(This column appeared in the May 21 edition of Newsweek magazine.)
A time-honored tradition for handling executive succession on Wall Street is the practice of putting two ferrets in a sack, figuratively speaking. That’s when a bank takes two promising managers and makes them co-heads of the same business. The expectation is that, like two feral mammals clawing each other in the darkness, one will emerge victorious. He will become CEO. The other is named deputy vice chairman of Bolivian equities. JPMorgan has yet to officially haul out the burlap sack, but the $2 billion trading loss it disclosed two weeks ago has accelerated the contest to succeed Jamie Dimon at the top of America’s biggest financial institution.
Not that Dimon is leaving anytime soon. His hair may be silver, but he’s only 56 and has every intention of running the place into his 60s. Moreover, the losses from bets on funky derivatives incurred by the chief investment office in London look manageable for a bank that minted a $5.4 billion profit in the first quarter and boasts nearly $200 billion in capital. But as Dimon readily admits, the trades were dumb. They certainly undermined many of his public arguments for resisting additional regulation of the banking industry. As a consequence, the question of who will one day fill Dimon’s wingtips has become a money-industry parlor game.
For clues, look no further than the cleanup crew for the trading snafu. Two of Dimon’s most capable lieutenants, Michael Cavanagh and Matt Zames, have been handed high-profile roles that will help determine their suitability in the eyes of the board, investors, and regulators to eventually run the $2.32 trillion bank. Zames, 41, is taking over the unit that made the crummy trades. Cavanagh, 46, is leading a team of senior officers to “oversee and coordinate” the bank’s response to the affair.
Both are important tasks. Zames must unwind the problem trades while minimizing losses. Given the size and public nature of JPMorgan’s wagers, that won’t be simple. Having run JPMorgan’s bond trading desk, he should be well-suited to the challenge, though it may be his stint at Long-Term Capital Management, the hedge fund that collapsed in 1998, that’s more applicable to the current situation.
But it’s Cavanagh’s job that has far larger ramifications for the bank as a whole. As Dimon says, “Mike will ensure that best practices and lessons learned are carried across the firm.” Read between the lines, and that means the former chief financial officer’s recommendations may include changes to governance, risk management and corporate controls that implicate flaws in Dimon’s stewardship. How successfully Cavanagh can constructively criticize his boss for the greater good of the institution may determine whether he emerges from the sack as bloodied ferret or CEO.