuting people in the financial industry. On April 22nd she named George Canellos and Andrew Ceresney Co-Directors of the agency’s Division of Enforcement. Canellos had been Deputy Director and then Acting Director of the division. Per the agency’s press release, Ceresney “served as a Deputy Chief Appellate Attorney in the United States Attorney’s Office for the Southern District of New York, where he was a member of the Securities and Commodities Fraud Task Force and the Major Crimes Unit. As a prosecutor, Mr. Ceresney handled numerous white collar criminal investigations, trials and appeals, including matters relating to securities fraud, mail and wire fraud, and money laundering.”

In particular White appears not interested in settlements that involve a fine with no admission of wrong doing. On her way in the door she got the board of the SEC to overturn a settlement with a hedge fund manager that included a no admission of wrong doing. Soon after, the individual involved signed a new settlement in which he admitted to most of the agency’s charges.  Later in the year, JPMorgan Chase reached its first settlement under the new leadership and it too included an admission of violating certain securities laws.

An article by Sheelah Kolhatkar in Bloomberg’s Business Week in mid October recaps this sea change and quotes Mr. Dennis Kelleher, president of Better Markets. “Mary Jo White has clearly changed the tone, and what she’s had to say is encouraging to anybody who wants the SEC to not only be successful, but be restored to its storied place as a protector of investors and markets.”

That’s the real story for investors coming out of 2013 and we look forward to more significantly stronger settlements in the year ahead.

Why this is important

Readers of this blog know that when it comes to ethical business behavior there is one key element that so often is overlooked to our detriment: the impact of corporate and industry culture on individual behavior. In the investment banking industry we have seen a cross company, industry level trading culture that has not only violated any sense of fair play and decency but has had tremendous real dollar impact on the global economy and investors’ trust. Alleged collusion on Libor rates was topped by collusion on foreign currency exchanges. Highly risky collateralized debt obligations were packaged and sold while the bankers made mockery of their  clients and customers. Massive bets were placed on global interest rates in a game of “top gun” between traders in different organizations.

This environment at an industry level makes it difficult for a CEO such as Jamie Dimon to totally manage his organization’s (and shareholders’ and customers’) risk. Mr. Dimon is doing all the right things in coming to relatively quick settlements and pledging to install new processes and oversight within his bank. I respect what he is doing. Yet until the industry as a whole changes its macho/top gun culture we global citizens are  not safe.

If there is one way to change that macho/top gun culture it is to prosecute, convict and sentence to jail a sufficient number of egregious individuals that the investment banking and trading community sobers up.


The head of the New York Fed said in a speech yesterday that there is an “important problem evident within some large financial institutions—the apparent lack of respect for law, regulation and the public trust.  There is evidence of deep-seated cultural and ethical failures at many large financial institutions.”  The remarks came in  this speech given by William C. Dudley, the President and CEO of the Federal Reserve Bank of New York.

His topic was “Ending Too Big to Fail.” Dudley first discussed various regulatory efforts to prevent another international banking disaster and how to reduce the risk of failure. Near the end of this speech he honed in on the ethical tone and business culture that is all to prevalent on the Street, in our opinion. Readers of this blog know that we often focus on the ethical issues of the banking industry and the need for both organizational and industry culture improvement.

Mr. Dudley’s statement in context said:

“Some argue that what I have proposed—higher capital requirements and better incentives that reduce the probability of failure combined with a resolution regime that makes the prospect of failure fully credible—are insufficient.  Perhaps, this is correct.  After all, collectively these enhancements to our current regime may not solve another important problem evident within some large financial institutions—the apparent lack of respect for law, regulation and the public trust.  There is evidence of deep-seated cultural and ethical failures at many large financial institutions.  Whether this is due to size and complexity, bad incentives or some other issues is difficult to judge, but it is another critical problem that needs to be addressed.  Tough enforcement and high penalties will certainly help focus management’s attention on this issue.  But I am also hopeful that ending too big to fail and shifting the emphasis to longer-term sustainability will encourage the needed cultural shift necessary to restore public trust in the industry.”

Good points, Mr. Dudley.

Jamie’s New Whales

Jamie Dimon, CEO and Chairman of JPMorgan Chase, may be facing three whales instead of two.

For much of 2012, Mr. Dimon was a financial media star. While other big banks were embroiled with the fall-out of the mortgage loan / CDO disaster, Jamie was heralded as the one banker who focused closely on risk management and had managed risk successfully.

Then came the first Whale. The so-called London Whale was at the trading desk inside the bank’s Chief Investment Office, the very office whose responsibility it was to manage the risk of the bank’s investments. The trading loss incurred by that one trader ended up a bit north of $6 Billion-with-a-B dollars.

Now Jamie is facing a second Whale as the CEO is negotiating a $13 Billion-with-a-B settlement with the US government related to mortgage fraud. Reports out this past week have indicated that Mr. Dimon personally negotiated this deal with the Attorney General and was attempting to get a settlement that closed the door on any criminal investigation of the bank. The fact that he eventually elected to pay such a high price in the settlement while not obtaining release from potential criminal charges is significant.

Mr. Dimon is an accomplished CEO and experienced risk manager. The reported settlement would lead one to surmise that Mr. Dimon believed there was a measurable risk that failure to settle would lead to even greater cost, greater than $13 Billion. The continued attempt to close the door on criminal investigations by the US government may be more than just an attempt to close the case so the bank can move on.

My bet is that there is one more whale of size. Stay tuned.

Bloomberg: Standard & Poor’s, facing charges that it defrauded investors, will defend itself by claiming that no one should have paid attention to its claims of independence. Why else would a ratings agency exist?

Per Bloomberg’s article, S&P will claim that “the government can’t base its fraud claims on S&P’s assertions that its ratings were independent, objective and free of conflicts of interest because U.S. courts have found that such vague and generalized statements are the kind of “puffery” that a reasonable investor wouldn’t rely on.”

This, of course, is resorting to the fine print of our legal system in an attempt to destroy the government’s case against the once well respected, and trusted, ratings agency. Far be it from us to complain about reliance on the decisions of prior cases. That reliance is the principle that supports consistency in the application of the law and is an essential component of “blind justice.”

However, if this is the best S&P has to offer in its defense, they may as well close the place down after the case is over. The whole point of ratings agencies such as S&P is precisely to provide an independent and objective opinion on the risk of an investment instrument. The very words “independence and objectivity,” which frequently appear in the codes of ethics of many professions, mean that there is no conflict of interest – that the competent opinion being rendered is untainted by any relationship the professional has with the organization on which an opinion is rendered.

If reasonable investors can’t rely upon that independence and objectivity, then there is no purpose served by a Standard & Poor’s. Close them down.

The fertilizer plant explosion in West, Texas was tragic and unnecessary. It may also have been unethical.

Regulation of chemical plants in general has been hobbled. Nationally, congress has resisted more stringent regulation, a successful result of industry lobbying. Texas in particular has long resisted regulation, indeed prided itself on its hands-off business philosophy. It is very possible that no one, corporation or executive, will be charged with a violation of the law.

However, there is a profession, the engineering profession, whose members are bound by a professional code of ethics and are subject to state level regulation via boards of engineering that oversee the licensing process and activities of professional engineers.

Similar to CPAs, certain activities cannot be performed without an engineering license.  The supervision of the work of non-licensed personnel with an engineering degree is one such activity. Only a licensed engineer can certify the structural integrity of buildings and bridges. A firm that holds itself out to be an engineering firm must have a licensed engineer in order to make that assertion.

Licensed engineers in particular and professional engineers in general are called upon to uphold a code of ethics. In most states that code of ethics is closely based upon or actually is the code of ethics adopted by the National Society of Professional Engineers® (NSPE).

The Preamble to the NSPE Code of Ethics states in part:

“Engineering has a direct and vital impact on the quality of life for all people. Accordingly, the services provided by engineers require honesty, impartiality, fairness, and equity, and must be dedicated to the protection of the public health, safety, and welfare.”

The Code goes on to state its “Fundamental Canons.” The very first Fundamental Canon is “Hold paramount the safety, health and welfare of the public.”

We await further investigation to determine the last time an engineer signed off on plant maintenance, what was examined, what was observed and what records were kept.

This week has been filled with tragedy and bravery. Once again, as they do without hesitation, our first responders and ordinary fellow citizens led by example. The Boston bombs were unexpected and events moved quickly. With many people wounded and the shock of two explosions still ringing in their ears, first responders, marathoners and people in the crowd aided the victims. Who can forget the scenes of people being raced to ambulances on gurneys and in wheelchairs, some with bleeding arteries held tight by another spectator.

The explosion at a fertilizer plant in the small town of West, Texas looked like a miniature nuclear bomb in the film clips I saw. A fire at the facility had already been burning, the town’s small fire department, a volunteer fire department, had raced to the scene. The ensuing explosion that leveled five city blocks hit them without warning. The evacuation of a nearby senior living facility, damaged by the explosion, took place with every vehicle that could be found. First responders arrived from nearby towns and cities. The wounded were transported as far away as Temple and Fort Worth.

In every tragedy our nation faces it is our fellow citizens, ordinary men and women who work for a living to support their families, who show us what ethical leadership really is. They don’t need corporate placards or SEC regulations to tell them what to do.