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JPMorgan Chase's (NYSE: JPM ) recent $2 billion trading loss has sparked the usual chorus of criticism for the big banks and a call for greater regulation. Simon Johnson, former chief of the International Monetary Fund, said, "It just shows they can't manage risk -- and if JPMorgan can't, no one can." Eliot Spitzer called the bank too big to succeed or manage, and several lawmakers questioned the Wall Street institution's scruples, including Sen. Dick Durbin (D-Ill.), who accused CEO Jamie Dimon and Co. of "gambling with taxpayer-insured money."
But the rush to regulation ignores the importance of the market reaction to the bad trade. The actions of the "London whale" left the bank short $2 billion and shaved as much as $19 billion in market value of the company as shares dropped more than 10% in the aftermath. Considering the bank has a book value of $183 billion and annual earnings around $20 billion, $2 billion is a relative drop in the bucket, which the bank can easily absorb. It appears, then, that JPMorgan may be facing greater problems internally than it has with regulators for violating rules to protect the greater economy.
The disproportionate loss in market value shows that it's not just the missing cash that matters here. The entire management structure is being questioned, as well the company's top-notch reputation in its industry. In addition to the monetary costs, JPMorgan had to force out its chief investment officer as well as two other top executives.
And the hemorrhaging didn't stop at JPMorgan's doors. Morgan Stanley (NYSE: MS ) dropped about 8% in the two days after the news came out, while Goldman Sachs (NYSE: GS ) gave back 6%, and Bank of America (NYSE: BAC ) lost 4%. Investors clearly believe this is an industrywide problem and not simply one bad move at JPMorgan.
While some regulation is necessary to control systemic risk, in a capitalist economy we expect actions to have consequences and for strong businesses to thrive as weak ones fail. Shareholders should exercise their influence over the company first before we ask the government to step in. This can happen if shareholders divest from the stock, which sends its value down, or by making demands of the company in which they're invested.
A new era of vigilantism?
Citigroup (NYSE: C ) shareholders' rejection of CEO Vikram Pandit's pay package last month could mark a watershed moment for investor activism. Despite the abhorrent share performance of the too-big-to-fail banks in some recent years, the decision represented the first time shareholders voted against oversized pay at the big banks. Shares of Citigroup are down 80% since the financial crisis and are the worst-performing of the Wall Street titans, despite executive pay near the upper end of the range.
During JPMorgan's annual shareholder meeting yesterday, the American Federation of State, County, and Municipal Employees proposed that Jamie Dimon resign his position as chairman of the board, an idea on the minds of many shareholders ahead of the meeting. The union argued for the proposal by saying that having "Dimon monitor his own performance was an inherent conflict of interest." The proposal was not approved, but it won a respectable 41% of the vote. Dimon said there were 10 other members of the board that could mitigate his influence.
Meanwhile, at UBS, which lost more than $2 billion when a trade of its own blew up last year, a number of investors voiced concerns at a recent shareholder meeting. Some complained about the inflated bonus pool, a lack of disclosure over how pay is determined, and specific performance criteria. Shares of UBS have dropped more than 33% in the last year.
Finally, at Barclays' shareholder meeting last month, 27% of investors voted against an executive pay package and expressed outrage at high pay despite falling profits and return on equity. Some also heckled the head of the compensation committee.
More to come
With its shareholder meeting set for next week, Goldman Sachs recently received approval for its executive-pay plan from ISS Proxy Advisory Services, but another group expressed disapproval for one of its board members. The mainstream $5.7 billion Sequoia Fund took the odd step of opposing the re-election of James Johnson, the head of Goldman's compensation committee. Sequoia's beef appears to center on Johnson's background, as the fund cited his risky management style as CEO of Fannie Mae in the '90s and stock-option controversies while he was a director at United Healthcare and KB Home. Goldman's board stood by Johnson, who has served since 1999.
But shareholder activism need not focus on executive pay alone. As the debate over the Volcker Rule shows, the ins and outs of the Dodd-Frank law will be parsed and debated, and the big banks will probably exploit any potential loophole, as the banks' argument for the need to "hedge" underscores. Unless the too-big-to-fail banks are broken up, they will remain opaque institutions where $2 billion can disappear even under the watch of the man regarded as the industry's top banker.
Of course, such banks can also generate huge profits, but the risk inherent in their practices reminds us that they are deserving of more shareholder vigilance than your average publicly traded companies. Only shareholders occupy that unique position of financial self-interest and the power to vote, and they must wield that influence when necessary for the system to work. It's up to them to hold the Wall Street institutions accountable for their actions, and to take bad actors to task.
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