The following entry appeared as part of GovernanceMetrics International’s GMI Blog. GMI is the leading independent provider of global corporate governance and ESG ratings and research. Corporate stakeholders – including leading investors, insurers, auditors, regulators and others – use GovernanceMetrics services to identify and monitor risks related to non-financial measures covering key environmental, social, governance and accounting risk factors.
JPMorgan Chase & Co.'s CEO Jamie Dimon told the market on Thursday that a hedging strategy failure lost the New York financial services firm more than $2 billion. Now investors sold the stock on Friday, despite years of warning signs that the company's managers can be reckless. The shocker: intelligent people make mistakes.
We have more work to do, but it's obvious at this point that there are many errors, sloppiness and bad judgment, Dimon said on a conference call Thursday.
He also said the problematic portfolio still has a lot of risk and volatility, but his team will manage it to maximize economic value for shareholders. What does that mean? Dimon said. It means that we're not going to do something stupid.
Except that JPMorgan apparently just did something stupid – something that cost investors on Friday. The stock closed at $36.98 per share, down nearly 9.3% compared to Thursday.
The stock has lost more than 10% of its value since Lehman Brothers filed for bankruptcy in September 2008, as the global economy recovers from the crisis and Dimon battles to restore some of his firm's credibility in the eyes of the market.
And yet JPMorgan continues getting into crosshairs with regulators. In February this year the U.S. Department of Justice said JPMorgan was one among five mortgage servicers to settle $25 billion over allegations of abusive foreclosure practices in the wake of the housing market collapse. The bank has had too many run-ins to name in one editorial. After its merger with Chase, for example, JPMorgan allegedly failed to separate client money held by its futures and options business between November 2002 and July 2009. As a result the U.K.'s Financial Services Authority said in June 2010 that it gave JPMorgan the regulator's largest fine ever, £33.32 million. The bank also allegedly misled investors in a complex mortgage securities transaction just as the housing market was starting to plummet, and paid $153.6 million to the Securities and Exchange Commission to settle the matter, the regulator said June 2011. Then in July 2011, JPMorgan agreed to pay around $228 million to settle allegations by the SEC and others that it fraudulently rigged municipal bond reinvestment deals, generating millions in ill-gotten gains.
Meanwhile Dimon accuses his regulators of stupidity, which some might call a reckless move too. After former Federal Reserve Chairman Paul Volcker proposed a law intended to prevent banks from making overly risky bets, Dimon said in a Fox Business interview earlier this year that Paul Volcker by his own admission has said he doesn't understand capital markets. . . He has proven that to me, according to news reports.
Carl Levin, D-Mich., chairman of the Senate Permanent Subcommittee on Investigations and co-author of the Merkley-Levin language establishing the Volcker Rule, pounced on the news Thursday. The enormous loss JP Morgan announced today is just the latest evidence that what banks call 'hedges' are often risky bets that so-called 'too big to fail' banks have no business making, he said in a statement.
In other evidence, JPMorgan's financial statements reflect an AGR of 8, indicating higher accounting and governance risk than 92% of comparable companies. The AGR score has been lower than those of most companies since at least March 2009.
GMI gives JPMorgan an F on its corporate governance.
Region: North America
Industry: Financials
Sector: Banks
Market Cap: $ 165,667.2mm (Large Cap)
ESG Rating: F
AGR: Very Aggressive (8)
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