EthicsBite™

In this morning’s news: JPMorgan Chase reports a $ 2 BILLION trading loss from it’s overseas hedging unit. Bad news, but what does this have to do with corporate ethics?

The Bloomberg article states that CEO Jamie Dimon “had transformed the unit in recent years to make bigger and riskier speculative trades with the bank’s money,” according to former employees. The key phrase is “with the bank’s money” and the question is: Was it really the bank’s money?

Ultimately all of any bank’s money belongs to two key parties: depositors and shareholders.  But in the case of a major international bank such as JPMorgan Chase and many others, what happens to that money also indirectly, yet very significantly, impacts hundreds of millions of people around the world who are neither depositors nor shareholders. We know that is the case because we experienced if first hand, and still are experiencing it, in the 2008 global melt-down.

“Too big to fail” means that failure is a calamity. Banks play a vital role in the world economy and any careless risk-taking can affect all of us. For U.S. depositors the direct risk is mitigated by institutions such as the FDIC. Shareholders are always taking a risk on a corporation’s performance, but did bank management tell them that the risk curve was going up? Many of those shareholders are individuals with retirement assets holding shares of JPMorgan Chase either directly or indirectly via mutual funds and pension funds. In addition, when risk taking results in huge losses it is ultimately the citizenry that bears the brunt with a weakened economy. That is why regulation is appropriate and necessary.

So what does this have to do with corporate ethics? The answer lies in the term “fiduciary responsibility.” In our Seven Layers of Integrity^®  model, corporate ethical failure occurred in two layers. Bank management and specific individuals failed to maintain the fiduciary responsibility called for by their profession (professional codes of ethics) and their lack of full transparency with investors failed the investment community and the general public (community standards).

Fiduciary responsibility is owed to one’s depositors and shareholders. It is their money, not “the bank’s money,” that is at risk. A major international banking organization should also have a fiduciary responsibility to the nations and people that rely upon banking stability. In this instance, bank management allegedly pushed the hedging unit to increase the size and risk of the trading positions involved. Was that prudent fiduciary responsibility? The investments they took positions in are called “synthetic credit securities.” Remember “collateralized debt obligations” and “credit default swaps?”  Here we go again.