Is it a hard sweep of a dirty deck, or a natural transition to a younger captain? In the mystery ship that is investment banking, it's hard to say into which category falls JPMorgan Chase's (NYSE:JPM) naming of a new, relatively young CFO. Either way, it feels like a deliberate and concentrated attempt by the bank to continue distancing itself from the "London Whale" scandal of earlier this year, a debacle that saw it book a nearly $6 billion loss in a derivatives trade.
Reputation rescue mission
Unusually for the financial sector, JPMorgan Chase has placed a woman on its financial throne. The lady is Marianne Lake, formerly the CFO of the company's consumer and community banking unit. Young for a top manager at such a big bank (she's 43), Lake has nevertheless put in plenty of time at the company, joining in 2004 after a stint at PricewaterhouseCoopers.
In contrast to her predecessor Douglas Braunstein, quite a bit of her experience in the company derives from the commercial/retail end of its operations, as opposed to the more freewheeling and riskier investment banking side. This is almost certainly not a coincidence. The bank is still reeling from the havoc wreaked by the Whale.
JPMorgan Chase has done a good job recovering financially from that ugly incident, but the damage to reputation is harder to mend. The bank scored a lot of points from investors and other interested parties for its nimble maneuvering during the financial crisis, which saw it post stronger profitability and take less federal bailout money than big rivals Citigroup (NYSE:C) and Bank of America (NYSE:BAC), and lumbering insurance giant AIG (NYSE:AIG).
With the London Whale going belly up, though, the company's fallibility was revealed for all to see. And it probably still feels vulnerable. Hence the need for those associated -- directly or otherwise -- with the incident to find other work or retire. Braunstein was a dead man walking as CEO following the Whale misadventure; he's now a vice chairman whose purview will be "serving the top clients of the firm", a vague and likely not very powerful brief that could mean just about anything.
This makes it look like he's being mothballed, as was apparently the case with Ina Drew, the company's longtime chief investment officer. She was the exec who managed the Whale's division and was unsurprisingly one of the scandal's first casualties, resigning shortly after it came to light.
The healing power of profits
Of course, the best way to recover from any financial tsunami is to post a big profit in its wake. Mark a check next to that item for JPMorgan Chase; the bank had an excellent 3Q. It brought in numbers that far exceeded the estimates of Wall Street analysts still shaking their heads over the Whale's exploits. Net shattered a company record at $5.7 billion -- why, almost the entirety of that ill-fated trading position, and an extremely pleasant 34% increase over 3Q 2011's figure. A more impressive increase was recorded in investment banking fees, which leaped more than three-fold on an annual basis to $1.4 billion.
Still, that pesky whale continues to haunt the company; he's a frequent mention in any story connected with the bank, and the losses he engendered have yet to be fully written off. Hence the benefit of loading the executive suite with people from the relatively safer non-investment banking operations of the company.
The big question is, will these execs change the character of the firm? Investment banking was the No. 2 division for JPMorgan Chase in terms of revenue for 3Q, and it brought in over one-quarter of its net profit. The traders are still hauling in plenty of treasure. If the company tacks harder in a more commercial/retail banking direction and the investment bankers feel like they're being slighted, they might just abandon ship. It's very probable that they're already operating under heightened supervision from management. And if there's one thing investment bankers don't like, it's heightened supervision.
Plus, the temptation must be strong for the bank to push more aggressively into non-IB activities. Its 3Q saw an 8% year-over-year boost in mortgage loan originations, for example, a number that could have been better. As it might well be in the future given the improvements in the housing market. Why continue to let big six rival and mortgage powerhouse Wells Fargo (NYSE:WFC) take much of that business? Perhaps with more resources and a greater concentration on the segment JPMorgan Chase can hitch on a big ride on that wave.
Charting a future course
It's too soon to tell what kind of effect new financial skipper Lake might have on JPMorgan Chase's operations. In a recent article in CFO magazine, she was quoted as saying that "it's not at the top of my mind to make sweeping changes right now." That's the right kind of language to use at a company still getting over the shock of a big trading loss and the resultant storm.
As one of the bank's most powerful and influential execs, though, even the smallest move she makes will have an amplified effect. How and to what extent remain to be seen; the company's investors and other interested parties should watch how this boat sways over the next few months.