Wednesday, March 28, 2018

Shareholder capitalism - JP Morgan Edition?

Consider this story of a large financial institution located in the country considered the flag-bearer for rule of law and free-market capitalism. The firm is charged with misleading clients, selling dodgy securities, deceiving and mis-selling to customers, rigging bids and interest rates, foreclosure abuses and mortgage misrepresentations, market manipulation, predatory sales, fraud cover-ups, and so on. In sum, the full spectrum of white collar crimes, many with outright criminal liabilities. And those at the receiving end included both retail customers, regular investors and high-net worth ones, and institutional investors, including public pension funds.

Enough one would have thought for the knives to be out - dismissal of the CEO, replacement of the Board, imprisonment of several employees including maybe even the CEO, radical restructuring of the firm, and so on. And also the country being the paragon of strong institutions and free-press, one would have thought of vociferous outrage if the regulators back-pedalled on any of these. 

So some questions. What happened to the CEO and the Board? What happened to those found responsible for these individual charges? What happened to the firm? 

Answer. None of the expected scenarios. In fact, exactly the opposite. The Chairman became the most influential and admired Bank CEO in the world. The firm became one the largest and most powerful banks in the world. Not one employee at any serious enough levels, leave aside executives, went to jail. The executives got promoted and were paid out fat bonuses. What's more, the CEO became the highest paid Bank CEO in the world, making the median employee's salary in just one day! 

For the record, this is no banana republic and any ordinary small financial institution. This is the United States, home to the Wall Street, corporate governance standards, beacon on shareholder capitalism and so on. These crimes belong to the long list of achievements of JP Morgan under Jaime Dimon that Zero Hedge has listed out. 

In the aftermath of the global financial crisis and spooked by some high-profile bank failures, the remaining few large banks like JP Morgan benefited from state support that helped them through the crisis not just unscathed but bigger and with a larger share of the market. As to Dimon himself, he enriched himself with $28 m in salary for 2017. He is feted everywhere as the face of the new Wall Street. He even sits on the New York Federal Reserve, influencing sabotaging any financial market reform proposal that seriously hurts Wall Street's interests, and advises the President of the United States on national economic policies by sitting on the President's Business Advisory Council. 

JP Morgan settled all these cases with a host of US regulatory agencies - SEC, DOJ, CFPB, FHFA, OCC, and even the FERC - and paid a small amount of over $35 bn in just over 3 years. And these fines came not from the salaries and bonuses of Jaime Dimon and other executives, but from the profits accruable to its shareholders. Not one person at the leadership level has been held accountable for the $35 bn in fines, leave aside all the frauds and crimes. It is almost as if those fines and long list of charges were respectively the cost and legitimate actions to boost the firm's share price and profits. 

In simple terms, Dimon and Co bet the Bank and lost, brought the entire financial markets to the brink and the economy to its knees, and came out rewarded with more adulation and much higher salaries!

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