This last week was a busy one for the politicians who are expert at making political theater and carrying it to an art form. Sen. Carl Levin's Government Oversight Subcommittee once again took up the issue of JP Morgan's large derivative trading loss of 2012 (known as the London Whale problem) seeking to determine whether the bank misled investors and regulators in the process. What started as a significant embarrassment for the bank almost a year ago has become a major headache.
I see two aspects here. There are political lessons to watch for. But the JP Morgan experience holds some practical banking lessons as well. Let's look at both of these in turn, and then a lesson from Rome.
Capitol Hill experience
Senator Levin (D.-Mich.) and his colleagues have mastered the art of asking rhetorical questions that generate a bona fide level of unease on the part of witnesses. Those watching on C-SPAN last week saw bank executives as well as representatives of the Comptroller's Office cast in an unfavorable light for their actions as the London Whale's trades unfolded both within the bank and later as a public relations nightmare.
The committee deliberations make it plain, at least to me, that the Too Big To Fail issue continues to have "legs" in Congress. Senators appear to harbor the opinion that there is still taxpayer exposure in any very large, systemically important institutions getting into serious difficulty. This point is underscored by recent comments of Tom Hoenig, FDIC vice- chairman (and former president of the Federal Reserve Bank of Kansas City) to the effect that present accounting rules (GAAP) understate the size of a bank. Hoenig has estimated, for example, that if all activity were reflected on the books of these very large banks and not treated "off balance sheet" that the size of the largest institutions would be double the currently reported amount.
So, the controversy remains in play.
An inadvertent word during testimony the other day revealed that JP Morgan suffered a downgrade by OCC of its CAMELS rating last summer. Such ratings are confidential and are very sensitive as well. Clearly, this is a significant development for JP Morgan's management, made all the more so because of management's admirable success in steering through the difficulties of the business environment during the last four years.
The ratings revelation gives some perspective on Jamie Dimon's comments early on that the management involved in oversight of the derivative trading problem "behaved like children."
(A lesson in exam management came too: It was also noted in the testimony that JP Morgan executives exhibited bullying behavior to examiners and in particular to a junior member of the Comptroller's staff. This is counterproductive for any bank being examined.)
Nor did OCC escape the senators' attention. The agency was seen as late in addressing lapses in its own processes and was guilty, perhaps, of not fully understanding the implications of information gaps or the interpretation of information that it had been furnished. I sensed that Comptroller Curry did not enjoy the experience in front of the subcommittee any more than Morgan's Ina Drew, who until last August was the executive in charge of the Chief Investment Office. The latter was the department responsible for managing the bank's overall pool of liquidity and the area within which the derivative trades originated.
A lesson in politics
The London Whale problem is instructive for all of us in direct proportion to how uncomfortable and unpleasant it has been for Dimon and his management group. In a big picture sense, the TBTF issue clearly seems destined for a lot more political discussion. Practically speaking, I suspect a tougher version of the Volker Rule is in the offing. That, and increasing pressure for increasing capital requirements for all banks.
This will make community bankers all the more vocal about the unfairness of a "one size fits all" supervisory approach to banking companies. On the other hand, how can anyone seriously argue that more capital is not a constructive response to our industry's recent experiences?
Lessons in banking
But let's put politics aside. What practical banking lessons should community and regional bankers in the trenches draw from JP Morgan's London Whale experience?
1. Management succession isn't just about replacing a retiring CEO.
One factor almost completely forgotten in the last several months: key employee health. Ina Drew was diagnosed with Lyme's Disease in 2010. In dealing with the personal crisis of her health--Lyme can be debilitating--she was occasionally absent from her office for periods of time. This was during the period when the Whale's derivative trading scheme was formulated and initially executed.
Ms. Drew is known as a highly competent and astute manager, so the observation that her absence occurred at a critical time in the evolution of the problem is probably quite relevant to what happened.
I recall a situation from my own working life where the president of our company suffered two significant health lapses, both within a little more than a year. One was a heart infection that put him flat on his back for several weeks and the other was a malignancy on his jaw that required surgery followed by radiation therapy.
During the latter illness, he was at his desk most every day but I hardly believe that the quality of his output during those days was up to his own very high standards. As a result, there was some "slippage" in the operating results. This was nothing evident to the outside world but those of us with a closer view had the sense that among some of the senior managers of the company there was not under any "adult supervision."
The overriding lesson here is that succession planning needs more than simply naming a designated successor. There needs to be a systemic alternative plan that can surface--and address--an issue of "temporary" impairment on a timely and proactive basis.
2. Another big lesson to me is my old boss's view that one earns most of one's pay by being able to get along with colleagues.
He was quick to point out that anyone not getting along in a harmonious and cooperative way with colleagues was not earning a significant part of his pay. The press reports of internal bickering and even Dimon's own comment about how some executives behaved seem like red flags in retrospect.
Disrespectful behavior in the workplace creates enormous dysfunction and the consequences are seldom consistent or benign.
Another thought, from Rome
I had another thought these last several days as I caught TV snippets of Pope Francis undertaking his new responsibilities.
It seems to me that by focusing on simple things--in Francis' view the poor, social injustices, and simplicity in one's actions are key--that the "kvetchers" lose many of the things they spend most of their time gossiping about. The result is likely to be significant as well as systemic operational improvement and a much more respectful dialogue as a consequence.
Are there "canary issues" here for us as bankers?
Perhaps the biggest is that disrespectful behaviors are pernicious, harmful, and destroyers of value.
And who are the biggest losers?
Unfortunately, the shareholders are the ones damaged the most. The perpetrators simply move on and find other hospitable surroundings.
Maybe it's time to help these sorts of people on their way.
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