December 1, 2023

DealBook: JPMorgan’s Board Uses a Pay Cut As a Message

The headquarters of JPMorgan Chase in midtown Manhattan.John Moore/Getty ImagesThe headquarters of JPMorgan Chase in Midtown Manhattan.

Shortly after the markets closed on Tuesday afternoon, an emissary from JPMorgan Chase’s board of directors walked two flights down to the 48th-floor corner office of the bank’s chief executive, Jamie Dimon, to deliver a stark message. The board had voted to slash Mr. Dimon’s annual compensation for 2012 by half.

At first blush, the move appeared to be a stinging rebuke of Mr. Dimon for his failures of leadership that contributed to the bank’s multibillion-dollar trading loss last year.

But the pay cut was actually a message from the board to regulators and worried investors that it was a strong watchdog over the nation’s largest bank, according to several people with knowledge of the matter.

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After facing criticism for its lax oversight, the board wanted to assert its position as a check on top management, according to the people, who declined to be named because the discussions were not public.

Mr. Dimon, who was the highest paid chief executive at a large bank in 2011, was unfazed when he heard the news. On Wednesday, Mr. Dimon said the board “had a tough job” in assessing how to reduce his total compensation for the year. He called the trading episode an “embarrassing mistake” and said, “I respect their decision.”

The decision came after back-to-back board meetings earlier this week where the head of the board’s compensation committee, Lee R. Raymond, the former chief executive of Exxon Mobil who is known for his no-nonsense style, made a compelling pitch to his fellow directors. The group, Mr. Raymond argued, needed to take swift, decisive action.

While a few members were initially skittish about the depths of the proposed cuts, the board voted unanimously to reduce Mr. Dimon’s pay to $11.5 million from $23.1 million a year earlier, according to the people. The directors also voted to release the results of internal investigations into the trading losses, which largely fault other top executives for the problems.

The extent of the cut took some JPMorgan executives by surprise when news of the compensation was disclosed on Wednesday along with the bank’s earnings, which surged to an annual record of $21.3 billion.

“Mr. Dimon bears ultimate responsibility for the failures that led to losses,” the board said in a statement. It added that upon learning the extent of the losses, he “responded forcefully.”

Still, the trading losses, which have swelled to more than $6 billion, have cast a long shadow over the board and management of the bank. Many of JPMorgan’s hallmarks that Mr. Dimon has trumpeted, from its deft management of risk to a deep bench of executive talent, have been partially undercut by the trading fiasco and ensuing upheaval.

Despite the board’s move on pay, some federal regulators are skeptical that the directors have prowess to adequately police risk, according to several current and former regulators with knowledge of the matter. Mr. Dimon, 56, who successfully steered the bank through the turbulence of the 2008 financial crisis relatively unscathed, still maintains a tight grip on the bank.

Some federal regulators worry that the board, which largely exonerated themselves in their internal investigation of the losses, cannot sufficiently push back against the hard-charging Mr. Dimon. Others, the regulators said, are concerned that the directors lack the financial acumen to rein in risky activities.

At the time of the losses, the board’s risk committee had three members, a smaller group than many of its major Wall Street rivals. Also troubling, the regulators said, the three included executives with little banking experience: the president of the American Museum of Natural History, Ellen V. Futter, and David M. Cote, the chief executive of the manufacturer Honeywell. Since the losses were disclosed, Timothy P. Flynn, formerly the chairman of the auditing firm KPMG, joined the risk committee.

Joseph Evangelisti, a JPMorgan spokesman, said, “This is the same board that brought us through the worst financial crisis in our history with flying colors.”

Since revealing the trading losses in May from a soured bet on complex credit derivatives, Mr. Dimon has exerted his powerful influence over the shape and direction of the bank. He has reshuffled the upper echelons of its management, claiming the jobs of some of his most trusted lieutenants. Two notable casualties are Douglas L. Braunstein, who ceded his role as chief financial officer in November, and Barry L. Zubrow, a former chief risk officer, who resigned as head of regulatory affairs late last year. Mr. Braunstein is a vice chairman reporting to Mr. Dimon.

Adding to the turmoil at the top of the bank, Ina R. Drew resigned as head of the chief investment office shortly after the trading losses were announced. Her precipitous fall was followed this year by the departure of James E. Staley, once considered a potential heir to Mr. Dimon.

To replace them, Mr. Dimon has elevated a group of younger executives, most of whom are in their 40s. Some bank analysts and executives at JPMorgan worry that the group does not yet have the institutional knowledge or experience of their more seasoned predecessors, according to several people with knowledge of the matter.

At a conference in San Francisco earlier this month, Mr. Dimon called the current group of executives “the strongest leadership team we have ever had in place.” He mixed his praise, however, with a sharp criticism of others at the bank in the aftermath of the trading losses. “Instead of helping, they were running around with their head chopped off,” he said. Some “acted like children” and wondered “What does this mean for me personally? How’s my reputation?”

At the same time, Mr. Dimon has emerged relatively unscathed. While critical of Mr. Dimon, an internal report, led by Michael J. Cavanagh, a head of the corporate and investment bank, leveled its most scathing attacks on the executives who directly oversaw the London traders who made increasingly outsize wagers in the bank’s chief investment office. “Responsibility for the flaws that allowed the losses to occur lies primarily with C.I.O. management,” the report, which was released on Wednesday, said. Also ensnared are Mr. Zubrow and Mr. Braunstein.

The cuts target Mr. Dimon’s bonus compensation. While his salary remained the same from a year earlier at $1.5 million, his bonus was whittled down to $10 million, paid out in restricted stock.

Still, Mr. Dimon has accumulated much wealth in his years at the bank. He owns bank shares valued at $263 million.

Ben Protess contributed reporting.

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Stocks Dip on Wall Street

The Dow Jones industrial average was down 84.73 points, or 0.74 percent, in early trading, at 11,434.12. The Standard and Poor’s 500-stock index, seen as a more complete barometer of the overall market, was down 10.3 points, or 0.85 percent, at 1,196.95. The Nasdaq composite index was down 0.25 percent.

The euro also gave up some of its recent gains against the dollar. It was down 0.5 percent at $1.3713.

Before markets opened in New York, JPMorgan Chase said third quarter income fell 4 percent on weaker investment banking and trading results and a loss in its private equity division. The bank also set aside $1 billion for litigation tied to poorly-written mortgage loans and securities. Earnings per share were $1.02, while analysts surveyed by FactSet forecast the bank would earn 91 cents per share.

Adding to pressure on stocks was news that China’s trade surplus narrowed for a second straight month in September, suggesting further cooling in the Chinese and global economies. The country’s trade surplus fell to $17.8 billion in August, well below July’s 30-month high of $31.5 billion, largely on the back of lower export growth — a sign that the stalling global economic recovery is could weigh on China’s elevated economic growth.

In Europe, Britain’s FTSE 100 fell 0.9 percent, while Germany’s DAX slipped 1.2. France’s CAC 40 was 1 percent lower.

Stocks have been buoyed this week as euro zone officials have indicated they are willing to take decisive action to resolve their sovereign debt crisis, such as larger write-downs on Greek debt and a push to make banks strengthen their capital against resulting losses.

New steps are seen as positive for stocks because a disorderly default by Greece and resulting losses to banks on its government bonds could cause a wider banking crisis, choking off credit to the wider economy and causing a recession.

But key details are lacking as officials rush to put their plans together ahead of a European summit 10 days from now and a Group of 20 summit of rich and developing countries in early November.

“The period of good feelings may well be drawing to a close,” said Stephen Lewis at Monument Securities in London. “This is because the tight timetable that the November G20 meeting imposes will leave little more time to settle intractable problems. Devising a ‘roadmap’, that is, an analysis of what needs to be done, is the easy part. To come up with viable measures will be more difficult.”

Attention later will also be centered on the next batch of earnings due, including Google. So far, the earnings released, from the likes of Alcoa and PepsiCo have presented investors with mixed news about the world’s largest economy.

News of the European proposals sketched out by European Commission president José Manuel Barroso on Wednesday helped Asian shares overnight. Japan’s Nikkei 225 index climbed 1 percent to 8,823.25. Hong Kong’s Hang Seng jumped 2.3 percent to 18,757.81 and South Korea’s Kospi index rose 0.8 percent to 1,823.10.

Australia’s SP/ASX 200 gained 1 percent to 4,244.50. The Shanghai Composite Index advanced 0.8 percent to 2,438.79.

Oil prices meanwhile tracked European equities lower — benchmark oil for November delivery was down $1.48 to $84.09 per barrel in electronic trading on the New York Mercantile Exchange.

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Vote of Confidence Is Only the First Step for Greece

But in many ways, that will be the easy part.

The payment of 12 billion euros will help Greece pay its debts coming due only until September. After that, Greece still faces obstacles to winning tens of billions more in a much bigger bailout package that is essential to its survival through next year.

It has to persuade private banks and other companies that hold its government debt to take part in the bailout by agreeing to lend the country the same amount of money again after their bonds are redeemed. Only then will other European countries and the International Monetary Fund agree to put up their share of the new bailout.

The I.M.F.’s acting managing director, John Lipsky, warned that the European Union must be prepared to underwrite the finances of the Greek state for the next year — a much tougher position than European officials expected — in order for the I.M.F. to release its portion of the aid.

“That needs to be done before we can move forward and we are hopeful that those conditions will be met with alacrity,” Mr. Lipsky said.

If Greece’s economic emergency is not dealt with quickly, the I.M.F. said in a report, there is a risk of contagion to other countries, starting with Ireland and Portugal, but possibly spreading to Spain, Italy and even Belgium.

“With deeply intertwined fiscal and financial problems, failure to undertake decisive action could rapidly spread the tensions to the core of the euro areas and result in large global spillovers,” the I.M.F. said.

Greece needed a 110 billion euro bailout last year from European governments and the I.M.F. The hope was that the country’s economy would be growing by now and that it could start selling bonds in the markets to raise money. But still in the grip of its economic crisis, it is short on cash to pay interest to private investors that have lent it money through the years in the form of government bonds.

As a result, Greece is seeking a second bailout from the rest of Europe and the I.M.F., possibly as much as 100 billion euros.

At stake in the negotiations is the degree to which Greece’s bondholders would agree to take a hit on their investments.

One aggressive option, proposed by Germany, was for banks to be forced to exchange all of their Greek debt for bonds of a longer maturity.

But such forced restructuring would have constituted a default and appears to have been ruled out, at least for now, after Germany backed down last week.

The other option is a voluntary rollover of maturing debt. Investors agree to buy their bonds again when they come due.

“The real question is what their incentive will be for all of the banks to roll over their short term bonds,” said William Rhodes, a former senior vice chairman of Citigroup who has been involved with several emerging market debt crises. “How do you do a voluntary deal and get everyone on board that does not trigger a default?”

If there is a delay in payment, even if voluntary, that could be considered a technical default. Analysts say that would spook markets, potentially leading to downgrades of the banks that own much of the debt, initiating payment clauses in insurance contracts written on Greek debt, and leading to questions being raised about the creditworthiness of other highly indebted European nations.

Stocks slipped on Monday in Europe, with the Dax in Germany down 0.2 percent, and the CAC 40 in France down 0.6 percent.

According to Moody’s, the credit rating agency, a delay in bond payments would not necessarily be considered a default if investors did not feel pressured into taking part in a plan to delay bond payments owed them.

But according to Nicolas Véron, a senior fellow at Bruegel, a research institute in Brussels, the definition of what is a default is deeply uncertain, and even a voluntary debt exchange could be challenged by holders of credit-default swaps, in a court of law.

“Part of the problem is there are different judges,” he said. “There are the rating agencies. There is the E.C.B., and what debt it will accept, and the International Swaps and Derivatives Association and its views on credit-default swaps. You may have three different opinions.”

Already, concerns are mounting about Greek banks, which are among the biggest holders of Greek government debt. There are worries about their ability to lend if they are swept up in a general default, crushing the Greek economy even further.

There are also worries about the exposure of American money market funds, which have large holdings of debt issued by European banks. Another uncertainty is the exposure banks have in insurance written on the debt of Greece, Ireland and Portugal.

To get buy-in from the banks and other private debtholders, Greece must find someone who can go out to persuade the private investors to get on board.

The spotlight is falling on Jean-Claude Trichet, president of the European Central Bank, who appears to be one of the few people who could credibly make the argument that private sector banks should join in the sacrifice.

But Mr. Trichet is in an increasingly uncomfortable position, having already led the central bank deep into uncertain territory at the center of efforts to bail out the euro zone’s troubled economies. Without him making the arguments, it is unclear how Greece’s bondholders are going to be won over.

“There is every possibility that at the end of this Greece is going to default anyway,” said Kenneth S. Rogoff, a former chief economist at the I.M.F. who is now a Harvard professor.

The European ministers plan to revisit the aid to Greece on July 3 following the Greek Parliament’s vote of confidence in the reshuffled government led by Prime Minister George Papandreou. The ministers also insist that Athens make a firm commitment to raise cash by selling assets and cutting spending. Mr. Papandreou faces a trial of strength both with opposition deputies in Parliament and with protesters on the streets.

Stephen Castle contributed reporting.

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Reuters Breakingviews: S.&P. States the Obvious

S. P.’s shift on Monday to a negative outlook on the country’s AAA credit shouldn’t come as any surprise. But it should provide a reality check.

S. P. doubts that President Obama and Congressional Democrats and Republicans are capable of reaching a meaningful agreement to rein in deficits, which it believes could push the nation’s debt load above 90 percent of gross domestic product by 2013. And even if they do reach agreement, there’s nothing to stop lawmakers from reversing course in the future.

Markets, which should be well acquainted with America’s ugly fiscal situation, took the news on the chin. Stocks initially fell around 2 percent while the yield on the 30-year Treasury bond spiked as much as 0.11 of a percentage point. However brief, there’s a chance such a jolt could help refocus the myopic obsession of many investors on short-term performance with the somewhat more distant but still real challenges.

Austan Goolsbee, a White House economic adviser, called S. P.’s decision a political judgment. But the heart of the rating firm’s reasoning is that without decisive action, America will soon look measurably sicker in financial terms than other AAA-rated countries and it will be increasingly difficult to justify its top rating.

Unfortunately, the Federal Reserve’s current ultralow interest rates make doomsday predications seem abstract, even to supposedly rational market players. That’s even more true inside the Beltway, where budget dogma on both sides of the aisle still persists instead of a pragmatic assessment of revenue and spending — and the communication to voters of the hard realities — that should be under way.

S. P. and its peers would hate to cut America’s rating. That would fracture the bedrock on which the debt world has rested for decades. But S. P. is right to up the ante. Any lawmakers living in Washington’s spendthrift past should perhaps heed the lyrics of “Once Upon a Time,” the song one participant reported hearing while waiting on hold for the credit rater’s conference call: “How we always laughed, as though tomorrow wasn’t there.”

The ‘Fair’ Price for Oil

The rulers of Saudi Arabia have long thought they could tell what a “fair” price for oil should be. Before the unrest on its borders, the country repeated its long-held view that the figure was $70 to $80 a barrel.

A recent pledge for a huge increase in spending on everything from housing to the religious police, however, is pushing Saudi Arabia to its largest budget. No wonder it now thinks that the market is “oversupplied,” as Saudi’s oil minister, Ali al-Naimi, said this weekend. What’s “fair” may prove more costly.

The kingdom will need an average oil price of at least $80 a barrel to balance its budget during 2011, according to various estimates. This is one of the highest break-even prices within the bloc of six Persian Gulf nations.

Supply disruptions in Libya, a country that produces a type of sweet crude that Saudi Arabia cannot easily replace, and the threat of similar problems erupting elsewhere, have pushed prices well above Saudi Arabia’s needs, to around $120 a barrel for Brent crude and $110 for West Texas Intermediate crude.

It is not in Saudi Arabia’s interests to keep prices so high that they threaten the global economy, irk Western allies and provide incentives for developing alternative fuels. But if higher spending becomes a new norm and the kingdom wants to avoid taking on new debt or eating into its foreign reserves, then it must adjust its view of what’s fair.

The previous margin between the country’s break-even requirements and its stated price target suggests a fair price closer to $90 to $100 a barrel. But even if spending comes down later, higher price expectations will be supported by another domestic factor: the country’s explosive growth in domestic oil consumption.

Speculation has long swirled about the longevity of Saudi Arabia’s reserves. Record spending and its own oil consumption, which amounts to about 15 percent of production by some estimates, suggest that domestic issues will probably force it to shift its consideration of what’s “fair” to something closer to $100 a barrel. Importers should take note.


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