Internal controls have failed spectacularly at the supposedly best-managed bank in the world, writes Fleming for European Voice. If this could happen at JPMorgan, it is not unreasonable to wonder what more damaging blunders could erupt elsewhere. (Includes quote from Graham Bishop.)
Aside perhaps from Rothschild, there is no more illustrious name in international banking than JPMorgan. It is a firm which, for a century, has exemplified the British poet Lord Byron's lines about the power of bankers: “every loan...seats a nation or upsets a throne”.
So it is easy to guess at the dismay that will have engulfed this august institution as it reluctantly conceded, on 10 May, that it had lost $2 billion (€1.6 billion) in derivatives trading, perhaps $5 billion (€4 billion), if the Wall Street Journal is to be believed. It happened in the chief investment office (CIO), a unit that was supposedly under the close scrutiny of its most senior executives, including Jamie Dimon – a man who, unwisely, critics say, fills the combined roles of chairman and chief executive.
The bank's swashbuckling founder, John Pierpont Morgan Snr, was the colossus of late 19th-century Wall Street. At times a massive risk-taker himself, he might have applauded the speculative elan of the woman who led the CIO, Ina Drew, and of Frenchman Bruno Iksil, the executive allegedly most directly responsible for the loss-making deals. He was nicknamed “the London Whale” because of the scale of the positions he took.
But JPMorgan bankers from more recent decades, the late Dennis Weatherstone, the British citizen who rose from teenage bookkeeper in London to become, in 1990, the first foreign chief executive of a leading American bank, or Weatherstone's mentor, the urbane Lewis Preston, would surely now be grinding their teeth at the reputational damage that the bank is suffering.
The loss reeks of ignorance, indiscipline and hubris at the very highest levels of an institution, known since a merger in 2000 as JPMorgan Chase, which had taken to preening itself about how, virtually alone on Wall Street, it had come unscathed through the financial crisis that began in 2007. Close to the Obama administration, Dimon was seen as the most influential bank lobbyist in Washington, DC.
So cocksure had Dimon become that last September he crudely harangued Mark Carney, the highly regarded governor of the Bank of Canada, about Western governments' excessive regulatory zeal, which he described as “anti-American”. After 20 minutes listening, silently, to this insolence, Carney had to walk out, leaving a meeting of two dozen of the world's most senior bankers and officials.
With JPMorgan keeping a lid on the causes of its distress, outsiders can only guess at what precisely went wrong at the CIO. We do know, however, that the CIO is based in London. So this is a European, not just a Wall Street story.
JPMorgan's apologists are pointing out that the losses are small in relation to both the bank's capital and assets. This is true, but over-simplistic.
Since late 2007, banks and their top managers have been pressed to get better control of the risks that they are running, to curb rampant speculation, to make sure internal controls are rigorous and that top officials understand what their subordinates are doing. Yet, at the supposedly best-managed bank in the world, internal controls have spectacularly failed. If this could happen at JPMorgan, it is not unreasonable to wonder what more damaging blunders could erupt elsewhere.
Think for a moment of the blow to financial markets' confidence if, instead of JPMorgan, one of its European peers, a BNP Paribas or Deutsche Bank, had announced such losses in the midst of the latest intensification of Europe's sovereign-debt crisis. Remember, it is not so long ago that France's giant Société Générale was struck by losses of €5 billion run up by an allegedly “rogue” trader.
Since JPMorgan's losses were incurred in London, is this another case of British regulators and supervisors asleep at the wheel, or too intimidated by Dimon, or too worried about protecting the City as a financial centre, to examine the bank too closely? After all, according to the Financial Times, the British Bankers' Association, the bankers' own lobby group, was known almost two years ago to be uneasy about the scale of JPMorgan's position-taking.
European woes
JPMorgan's losses are already making waves on this side of the Atlantic. “There is no doubt that events at JPMorgan will trigger more demands in the European Parliament for even closer scrutiny of banks' operations”, says Graham Bishop, an independent consultant on European finance.
In these troubled times Europe remains heavily dependent on its banks to keep the economic wheels turning. They deliver about 80 per cent of private sector corporate finance. In the United States, where companies rely mainly on bond and securities markets, the figure is nearer 20 per cent.
Moreover, as the sovereign debt crisis shows, the deep relationship between governments and banks is another European vulnerability, contributing to the negative feedback loops, or vicious circles, which have brought the single currency to the brink of collapse.
And it is not just the eurozone that is vulnerable. As participants at a European Bank for Reconstruction and Development seminar in London heard last week, big western EU banks control some 80 per cent of the bank assets in the central and eastern European countries. In response to financial market and government regulatory demands they are still shrinking their lending in the region as well as in their home markets. This is part of a generalised effort to strengthen these institutions, so called “deleveraging”. It is putting additional pressures on central and eastern European economies, in spite of official efforts, through the so-called Vienna Initiative II, to manage this adjustment.
In the longer term, stricter regulatory and supervisory oversight, tighter liquidity rules and bigger capital buffers, are needed. Right now, however, given Europe's weak economic recovery prospects, regulators should be fine-tuning the process, and governments urgently injecting new capital into weaker banks wherever they are located.
© European Voice
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