This year I introduced a weekly series called "CEO Gaffe of the Week." Having come across more than a handful of questionable executive decisions last year when compiling my list of the worst CEOs of 2011, I thought it could be a learning experience for all of us if I pointed out apparent gaffes as they occur. Trusting your investments begins with trusting the leadership at the top -- and with leaders like these on your side, sometimes you don't need enemies!
This week, I'm highlighting the CEO of JPMorgan Chase (NYSE: JPM ) , Jamie Dimon.
The dunce cap
Is it me, or does it feel like we're just running the gauntlet with financial foul-ups this year?
Goldman Sachs (NYSE: GS ) started us off in March when one of its former executives abruptly resigned and wrote an op-ed column in the New York Times to express his disdain at what he saw as the recent bifurcation between Goldman's ethos and its actions. Citigroup's (NYSE: C ) CEO, Vikram Pandit, was next in attempting to boost his pay package from $1 to $15 million even as the company faced billions in mortgage-related settlements. Thankfully, shareholders would have none of it and shot down Pandit's compensation package. Finally, Bank of America's (NYSE: BAC ) CEO, Brian Moynihan, had his compensation boosted sixfold while his company faced similar settlement charges and produced an annual profit of just $0.01 per share!
So you see, it was just a matter of time until JPMorgan fouled up.
Late last week, JPMorgan disclosed that two traders in its London derivatives unit had made such poor trading decisions that the bank had lost $2 billion in just a matter of six weeks. On top of that, to minimize its losses on these credit derivatives, JPMorgan could lose an additional $1 billion as it tries to exit these trades at unfavorable prices. The trade was actually meant to reduce JPMorgan's risk and offset some of the riskier trades the company had made with its own money -- but it actually had the opposite effect.
Thumbs up, guys!
To the corner, Mr. Dimon
But wait -- there's more!
You somehow knew this was going to get better, and it did as soon as people began opening up their mouths about this errant lack of judgment.
First up was Rep. Barney Frank (D-Mass.), who noted that while JPMorgan Chase had complained virulently about the costs of financial regulation, it had lost five times the amount of the cost of that regulation in just six weeks. I rarely agree with Rep. Frank's ideas, but he hit the nail on the head with his analysis here.
Then came comments from JPMorgan itself that Chief Investment Officer Ina Drew, who had overseen these trades and reports directly to Dimon, was retiring after a 30-year career with the company. While I don't have much to say beyond wagging my finger in disdain after overseeing such poor trades, I do have to laugh about the company's possible replacement, Matt Zames.
Zames has been mentioned as a possible successor to Dimon but seems like an ominous fit for the CIO role? Why? Because Zames was one of the speculative mortgage-backed security traders for former hedge fund Long-Term Capital Management, which almost singlehandedly wiped out the U.S. financial market in 1998. The collapse of the Russian bond market in 1998 caused LTCM to lose $4.6 billion in just four months! Then again, maybe he's a natural fit to fill a position that lost $2 billion in just six weeks?
It's still unclear exactly how much Dimon knew about these trades, but the chain of command seems to be very simple: Drew reported to Dimon on a fairly consistent basis, and Drew was "in-the-know" when it comes to these derivatives trades. While even $3 billion worth of losses won't cripple JPMorgan's balance sheet, it's not a drop in the bucket, either. If anything, it provides the spark that may force Congress' hand in enacting sectorwide reforms that govern the way that financial institutions make use of leverage and even invest their own money.
Some call this a cause for reform; I call it Darwinism in action.
Do you have a CEO you'd like to nominate for this dubious weekly gaffe honor? Shoot me an email and a one- or two-sentence description of why your choice deserves next week's nomination, and you just may wind up seeing your nominee in the spotlight.
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