The first rule in banking, even before know thy customer, is never aggravate your regulator. JPMorgan is usefully illustrating the importance of this dictum by paying through the nose for embarrassing the many agencies charged with overseeing the largest U.S. bank by assets. Though the many fines the firm is paying are unlikely to cost Chief Executive Jamie Dimon his job, they provide a useful lesson in the importance of hubris management.
The $700 million JPMorgan may disgorge this week to regulators over the “London Whale” trade is the rancid cherry on the cake that Dimon has baked with shareholders’ flour and sugar – after chiding his overseers for years and then making them look stupid. A series of bad bets on illiquid securities by traders in the group’s chief investment office took a $6 billion bite out of JPMorgan’s revenue last year.
Moreover, the existence of the trades made it look as though the bank’s regulators were dosing Ambien on the job. Indeed, rival banks puzzled every quarter over JPMorgan’s ability to squeeze out an extra $1 billion or so from its holdings of what were supposedly low-risk, liquid securities. That bank examiners holed up in JPMorgan’s offices missed this was mystifying.
Adding insult to embarrassment is Dimon’s propensity to lash out publicly at regulators. In June 2011, he publicly hectored Ben Bernanke on whether the Federal Reserve had properly conducted a cost-benefit analysis of financial reforms.
So as soon as JPMorgan slipped, and exposed its weaknesses as a risk manager, it was no surprise that the many Dimon-bruised regulators went on the warpath. With the current settlement, and another $2.5 billion JPMorgan may add to its legal reserves by December, the bank will have set aside some $21 billion in the past four years.
Even pathetic Bank of America has racked up just $15 billion of litigation reserves since 2010. All else being equal, JPMorgan would have made an extra 21 percent in profit between 2010 and 2012, and would have boosted its 2012 return on equity to 13.5 percent from 11 percent.
Dimon has run a far sturdier ship than his money-center rivals, once all the non-litigation losses from the crisis are folded in. But the mounting legal tab rather undermines any claims of propriety. It also suggests a simple lesson: don’t bite the hand that regulates.