NEW YORK, March 17, 2013. Last Friday before a United States Senate Subcommittee, the smartest senior executive at JPMorgan Chase was definitely not inside the Dirksen Building hearing room.
Safe for the moment in Manhattan, the captain of the good ship Morgan, Jamie Dimon, may well have mused these words of Captain Ahab regarding Moby Dick:
“From hell’s heart I stab at thee; for hate’s sake I spit my last breath at thee. Ye damned whale.”
Considering the spectacle he likely watched on this fateful “Ides of March”, Dimon could wonder whether his days as Morgan’s Caesar are now numbered, and if so, who might dare conspire against him.
All Friday, enormous trades carried out by Morgan’s “London Whale” were the focus of glaring media attention. Numerous executives were subjected to a televised inquisition led by Senator Carl Levin concerning obvious questions.
Is JPMorgan Chase—a creature so comfortable in deep financial lagoons—now a veritable monster that has slipped outside human control?
If so, who in management and at board level deserve blame?
How should ineffective control of this financial behemoth be rectified?
How do America and the global financial system actually move forward?
The latest drama to swirl around Dimon and Morgan leapt into public view in April 2012. An excellent 307 page report just issued with 1,654 juicy footnotes paints a disturbing picture.
Numerous executives seem to have defeated internal controls and external oversight in an attempt to conceal mounting losses from “speculation” that had been characterized as prudent “hedging”. In the process, Morgan seems to have generated a whopping $ 6.2 billion in losses over the course of just a few months.
So far, careers have ended and compensation levels have been cut for many of the remaining Morgan bankers. Now the Senate Subcommittee is asking whether activities covered in its report rise to the level of “crimes”. Even if the answer ultimately is “No”, does Captain Dimon need to go to restore confidence in Morgan and in the integrity of American and global capital markets?
Jamie Dimon has, on occasion, been more than amply full of himself. Still, before we delight in cutting down to size yet another greedy financier, a bit of context seems highly relevant. Staying with our nautical metaphor, the beached Morgan whale seems far less threatening than even larger leviathans that remain loose and wreak havoc on greater scale.
Though Carl Levin is an important Senator, neither he nor his colleagues in government direct the day-to-day affairs of JPMorgan Chase. As far as I know, Morgan is not yet an arm of the U.S. government like other large financial insititutions that were seized such as Fannie Mae, Freddie Mac and AIG back in September 2008.
Moreover, Morgan produces voluminous, unaudited and audited reports regularly that provide rich insight into the Bank’s operating metrics and financial results. These reports show that Morgan is solvent and remains well away from existential danger.
According to its latest public filings, Morgan has $ 204 billion in stockholders’ equity as against $ 2,359 billion in total assets. Under Dimon’s watch, Morgan generated solid consolidated profits. The Bank clearly has a deep executive bench and many distinguished individuals serve as Board Directors.
In short, Morgan can and will re-configure itself to serve stockholders while protecting depositors and promoting the interests of customers and employees. Morgan can govern itself.
Do I have the same confidence that the U.S. Senate, and the Federal Government will honor its Constitutional duties and serve the interests of we, the American people?
The most pressing domestic threat is America’s runaway Federal Government deficit. Carl Levin and his Democrat colleagues refuse to tender responsible annual budgets that fairly and honestly reckon with this stubborn, self-inflicted wounding of our shared economic reality.
In three years from 2009 through 2011 under President Obama, America piled up $ 4.3 trillion in Federal deficits—57% more than the $ 2.8 trillion President Bush saddled us with in eight years. This analysis excludes the massive deficit recorded in 2012 because we do not yet have truly comparable figures.
On an annual basis, President Obama’s deficits are running more than four times those of President Bush.
JPMorgan Chase does have a “control” problem—but the Bank protects the value of its stockholders’ equity and regularly takes in more revenues than it spends in expenses.
In stark contrast, the Federal Government is addicted to “red ink” and remains stubbornly in denial. Imagine how concerned the numerate and literate staffers who authored the recent report on Morgan might be if they turned the same level of attention upon Federal Government financial statements and budgets.
Which brings me to the biggest threat to stability of the global financial system—the Federal Reserve Bank and the merry band of Central Banks that issue “fiat” currencies.
When we sniff danger in the air, Americans think first of places like France, Italy and Spain. Perhaps all of us should do better homework into the course of reported economic “progress” inside the United States itself.
From 1999 through 2012, the average net worth of American households rose a cumulative 32 %, However, adjusting for “inflation”, the average net worth of American households was unchanged. Worse, measured in “gold terms”, the average net worth of American households dropped by a stunning 78% from 1999 to 2012.
Investors have been patient since 1999. Most have meekly accepted the destruction in values of widely traded currencies caused by inflation and the reality that some commodities and precious metals are better “stores of value”.
This minute, we watch ripple effects cast upon troubled waters by the tiny nation of Cyprus. To receive a bailout, Cyprus is being forced by European hawks down the potentially disastrous path of seizing a portion of capital put on deposit inside its banks to fund re-structuring of that nation’s damaged economy.
The decision with regard to Cyprus, if carried out as reported, should cause investors everywhere to question the wisdom of keeping sums on deposit inside countries that have proven they cannot and will not manage their own finances responsibly.
If there is an over-arching lesson from the Levin Inquisition into JPMorgan Chase it must be that gigantic global institutions can end up deceiving counter-parties and themselves if financial reports are not granular and accurate enough.
Do we really think it is reasonable simply to force one large American bank to report more effectively using relatively tight standards when we allow our own Federal Government, other national governments, our Federal Reserve System and other Central Banks to hide their broken finances in plain sight?
Integrity in the global system will only be restored upon the emergence of sound currencies when corporations and governments are forced to make full, fair and timely disclosures.
Problems at JPMorgan Chase pale in comparison to systemic threats that rise as regulators and the wider public sleep.
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