Getting More For Doing Less: Bank Board Directors

Executive compensation is an art rather than a science. It is not as if numbers are fed into a computer and the correct compensation pops out. More discretion is involved than meets the eye. “Since the financial crisis,” The New York Times reported in 2013, “compensation for the directors of [America’s] biggest banks has continued to rise even as the banks themselves, facing difficult markets and regulatory pressures, are reining in bonuses and pay.” [1] Just five years after the financial crisis, it is interesting how the banks' respective managements decided to spend the TARP money from Congress and even more money from the Federal Reserve Bank. Also of note, board and upper management compensations seemed to be going in different directions in spite of both being presumably tied to the same firm performance. Even a performance-incentive approach tied to firm-performance can accommodate a lot of latitude, such that banks differ in how much they pay their respective boards. The discretion permits inside collusion and even outlandish demands by "celebrity" members whose advice does not necessarily come up to celebrity status. 

The full essay is at "Bank Boards Getting More for Doing Less."

1. Susanne Craig, “At Banks, Board Pay Soars Amid Cutbacks,” The New York Times, April 1, 2013.

Bankers or the Bank: Which Is Responsible?

Along with paying $2.6 billion to settle criminal and civil charges for having “failed, and failed miserably” to notify the SEC of warning signs that could have short-circuited Bernie Madoff’s $17 billion Ponzi operation, J.P. Morgan Chase only had to acknowledge that its actions were improper.[1] No criminal prosecution ensued. The electronic evidence against Madoff's operation was too damning for JP Morgan Chase to have missed it. Indeed, according to USA Today, “JPMorgan had suspicions about Madoff’s operation as early as December 1998, when a bank fund manager warned the investment returns were ‘possibly too good to be true.’”[2] Without submitting any “suspicious activity reports” to the U.S. Government as required by law, the bank had pulled $275 million of its own “feeder funds” from Madoff’s fund two months before Madoff’s financial services firm collapsed.[3] In other words, the bankers connected the dots well enough for the bank's financial interest and perhaps even their own, yet strangely  enough no one at the bank could manage to let the outside world  know, even though federal law mandated reporting the suspicions to the SEC.  and responsibility urged it.

The full essay is at "Bankers or the Bank: Which is responsible?"

J.P. Morgan hitting a man. Was he demonstrating that criminal law applies to human beings rather than to organizations themselves?  Image Source: Wikimedia Commons

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1. This was according to Manhattan U.S. Attorney Preet Bharara.Tim Mullaney and Kevin McCoy, “JPMorgan to Pay $2.6 billion in Madoff Case Settlements,” USA Today, January 8, 2014.

2. Ibid.

3. Ibid.

On the Various Causes of the Financial Crisis of 2008: Have We Learned Anything?

In January, 2011, the Financial Crisis Commission announced its findings. The usual suspects were not much of a surprise; what is particularly notable is how little had changed on Wall Street since the crisis in September of 2008. According to The New York Times, "The report examined the risky mortgage loans that helped build the housing bubble; the packaging of those loans into exotic securities that were sold to investors; and the heedless placement of giant bets on those investments." In spite of the Dodd-Frank Financial Reform Act of 2010 and the panel's report, The New York Times reported that "little on Wall Street has changed." One commissioner, Byron S. Georgiou, a Nevada lawyer, said the financial system was “not really very different” in 2010 from before the crisis. “In fact," he went on, "the concentration of financial assets in the largest commercial and investment banks is really significantly higher today than it was in the run-up to the crisis, as a result of the evisceration of some of the institutions, and the consolidation and merger of others into larger institutions.” Richard Baker, the president of the Managed Funds Association, told The Financial Times, "The most recent financial crisis was caused by institutions that didn't know how to adequately manage risk and were over-leveraged. And I worry that if there is another crisis, it will be because the same institutions have failed to learn from the mistakes of the past." From the testimonies of managers of some of those institutions, one might surmise that the lack of learning in the two years after the crisis was due to a refusal to admit to even a partial role in crisis.  In other words, there appears to have been a crisis of mentality, which, as it contains intractable assumptions and ideological beliefs, as well as stubborn defensiveness, is not easy to dislodge such that legislation past Dodd-Frank could ever be passed.

Lehman was a particularly inept player leading up to the crisis.     Zambio

The full essay is at "Causes of the Financial Crisis."

Unnecessary Systemic Risk: Banks' Price-Fixing and Racketeering in Side Businesses

A lawsuit filed in a Florida district-court in 2013 alleged that JPMorgan, Goldman Sachs, and the London Metal Exchange (LME) artificially inflated aluminum prices.  The plaintiffs accused the companies of anti-trust practices and racketeering, including the “manipulation of the aluminum market through supply price fixing.”[1] This sounds like what had led to the forced break-up of Rockefeller’s Standard Oil Company, though in that case exactly a century before, the restraint of trade had to do with the company’s main line of business (i.e., oil). In the case of the banks, however, owning commodity assets such as storage facilities and trading in raw materials do not constitute banking. This point triggers a larger question involving the repeal of the Glass-Steagal Act.

Should we allow banks to expand even beyond these functions to owning commodities and related real-estate? What does this do to the banks' systemic risk?    Image Source: salisburyareafoundation.org. 

The full essay is at "Unnecessary Systemic Risk in Banking."

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[1] Melanie Burton, “Glencore, JPMorgan Sued Over Warehouse Aluminium Prices,” Reuters, August 7, 2013.

Is Modern Banking Fundamentally Flawed?

Jamie Dimon, CEO of JP Morgan Chase and board member of the New York Federal Reserve (a banking regulatory body), advocates not only that financial regulation reform is not necessary, but also that deregulation is the best course for the American financial sector. Meanwhile, JP Morgan lost $2 billion in an effort to reduce risk. President Obama quickly pointed out that if one of the smartest bankers in the room can preside over such a massive loss, then a deregulated financial sector would likely present us with an unacceptably high level of risk to the entire financial system (and economy). Elizabeth Warren suggested that relying on bankers to regulate themselves would not reduce the systemic risk. The alternative would seem to be strengthening financial regulation, even though—according to Sen. Dick Durbin—“the banks own Congress.”

The full essay is at " Banking as Flawed."

Market or Government: Which Should Reduce Systemic Risk in the Banking Industry?

If the five largest banks—JP Morgan, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley—are too big to fail and yet substandard operationally on account of their respective complexities (e.g., investment banking added to commercial banking), might it be that the market-based decisions of investors will relegate the giants, which by the way had price-to-book value ratios of between .37 to .77 in May 2012, thereby solving the problem of systemic risk?

The full essay is at "Reducing Systemic Risk: The Market or Government?"

Limiting Bank Size: Crude But Advisable

In February 2012, Tyler Cowen claimed in the New York Times that people across the political spectrum were “talking about splitting up America’s large banks.” At the time, I could discern no such talk, although this does not mean that it was not going on. As the Dodd-Frank financial reform law was being written in 2010, the option of splitting up banks like Bank of America, Goldman Sachs, and JP Morgan Chase was quietly but assiduously kept off the front burners. It is difficult to believe that the big banks would have relaxed in their efforts to relegate such threats in early 2012 as if the passage of the legislation in 2010 meant that more astringent options were no longer possible. In his article, Cowen includes some other questionable claims. Reading between the lines, he seems to have been “playing by the rules” in support of the big guys.

The full essay is at "Limiting the Size of the Big Banks."

Investment Bank Dinners with Corporate Executives and Hedge Fund Managers: The General Public Not Admitted

“One day in early March [2011], the phone lines of hedge-fund traders around London and New York suddenly lit up. A stock that many of them had placed hefty bets on—Pride International Inc., an energy company in the process of being sold to a rival—was falling. The traders had no idea why. They soon figured it out: J.P. Morgan Chase & Co. had hosted a meeting that day between a handful of hedge-fund traders and executives from a company that was considered a prime candidate to start a bidding war for Pride. One of those executives had indicated they weren't likely to make a bid.”

“The prospect of a bidding war had lifted Pride's shares above where they likely would have traded in the absence of a potential interloper. . . . At the March 8 lunch, though, as the traders munched on scallops and fish, Seadrill vice president and board member Tor Olav Trøim splashed cold water on the idea of a bid. He recalls telling traders that the company's Feb. 24 statement was ‘not normally what you would say if you were interested in bidding yourself. His intended message, according to one person familiar with the matter, is that Seadrill was "very unlikely’ to launch a competing offer for Pride. The information was market-moving, traders say. In the hours after the lunch, some traders wagered that the odds of a bidding war had declined. Seadrill's shares rose more than 1% as it was viewed as less likely to pursue a costly acquisition. Pride's shares fell by about 0.5% in the minutes before markets closed.”

“The moves may seem small, but they were significant for ‘merger arbitrage’ traders, who make short-term bets on deal stocks. In the case of the Ensco-Pride deal, the movements translated into a sudden 64% spike in the deal's ‘spread.’ That arcane measure reflects the difference between a target company's stock price and the per-share value of the acquirer's offer. The spread is closely watched by hedge funds that focus on merger arbitrage, which stand to gain or lose large sums based on the spread's movement. As the shares moved, anxious investors bombarded Seadrill's investor-relations office with phone calls, trying to figure out whether the company had issued new guidance about its appetite for bidding on Pride, according to a person familiar with the matter. Company officials responded that they hadn't released any new information. . . . Trøim says Seadrill executives regularly meet with large and small investors and that it is appropriate to help them understand the company's strategy. ‘We cannot see that we in any way have crossed any lines for giving privileged information,’ he says.”

The full essay is at "Investment Bank Dinners."

Source:

David Enrich and Dana Cimilluca, “Banks Woo Funds with Private Peeks,” The Wall Street Journal, May 16, 2011.

Too Big to Fail: The Trillion Dollar Club

Banks with assets over $50 billion are considered “systemically important” according to the Dodd-Frank law of 2010. The act is geared to shoring up protection against systemic risk. The U.S. Government deems certain banks (and companies) systemically important if they are big enough to threaten the entire financial system should they fail. Such enterprises are subject to higher capital standards and stricter rules. Roughly three dozen banks in the U.S. had been classified as systemically important by mid-May 2011.

The full essay is at "Too Big to Fail."

JPMorgan: Fault and Criminal Fraud under the Settlements' Radar?

Resolving just a part of the $13 billion being demanded by the U.S. Government in court, JPMorgan capitulated in October of 2013 to a $5.1 billion settlement to resolve claims by the U.S. Federal Housing Finance Agency that the largest American bank had sold Fannie Mae and Freddie Mac mortgages and mortgage-based (i.e., derivative) securities by knowingly misrepresenting the quality of the loans and the loan-based bonds.[1]  At the time of the $5.1 billion settlement, JPMorgan’s executives were trying to settle “state and federal probes into whether the company misrepresented the quality of mortgage bonds packaged and sold at the height of the U.S. housing boom.”[2] It would seem that the bank was in a vulnerable position in the settlement negotiations, having “capitulated.” I’m not so sure.

The full essay is at "Essays on the Financial Crisis."

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[1] Clea Benson and Dawn Kopecki, “JPMorgan to Pay $5.1 Billion to Settle Mortgage Claims,” Bloomberg, October 25, 2013.

[2] Ibid.

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Corporate Social Responsibility and Reputational Capital: JPMorgan Facing Criminal Investigation

After years of claiming that no criminality had been involved in the securitization and sales of subprime-mortgage-based bonds, the U.S. Department of Justice began to change its tune by mid-2013. The Justice Department was investigating the $2.6 trillion-in-assets JPMorgan Chase bank over its sale of mortgage securities from 2005 to 2007. The government was investigating other large financial institutions too, but the damage to JPMorgan’s reputation could easily dwarf such impacts on the other big banks. For this reason, JPMorgan’s executives, rather than having no comment as the bank released the news in quarterly filings, should have “taken the bull by the horns” by acting proactively in terms of corporate social responsibility.

"Ok, I lied to clients about the bonds, but we had a deal: No Jail Time!"  Image Source: serenity-international.com

The full essay is at "JPMorgan: An Unethical Monstrosity?"

Recommended Reading: "A Systemic and Ethical Analysis of the Financial Crisis"

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Jamie Dimon Wins Stockholder Vote: Exploiting Conflicts of Interest Undercuts Fairness

Chairman of JPMorgan since 2006 and CEO a year longer, Jamie Dimon faced down a daunting stockholder vote on May 21, 2013 on whether he should be allowed to retain both roles. Despite the bank’s $6.2 billion trading loss, deeply flawed risk-management oversight, and “credibility issues” with regulators, only about 32% of the votes cast were in favor of the nonbinding resolution that the chair and CEO jobs be separated. Interestingly, not only does the chair/CEO duality have an inherent conflict of interest because part of what a board (including its chair) does is hold management (including the CE) accountable, the means by which the pro-duality side campaigned also included conflicts of interest. I cannot help but wonder whether Jamie Dimon, his immediate subordinates, the bank’s board directors and even the stockholders who altogether voted a supermajority of shares in support of Dimon’s two roles were negligent ethically in failing to even recognize the institutional conflicts of interest involving Dimon and the board. To the extent that recognition existed, permitting the conflicts to exist and in some cases knowingly exploiting more than one at a time are even more squalid than merely being oblivious to them. To the extent that structural conflicts of interest were enabled through the campaign and in the election results, JPMorgan Chase can be likened to a house of cards. This does not bode well for the financial system and broader economy to the extent that the largest American bank holds systemic risk (i.e., “too big to fail”). I look at the campaigning first, as doing so will lead us directly to the main conflict of interest that is at issue here.

 Jamie Dimon, CEO and Chair of JPMorgan Chase.  The duality of roles can benefit him both personally and institutionally. NYT

The full essay is at "JPMorgan: An Unethical Monstrosity?" and at
Institutional Conflicts of Interest, both available in print and as an ebook at Amazon.

JPMorgan’s Management: Overly-Defensive From Weakness?

According to the Wall Street Journal, at JPMorgan, the largest U.S. bank by assets, revenue in the first quarter of 2013 fell 4% from the same period a year earlier. The mortgage squeeze affected the firms' overall results. Net-interest income, which reflects the amount a bank makes from its loans, dipped 6%, to $10.9 billion, from a year earlier. Even so, J.P. Morgan's net income rose 33%, to $6.53 billion, or $1.59 a share, as a jump in investment-banking income and a cut in expenses helped cushion the mortgage pullback.

The full essay is at "JPMorgan: An Unethical Monstrosity?"

JPMorgan Management Evades Stockholders

After the $6 billion trading loss at JP Morgan, the U.S. Senate Permanent Subcommittee on Investigations issued a report raising the prospect of wider problems than that of a rogue lower-level trader. Specifically, the report suggests that executives at the bank “ignored warning signs and failed to alert investors about changes to its method for detecting risk,” according to the New York Times.  That is, the bank had not been publically disclosing its risky trading, thereby misleading stockholders and regulators. Banks such as JP Morgan had been urging regulators to weaken the Volcker Rule in the Dodd-Frank Act of 2010 to allow banks to continue to engage in some risky proprietary trades.

The full essay is at "JPMorgan: An Unethical Monstrosity?"

JP Morgan: Conflict of Interest in Mutual Funds

As JPMorgan Chase was increasingly getting into the managing function of mutual funds, the bank also created and sold its own funds. I submit that these two tasks being done by the same firm constitutes a structural conflict of interest, regardless of any purported “Chinese wall.” In other words, a certain tension exists when the two functions are performed by the same business entity because the incentives in one of the two tasks (i.e., selling one’s own funds) inherently shirk the viability of the other task (i.e., being a financial advisor). In particular, the objectivity implied and even advertised in the latter is apt to be relegated as the sales function kicks in. The “answer” to this ethical problem is that a given bank should do one or the other, but not both tasks. Put another way, only a fool tries to do everything—only a greedy fool.

Geoffrey Tomes admits to having favored the bank's own funds in "advising" clients

The full essay is at "JPMorgan: An Unethical Monstrosity? and
Institutional Conflicts of Interest, both available in print and as an ebook at Amazon.

Barclays: Riddled with Conflicts of Interest

Lest it be presumed that no harm to society can come from having Wall Street bank CEOs such as Jamie Dimon (of JP Morgan) on the New York Fed’s board of directors, Marcus Agius, the former chair of Barclays who resigned after his bank agreed to pay $450 million to settle accusations of rate-setting, was also the honorary chairman of the Bankers’ Association of the state of Britain in the E.U. That association oversees one of the key rates in question, the London interbank offered rate, or Libor.

The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

JP Morgan Chase on the NY Fed's Board

The New York Fed allows private bankers to sit on its board, even while it crafts bank policy and puts together financial industry bailouts. "There's a conflict of interest here. You serve two masters. You can't draw this extraordinary salary from JPMorgan Chase and, at the same time, say, 'Oh, I'm out here acting in the public interest.' You can't do both." So said Elizabeth Warren, who came up with the idea that became the Consumer Financial Protection Bureau as part of the Dodd-Frank Financial Reform Act of 2010. Referring to Jamie Dimon, the CEO of JP Morgan who presided over a $2 billion trading loss, she added, "He says he wants to take responsibility. Then show some responsibility. Show you get it. Putting Wall Street bankers on the Federal Reserve Board is like finding the guys who torched the entire town and putting them on the fire advisory board. It makes no sense." 

The full essay is at "JPMorgan: An Unethical Monstrosity?"

A Conflict-of-Interest in Lobbying: The Case of JPMorgan

At the JP Morgan stockholder meeting on May 15, 2012, as the FBI was opening an investigation into the bank’s $2 (or $3 )billion loss on credit derivatives, Chair/CEO Jamie Dimon gave what the Huffington Post calls “a spirited defense of the bank’s efforts to lobby against stiffer financial regulation.” He argued that the bank’s interest is the same as the stockholders—namely, to make the financial system strong and sound. What he omitted was the part about the bank’s interest including its own profit, even if systemic risk of the system is increased as a result. In general, any business looks primary after its own interests, and only then to the general interests of the system.

The full essay is at "JPMorgan: An Unethical Monstrosity," available at Amazon.