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In the midst of hard-core lobbying by the banking industry designed to soften the drive for more stringent financial regulation, some key institutions haven’t exactly covered themselves in glory lately.
In May, there was JPMorgan Chase’s disclosure of a $2 billion trading loss, which has nearly tripled since then and is rumored to be as high as $9 billion. The loss stems from a $100 billion derivatives position on a corporate credit-default index amassed by an employee, Bruno Iksil, aka the “London Whale.” The episode has bruised the reputation of JPMorgan CEO Jamie Dimon and has heightened the debate on where the line crosses between banks hedging risk or making outright bets with their proprietary trading.
Across the pond, the LIBOR scandal involving the esteemed British bank Barclays surfaced a few weeks ago. LIBOR, for London interbank offered rate, is one of the most important numbers in finance. It serves as the base interest rate on trillions of dollars in mortgages, credit cards, student loans and other loans.
Regulators accused Barclays of manipulating the LIBOR rate-setting process from 2005 to 2009 in an effort to boost the bank’s earnings and deflect concerns about its financial health. Barclays has agreed to pay $455 million to settle the charges with U.S. and U.K. regulators. As a result, both the CEO and chairman of the bank have resigned.
These improprieties follow last year’s misappropriation of hundreds of millions in customer funds at securities trading firm MF Global, headed by former Goldman Sachs CEO, former New Jersey governor and former U.S. Senator Jon Corzine.
These seemingly recurring episodes, taking place at institutions led by managers who generally were considered the best in the industry, has regulators questioning whether any executive suite has a grasp on the risks being taken by their firms.
Warren Buffett’s witty remarks have come home to roost—derivatives are financial weapons of mass destruction—and now, as the tide rolls out in the wake of the credit crisis, we are finding out that more financial institutions and employees have been swimming naked. Is it any wonder that Gallup polls show only 21 percent of Americans have confidence in banks?
The JPMorgan trading fiasco shows a culture of cowboy capitalism is still present in the industry. Although the chief investment officer at JPMorgan whose division was responsible for the trading losses was fired, she walked out the door with $31 million in severance awards. This is no way to change the behavior and culture of a firm and doesn’t come anywhere close to passing muster with Main Street. Executives responsible for reckless and risky behavior should suffer severe financial penalties. Those kinds of consequences might change behavior.
Regulation can go only so far in curbing risks and is an imperfect mechanism in changing behavior. For example, the new rules for derivatives bring a level of transparency to the trading in those markets. However, one commodities commissioner, Bart Chilton, complains there are plenty of loopholes in the rules for Wall Street to exploit.
In financial institutions, where trust and integrity are paramount, the corporate culture is determined by executives who project a principled behavior that permeates the entire organization.•
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Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money management firm. His column appears every other week. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.
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