JP Morgan: Post Mortem

By Shlomo Maital  



 Joe Bftplsk Morgan


The chances are good that by the time JP Morgan manages to unwind its disastrous credit default swap trades, its losses will far exceed $2 b.  NYT:  “the trades could continue to spill red ink for months, costing the bank several billion dollars.”

  Here are a few things that contributed to this bungle.

  1. CEO Jamie Dimon is also the Chair.   When you invest in a company, you should prefer firms that have a strong independent Board of Directors, including a Chair who is NOT the CEO.   Nothing can destroy an organization faster than a charismatic leader, someone once said.  And, they should add, chairs the Board as well.  NYT:  “…four out of 10 directors wanted to replace Mr. Dimon as chairman with an independent director”. Just short of a majority….

  2. Value-at-risk, as a risk management system, should never be used.  Does anyone remember Bankers Trust?  The world’s greatest, sharpest, money-making investment bank?  Well, they were destroyed by the “world’s best” value-at-risk risk management system.  Nobody remembers them today.  What IS value at risk?  Basically, picture a normal curve (a ‘bell curve’).  Picture the left-hand tail, where the losses are. Shade in the part of the left hand curve that covers, say, 5% of the area.  Estimate that area. That’s your value at risk.  Track it daily, manage it, control it… Sounds reasonable, right?  Except – returns and losses are not distributed normally, like a bell curve, and their actual distribution constantly shifts.  When there is systemic risk, and if you are blindly using value-at-risk, you will miss it – by the time you wake up, it’s too late. J.P. Morgan, by their admission, used value-at-risk.  Why?

 3. Beware of chief executives who draw obscene pay.  Dimon earned $23 m. annually.  His Board of Directors, representing the shareholders, approved it.  There is now talk of clawback.  There should have been no claws in the first place.  Even if he gives all of it back, it will be less than 1 per cent of the bank’s losses from the disastrous uncontrolled gamble.

4.  Permanent black clouds.  A cartoon character in L’il Abner, Joe Btflpsk, had a permanent black cloud over him.  Now so does J P Morgan.  NYT: “The F.B.I. case will examine potential criminal wrongdoing at JPMorgan, according to people briefed on the matter, representing the most serious inquiry to stem from the losses.”   Even if nothing at all comes of this inquiry, it will be a black cloud hanging over JP Morgan for a very long time..and then, afterward, it will be remembered.  JP Morgan will never be quite the same. The SEC will investigate as well, apparently.  Two black clouds.