Regulators to JPMorgan's Management: Shape Up!

Following two day of losses, stocks opened higher this morning, with the S&P 500 (^GSPC +0.13%) and the narrower, price-weighted Dow Jones Industrial Average (^DJI +0.16%) up 0.57% and 0.53%, respectively, as of 10:05 a.m. EDT. The Cypriot crisis remains unresolved, but without direct evidence to support it, the notion of contagion to other Southern European nations may be losing its poignancy with U.S. investors.

Downgrading a Dimon
Dow component JPMorgan's (JPM +0.25%) main regulator, the Office of the Comptroller of the Currency, or OCC, downgraded the bank's management rating last July from "satisfactory" to "needs improvement." This tidbit was reported last week when the full results of big banks' capital plans were released, but The Wall Street Journal published a story yesterday that unearths some of the details concerning this confidential process.

The OCC scores banks according to a framework that goes by the acronym CAMELS, wherein each letter stands for one facet of the bank's condition ("M" stands for management). In a move that was relayed to JPMorgan on July 27 last year, the OCC lowered its management rating from two to three (on a scale of one to five). According to the OCC, a score of three indicates that "the capabilities of management or the board of directors may be insufficient" and that management and board performance "need improvement."

The downgrade was partially -- but not wholly -- the result of the "London Whale" fiasco, which cost the bank roughly $6 billion in trading losses and unquantifiable (but substantial) reputational damage.  

What are the implications for JPMorgan shareholders? I continue to think JPMorgan's management is first-rate -- on par with that of Wells Fargo and Goldman Sachs. However, the latter two are not hybrids in the way a universal bank like JPMorgan is. Combining a huge investment bank and a commercial bank adds a layer of complexity to what are, separately, phenomenally complex organizations. "Too big to manage" is a genuine problem for any management, no matter how skilled.