3 Things to Remember About JPMorgan's Management

Thinking about JPMorgan Chase (NYSE: JPM  ) as an investment? I can't blame you. It's almost unanimously accepted as the world's premier megabank. It has a better reputation, a stronger balance sheet, deeper political connections, and yes, is better managed than many of its rivals.

Let's focus for a moment on that last one -- management.

Most stories reporting on JPMorgan's management run with a common narrative: Its leaders are the best. CEO Jamie Dimon is the target of unending praise. The New York Times says he's "perhaps the most credible voice of a discredited industry." Warren Buffett remarked: "I think Jamie Dimon is one of the best bankers in the world. He understands banking and risk."

All fine and well, and probably right. But there are a few things investors should keep in mind about JPMorgan's management. A devil's advocate argument, if you will.

1. The case of Bruno and Ina
Earlier this year, JPMorgan admitted it had made a massive wrong-way bet on certain debt securities. The trade, which has cost the bank some $6 billion, was allegedly engineered by a London trader named Bruno Iksil, who worked in a trading division overseen by a JPMorgan executive named Ina Drew.

Who were Iksil and Drew? Very few outside of Wall Street had ever heard of them. Iksil isn't mentioned in the company's annual report. Ina Drew's name appears once, but with no significant details about experience or day-to-day duties.

And yet these two mostly unknown employees (or really, one, as the trade appears to be Iksil's doing) had the authority to engineer a trade that cost shareholders billions of dollars. That should give you pause. There are very few industries outside of banking where, in the normal course of business, an obscure line worker can singlehandedly blow a hole in the company's earnings and balance sheet.

What this highlights is that there are issues of risk management -- really deep, important ones -- that fall outside the grasp of upper management. This is true for all companies, as upper management can't oversee every worker's daily activities. But it's particularly prevalent at a large bank like JPMorgan, with 262,000 employees, an unknown number of which are permitted to trade with not-insignificant amounts of shareholders' capital, amplified by leverage to boot. A CEO is only as strong as his most brazen rouge trader.

2. Dimon's strength is in avoiding trouble, not creating shareholder value
JPMorgan gained respect after the financial crisis because it didn't melt down like most of its peers.

This was an invaluable feat, and Dimon deserves praise for it. A strong defense is worth its weight in gold during a financial crisis. Dimon's commitment to maintaining JPMorgan's "fortress balance sheet" was one of the smartest banking moves of the last decade.

But investing is about more than preservation. While Dimon navigated around catastrophe, his record in generating shareholder value isn't terribly impressive, even compared with industry peers.

From the time Dimon became CEO through the second quarter of 2012, JPMorgan shares returned negative 7%, including dividends. Several large banks, including Wells Fargo (NYSE: WFC  ) and US Bancorp (NYSE: USB  ) , produced double-digit positive shareholder returns over that period.

The shortfall goes beyond shareholder returns. The headline numbers of JPMorgan's profits can look massive -- $17.8 billion of net income in the last year -- but that has to be put into context of its $2.3 trillion in assets. JPMorgan has posted an average return on assets -- arguably the most complete measure of a bank's performance -- of 0.8% under Dimon's lead. A collection of the 50 largest public banks shows the group's average return on assets since 2006 is 0.8%. Sort them in order, and JPMorgan ranks as the 31st-best. Far from the being the most impressive U.S. bank, JPMorgan sits square in the middle of the pack when it comes to efficiently monetizing its assets.

3. Bankers pay themselves simply awesome amounts
Investing great Leon Cooperman once said, "I determined many years ago that if you want to make money on Wall Street, you work there; you don't invest there. They just pay themselves too well."

As mentioned, JPMorgan shares have returned negative 7% since Dimon took over as CEO in 2006 through the second quarter of this year. Earnings per share increased a total of 4% during that time. Dividends per share have declined. For his effort, Dimon has been paid $149 million, according to S&P Capital IQ. Over the same period, an S&P 500 index fund returned 15%, S&P 500 earnings increased 10%, and the average CEO was paid of $71.9 million, according to Forbes.

Management should be paid a lot of money for good performance. But far too often, particularly on Wall Street, that logic is stretched into paying dynastic sums for average or even subpar performance. JPMorgan is perhaps a leader among large Wall Street banks in looking after shareholders' interests, but the big money in this industry invariably ends up with bankers, not bank shareholders. 

Fool contributor Morgan Housel has no positions in the stocks mentioned above. The Motley Fool owns shares of JPMorgan Chase & Co. and Wells Fargo & Company and has the following options: short OCT 2012 $33.00 puts on Wells Fargo & Company and short OCT 2012 $36.00 calls on Wells Fargo & Company. Motley Fool newsletter services recommend Wells Fargo & Company. Try any of our Foolish newsletter services free for 30 days.

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Read/Post Comments (16) | Recommend This Article (45)

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  • Report this Comment On October 10, 2012, at 4:23 PM, slpmn wrote:

    "JPMorgan shares have returned negative 7% since Dimon took over as CEO in 2006 through the second quarter of this year. Earnings per share increased a total of 4% during that time. Dividends per share have declined. For his effort, Dimon has been paid $149 million..."

    But he works really, really, hard.

  • Report this Comment On October 10, 2012, at 6:00 PM, nickjob wrote:

    $18 million rip off of one of its trust accounts. Who would have thought??? No integrity! Sell it!!! Dimon is a thief. He never gave back stolen MF Global money! Maybe if republicans get in, Dimon will go to jail with Corzine!

  • Report this Comment On October 11, 2012, at 5:56 PM, hanover67 wrote:

    An interesting perspective. I used to invest in bank stocks, which were steady dividend payers but whose share price rose and fell like a roller coaster. I would buy when the dividend yield was 7% and sell when it was 4%, year after year. But then a series of mega-mergers and quasi-national banking came into being, followed by the financial crisis, so investing in banks is like investing in airlines - you can't make money at it.

  • Report this Comment On October 11, 2012, at 7:46 PM, wincher6152 wrote:

    So Iksil's cheeks are red from rouge, a cosmetic coverup to be sure. happily it appears that he was also a rogue (correct spelling intended?) trader. I will sleep better tonight!

    Ron

  • Report this Comment On October 11, 2012, at 10:44 PM, burningdaylight2 wrote:

    Another good example of why you have to manage your own money, make your own investment choices, and be Foolish. There are analysts pontificating on all sides of every of situation. I try to tune out hype and persona.

  • Report this Comment On October 12, 2012, at 9:53 AM, artmuseum wrote:

    Bravo - finally someone, that is Motley Fool,

    gives us the naked truth about the emperor's toga!

  • Report this Comment On October 12, 2012, at 10:51 AM, Mega wrote:

    "return on assets -- arguably the most complete measure of a bank's performance"

    That's a lot of malarkey. ROE and growth in TBV per share are much more complete.

  • Report this Comment On October 12, 2012, at 10:53 AM, TMFMorgan wrote:

    ^ ROE is mostly a function of leverage, not management skill.

  • Report this Comment On October 12, 2012, at 10:53 AM, TMFMorgan wrote:

    Also, use of the word "malarkey" is up at least 1,000x since last night's debate.

  • Report this Comment On October 12, 2012, at 11:25 AM, Mega wrote:

    Performance and skill are two different things.

    How can ROA be complete if it ignores leverage, which is critical to banking?

  • Report this Comment On October 12, 2012, at 11:38 AM, TMFMorgan wrote:

    Here's an example.

    Bank earns ROE of 10% on 10x leverage.

    The CEO -- we'll call him Dick Fuld -- increases leverage to 20x and says, "Look, we've doubled ROE! I'm so good! I'm so smart!" Until the whole thing explodes.

    ROA shows your ability to generate income on a given set of assets. ROE shows your willingness to leverage those assets.

  • Report this Comment On October 12, 2012, at 12:03 PM, whyaduck1128 wrote:

    I don't believe for a second that Jamie Dimon really interested in anyone's well-being other than that of Jamie Dimon. He's just another celebrity who believes his own press clippings. The difference between him and other celebrities is that all the risks he takes are with other people's money.

  • Report this Comment On October 12, 2012, at 12:39 PM, Mega wrote:

    ROE doesn't include any measurement of risk - fair point - but neither does ROA.

    How about another example? Which would you rather own?

    WFC 1.0% 5 year ROA, 10.6% ROE

    FBAK 1.5% 5 year ROA, 8.6% ROE

  • Report this Comment On October 12, 2012, at 1:33 PM, phexac wrote:

    This is a shallow article that plays off the popularity of bashing the banking industry. While there are arguments to be made against JP Morgan's management, concluding that Dimon does not know how to create shareholder value based on a perfunctory look at stock prices and cherry picking 2 random price points is a pretty lame attempt at analysis.

    The other two points are quite weak as well. The trading loss has been blown out of proportion. Expecting to see the names of people involved in annual SEC filings is childish at best.

    To be honest, this article looks to me like someone with a preconceived notion (or a topic assignment?) set out to look for evidence and, unsurprisingly, found it.

  • Report this Comment On October 13, 2012, at 12:33 AM, TomBooker wrote:

    Even at 18th, JPM is a Primary Dealer and has solid returns from $XXXB of Treasuries they had to hold for about 3 secs, before they sold them to the Fed.

    Plus, JPM get .25% from the Fed on the excess Reserves which have cobwebs growing on it.

    How could these banks have such sucky ROA.

    Let's put FASB 157 in effect for calendar Q4 and audit the Fed for JPM vehicles.

    I know, I need to grow-up and face reality.

    The "hedge desk" concept is an obscenity. The explanation of the specific deal was obtuse. The Chief of risk had to go, because her VaR program was broken and the traders and the Exec Committee needed a head. Which was great because, then they could move in the guy who "left" LTCM in '99.

    This stuff is too funny to make up. ;)

    Risk is easy to find, look in the traders' comp. That settles every day. That's how we used to do it when somebody was actually watching. Any big movements up or down and 1 person could audit his book in 5-6 hours.

    It was a bottom-up approach to Systemic risk.

  • Report this Comment On October 15, 2012, at 9:07 PM, Compradore wrote:

    You can't really compare WFC and USB, as these are primarily retail/mortgage banks and not caught up in the whole anti-Wall Street movement. JP Morgan is huge in investment banking and is basically the face of Wall Street.

    And who cares if WFC's ROA is higher than JPM? What's important is what are you PAYING for that ROE/ROA. On a per dollar invested basis you're probably paying about the same

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