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.