You know who thinks JPMorgan Chase’s possible decision to dock Jamie Dimon’s bonus as punishment for the management missteps that led to the London Whale’s $6 billion loss is a big deal? The Wall Street Journal. The paper published a huge front-page story on Dimon’s bonus shrinkage and other potential ramifications of an internal report JPMorgan Chase’s board is scheduled to issue on Wednesday.
You know who certainly doesn’t think it’s as big a deal? Jamie Dimon.
Partly, Dimon’s indifference is related to how little any potential bonus drop will affect his personal finances. You think the guy who pulled down $40 million in the last two years — and who already gets his black cars, private jet travel, and other perks paid for by his employer — is going to go hungry?
But mostly, Dimon’s shoulder shrug will come because he sees the London Whale as a loss leader. With every bit of self-flagellation over the CIO’s trading loss, Dimon solidifies his straight-shooter reputation — the same one that got him praised by Andrew Ross Sorkin as a model CEO — and makes JPMorgan Chase seem more trustworthy and honest than its rivals. Dimon is already reportedly pushing to make the board’s internal report public and “let it all hang out”; clearly, he sees a little short-term embarrassment as being in his, and the bank’s, long-term interests.
So, although cutting Dimon’s bonus would be a symbolic wrist slap, it would neither hurt Dimon personally nor punish JPMorgan’s management for failing to catch Bruno Iksil before his hedge-gone-wrong cost the bank $6 billion.
The buck stops with Dimon, of course, and the board is certainly within its rights to punish him for failing to oversee the disastrous trades. But if JPMorgan Chase’s shareholders really want to tweak the bank’s practices in a way that will engender investor confidence and make Whale-type losses less likely to happen in the future, its board has to mandate changes in the way the bank discloses information about its trading positions.
As Peter Eavis pointed out last May, when Whalegate was in full swing, JPMorgan Chase provided little specific information on what went on inside its chief investment office, the division where Bruno Iksil dreamed up his ill-fated trade. Nowhere in its quarterly financial statements did the bank break out detailed, categorized information about its hedging activity and derivatives exposure, including granular specifics about the credit protection it sold in its CIO. Much of Whale’s hedging activity — which, as we know, behaved less like a hedge than as a gigantic prop bet — was not labeled as such. And what hedge disclosures did exist were jumbled in with other figures and buried in aggregate totals that made it nearly impossible for investors to know how many of the bank’s trades were legitimate hedges on behalf of clients, and how many were part of complex strategies designed to make money for the CIO itself.
As Eavis put it, “Investors might have asked questions earlier about what was going on at the chief investment office if JPMorgan had more clearly broken out its hedging activity. In particular, outsiders might have seen how much protection was sold as a hedge and pressed the bank for answers.”
To its credit, JPMorgan made better disclosures about the Whale’s trades after the fact. It also tweaked its description of its value-at-risk model to account for the imprecise nature of how it calculates possible losses. But the descriptions of its trading activity contained in the firm’s most recent quarterly report don’t tell outsiders much more about how the CIO’s so-called hedges are performing, or break hedges down into more and smaller categories that would be useful for investors to see what’s going on.
Minimal disclosure isn’t unique to JPMorgan — Jesse Eisinger and Frank Partnoy recently took a trip through Wells Fargo’s 10-K and found similar obfuscation at work. But it is remarkable that even after a huge, embarrassing loss, the bank hasn’t made a regular practice of the kind of disclosures it made after the Whale’s losses came to light.
If it wanted to, JPMorgan’s board could mandate a full reveal of all the CIO’s trading positions on a quarterly basis. This level of disclosure can be costly, since it amounts to revealing proprietary strategy and gives away much of the bank’s informational advantage. But it can be done in times of crisis. In 2011, Jefferies released extremely detailed information about its European debt exposure, down to individual CUSIP numbers, when investors were losing confidence and sending the bank’s stock price spiraling.
JPMorgan’s board isn’t in Jefferies-style dire straits. Dimon has been proactive and open about acknowledging the management mistakes he and others made, and the bank’s stock price is up more than 20 percent since mid-May, when it disclosed the Whale’s losses.
But the board has a chance, with Wednesday’s report, to make its disclosure practices the most transparent in the industry, and make investors more confident that they won’t be caught by surprise by a huge trading loss again. It should take advantage of that chance, rather than being content with the symbolic hit of lopping a few million dollars off Jamie Dimon’s bonus, which won’t be missed much anyway.
