Saturday, January 25, 2014

Paying Jamie Dimon

A few days ago, it was reported that JP Morgan Chase's Board of Directors gave CEO Jamie Dimon $20 million in salary and restricted stock in compensation for his work in 2013, a 74% raise what he was paid in 2012. Reporters questioned the wisdom of such an award, after all, JPM paid roughly $20 billion in fines to the federal government, homeowners and others in 2013 for actions related to the housing meltdown, the Madoff scandal and other instances of malfeasance. [1] And JPM is not alone. Other financial institutions have also paid multi-billion and multi-million dollar settlements for everything from robo signing title documents to currency manipulation. 

While these settlement figures are eye catching, their value to the banks is incalculable. As in business, in the law you want certainty - writing a large check, even an 11-figure one, may seem punitive, but getting a release from any future threat of litigation more than pays for itself. Consider that even with the $20 billion JPM paid out in 2013, it still cleared more than $17 billion in profit and since it faces no threat of future litigation related to the matters it settled, that profit margin will only increase going forward. Moreover, because the Federal Reserve is essentially lending money to banks for free (zero percent interest) JPM and its ilk have the additional certainty that if they do need to borrow money, capital will flow free of charge while nothing precludes them from charging their normal rates of interest, further solidifying their balance sheets. 

Of course, it didn't have to be this way. When the major banks were teetering on the edge of insolvency, instead of handing over what was initially going to be up to $700 billion with no strings attached, the federal government could have demanded accountability - the firing or resignation of senior management, temporary nationalization, mandatory write downs of underwater mortgages, and changes to the bankruptcy law that would have shielded homes from foreclosure, among other actions. [2] Further, the federal government should have launched aggressive criminal investigations to ferret out wrong doing. The paper discovery alone would have been well worth the time and effort to understand how these actions were allowed to occur. Finally, the Glass-Steagall Act, a law that had, until it was repealed in 1999, helped us avoid precisely the type of systemic financial meltdown that occurred in 2008 should have been reinstated. 

Instead, consolidation in the wake of the Great Recession has simply put even more power and control in the hands of a few massive banks. Already deemed "too big to fail," JPM, Wells Fargo, Bank of America, CitiBank, Goldman Sachs and Morgan Stanley now control two-thirds of all assets in our financial system. [3] Having recovered from their near death experience, this group has lobbied aggressively to water down any effort to limit their reach and their stock prices have rebounded nicely. 

Of course, we've seen this movie before. Back in the 1998, the major tobacco companies entered into a more than $200 billion global settlement with 46 states (the other four states settled separately) to shut down lawsuits against the companies. Since then, to take one example, Altria, the maker of Marlboro cigarettes, has seen its stock price rise 215% and in return for paying its share of that global settlement, saw their litigation risk disappear forever. Similarly, ExxonMobil and BP have paid billions in the wake of massive environmental catastrophes with absolutely no impact to their balance sheets. So, do not mock Jamie Dimon - to the Board of Directors and shareholders of that company, he's worth every penny paid to him. 


2. Iceland is an interesting case study. There, managers were fired and the banks were briefly nationalized. The economy has come back nicely with no sign of the resurrection of Chairman Mao or Uncle Joe.

No comments:

Post a Comment