Editor’s Note: Earlier this week, this post, written by Mark T.Williams, a former Federal Reserve Bank examiner who teaches risk-management at Boston University School of Management, is author of “Uncontrolled Risk” about the rise and fall of Lehman Brothers ran with the headline, “The Cost of Doing Bad Business – Jamie Dimon Must Go.” As of today, Dimon has relinquished his role as chairman of JPMorgan Chase Banking Unit.
The willingness of JPMorgan’s board and shareholders to keep Jamie Dimon at the helm has become increasingly costly. Recent multibillion dollar legal settlements and the prospects of more civil and criminal actions ahead, underscore a big bank ‘gone bad.’ ‘These mounting shareholder expenses also reopen the debate of whether Dimon is an asset or a liability.
As the nation’s largest bank, JPMorgan has morphed into an overly aggressive hedge fund disguised as a FDIC-insured commercial bank. Rapidly, the King of Wall Street is looking more like all the other bank CEOs who chased risky profits at the expense of market integrity, trust and honesty.
As chairman and CEO since 2005, Dimon must be held accountable for both good and bad things that have happened at JPMorgan. In 2011, he won the moniker of highest paid banker on Wall Street, earning $23 million. But during his reign, the sheer scope and size of the bank’s misdeeds have become mindboggling.
Risky practices include the full gambit — questionable mortgage practices, the $6 billion “London Whale” trading scandal, bribery of Chinese officials, shoddy debt collection practices, the Libor-fixing probe, violations of the federal mortgage insurance program, charging credit-card customers for services never received, manipulation of western electricity markets, compliance weaknesses in money laundering controls, a settlement relating to client money taken by MF Global, and a potential damaging link to financial psychopath Bernie Madoff.
Remarkably, despite these wrongdoings, Dimon has remained immovable. This is in stark contrast to Bob Diamond, the former CEO of rival Barclays who was fired last year for far lesser transgressions. Even as late as the May 2013 annual shareholders meeting, it appeared Dimon gained immunity as he was allowed to retain his dual — but conflicted — role as both chairman and CEO.
Now things are different. The current regulatory feeding frenzy coupled with mounting multibillion dollar fines are the game changers.
Since 2010, JPMorgan has paid out a staggering $17 billion in legal settlements. Estimated fines this year could top $15 billion or 10 percent of the bank’s tangible capital. Important regulatory trust has also been broken as JPMorgan intentionally hid those “London Whale” trading losses from its primary regulator and berated the Office of the Comptroller of the Currency (OCC) as stupid. Meantime, Dimon has remained outspoken in his attacks against Dodd-Frank legislation designed to help keep big banks in check.
Increasingly, government regulators — including the Securities and Exchange Commission, the U.S. Attorney General, and the Federal Reserve — are gaining a louder voice as they push for historic settlements, tougher criminal prosecution and restored trust in the market. Yet since the crisis of 2008, JPMorgan has grown bigger, more powerful and apparently more unmanageable, even for a supposedly capable CEO. With economic stability returning, it is an opportune time to break up this too-big-to-fail bank into smaller, less risky, and more manageable pieces.
Historically, Dimon hid behind stock performance to validate his existence. In the past few months, this cover has disappeared as JPMorgan stock has lagged peers and is down about 10 percent from its 52-week high. After six years the stock trades only near where it did in pre-crisis 2007. Regulators are losing confidence in Jamie Dimon. In July 2012 the OCC also dealt a blow to bank credibility, downgrading management to a “3” or a “needs improvement” rating — a weak designation far below what a bank of JPMorgan’s stature should allow.
Crisis-era acquisitions of Bear Stearns and Washington Mutual have proved disastrous while billion-dollar settlements and the threat of future criminal actions only reignite debate of whether shareholders are being protected or harmed. Independent of shareholder action, board members have a clear fiduciary duty to ensure the best interests of shareholders. Accumulating regulatory actions are a wakeup call, providing JPMorgan’s board members with a billion more reasons why they need to rethink who occupies the corner office.
Firing Jamie Dimon would be just what the market needs and part of a healthy cleansing process. A properly functioning capital market should reward bank CEOs who create value — and punish those that destroy it. Market-pricing signals only get distorted if underperforming CEOs are allowed to stay entrenched. I’ll bet that if Dimon is replaced, JPMorgan stock will rally. Until then, regulators will continue to extract their pound of flesh, upping the stakes for CEO change.