Another note on the J.P. Morgan penalty

by Walter Olson on November 10, 2013

MantisKevin Funnell, on “The Long-Range Consequences Of Adopting The Mating Habits Of A Praying Mantis,” quotes Matthew L. Brown in Boston Business Journal on the consequences of slamming the institution that agreed to help rescue WaMu and Bear Stearns, and is now paying for their sins: “It’ll be a long time, indeed, before a big bank answers the federal help line.” Related: Daniel Fisher, Forbes.


1 Boblipton 11.10.13 at 11:00 am

As a longtime shareholder of J.P. Morgan-Chase and some of its antecedent firms, I have been a witness to the alternating efforts of the Federal government in force-growing the company to cover up mistakes of management and regulators and then holding the company responsible for those mistakes. In the 1980s, they were overjoyed to have Chase buy Texas banks to cover up the bad and frequently illegal loans made there. In 2008, Jamie Dimon was the only major banker willing to take on the risks that Bear Stearns and Washington Mutual would swamp it. Even then, Bears’ CEO, Jimmy Cayne, blackmailed him into raising the price by promising to vote his own shares in favor of the merger and then sold his shares in the market before the vote could be taken.

The immediate reaction to the collapse in house prices was to demand that banks 1: make more loans; 2: increase their reserves; and 3: improve the quality of their loans. As with the rule of Good, Cheap and Fast: choose two, this seemed to not be ridiculous to most people. Instead, noting that no reserves are needed against loans made to sovereign entities, banks rationally increased their loans to the Federal Reserve…. and Greece.

As a Morgan-Chase shareholder, I am outraged by the London Whale and want my money back from those lying thieves. Penalties on the bank may be appropriate, even though listening to senators go on about how matters like the London Whale could sink the bank and force the government to pay, I wonder how removing eleven billion dollars of capital from the bank will enable it to stand up to future shocks. However, when it comes to the wrongdoings of Bear Stearns and Washington Mutual, I am certain of the morality of the situation: Morgan-Chase bought those companies at the behest of the government (in the person of the New York Federal Reserve Bank) because the government lacked the ability or will to clean the mess up themselves. Jamie Dimon said at the time that the company lacked the time to do a proper investigation into what they were buying, but relied on government indemnification and goodwill. In my opinion he did the right thing. However, we see how well relying on the word of the government works.

Matthew Brown’s musing on how anxious bankers will be to come to the aid of the government next time are not novel with him. Dimon said much the same thing a couple of years ago. We can hope that the next time a crisis of this magnitude happens, the people with the ability to move will have forgotten this particular lesson. However, I fear not.


2 William Nuesslein 11.11.13 at 8:42 am

Bob Lipton’s comment is excellent.

I am confused about the London Whale event. As a shareholder wouldn’t Mr. Lipton’s recompense come from his pocket?

3 Boblipton 11.11.13 at 6:42 pm

I want the people who made the decisions and trades and pocketed their bonuses to pay. There is a clear dichotomy in the way these players are treated. If the firm makes money, they want to be partners and if the firm loses money, they want to be overpaid employees.

I can understand the you-eat-what-you-kill attitude of the traders and their supervisors. However, if it kills you, we get to eat you. I’m sure that these relatively young men and women have assets that can be converted into cash to recompense the people whose money they have lost. If not in full, I’m sure they have organs which can be sold in India to close the gap.

There are clear and obvious ways to pay people generously without a lot of the nonsense that the “Executive Compensation Experts” that CEOs hire to pitch their demands to the Boards of Directors that CEOs hire. Restricted stock would align management interests with shareholders in a way that stock options would not. Bonuses could be disbursed over a time frame commensurate with the lifetime of the contract or risk period. As a result of my ignoble two-day career as a salesman in the 1970s, I collected commissions of 87 cents a year for the five years of the contract.

As a shareholder, I want the companies in which I am a silent partner to be well-run companies that make money and disburse surplus funds to us shareholders. Immediate stock appreciation is irrelevant to me I believe that Jamie Dimon, who has spent considerable amounts of his own money to buy shares in Morgan-Chase and its predecessors, has been trying to institute these changes, but cultural changes like cannot be performed quickly. It can take decades. My opinion can be gleaned from the fact that I have no intention of selling my shares at anywhere near the current price. However, it might be sped up by selling off some of the London officers’ more valuable body parts.


4 TexJudge 11.12.13 at 7:50 pm

How many billions of dollars have been legally extorted out of the private sector by the SEC, the DOJ and state attorneys general in matters as wide ranging as the tobacco litigation, so-called Wall Street insider trading cases and the 2007-08 mortgage meltdown? Corporations are left with little choice but to cave because they know that ideologically-driven regulators can put them out of business. Perhaps the most outrageous instance was the whole robo-foreclosure mess where the big banks were forced to give up close to 30 billion and there was absolutely no evidence that any homeowner was the victim of an undeserved foreclosure.

Comments on this entry are closed.