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DealBook: JPMorgan Report on Trading Loss Takes Aim at Top Executives

January 16, 2013 by NewsMaker Leave a Comment

Jin Lee/Associated PressJamie Dimon, chief of JPMorgan Chase, at the bank’s headquarters in New York.

The bad bet that cost JPMorgan Chase more than $6 billion has already provoked scrutiny from regulators and federal agents.

Now it is JPMorgan’s turn to assess the actions of its executives.

In a 129-page report attached to its quarterly earnings on Wednesday, the bank dissected the multibillion-dollar trading loss at the chief investment office, outlining a breakdown at the highest levels of management and detailing the “remedial” steps it has taken to heal a rare black eye.

Few surprises emerged from the report, which noted that the bank had overhauled its oversight of the chief investment office and fired the executives responsible for the trade. It was widely expected that the task force would issue a broad critique of the bank’s trading strategy and management.

Still, it is not often that a bank pulls the curtain back on its own executive fiasco. Some within JPMorgan were wary of releasing the report, worried that it would provide a road map for plaintiffs’ lawyers seeking to sue the bank. The chief executive, Jamie Dimon, reportedly supported a broad release of the document, however.

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The report, written by a JPMorgan management “task force,” spread the blame widely. Not even Mr. Dimon, long celebrated for his risk management prowess, was spared. The bank announced on Wednesday that Mr. Dimon, portrayed in the report as somewhat complacent, had his compensation halved to $11.5 million in response to the trading loss.

While the task force report acknowledged that Mr. Dimon could “appropriately rely upon” senior managers who oversaw the trading strategy, it concluded that he “could have better tested his reliance on what he was told.” Mr. Dimon has conceded as much in the past.

The task force, led by Michael J. Cavanagh, the bank’s co-head of corporate and investment banking, hinted at Mr. Dimon’s docked compensation. “Mr. Dimon bears some responsibility,” it said, adding that “Mr. Dimon reports to the board, and the board will weigh the extent of Mr. Dimon’s responsibility.”

Mr. Dimon is one of the best-paid executives on Wall Street. And the former leader of the chief investment office, Ina R. Drew, was one of the highest-paid people at the firm.

Yet the report did not take to task JPMorgan’s lavish compensation policies. “The firm’s compensation system did not unduly incentivize the trading activity that led to the losses,” the report stated.

The bank’s board also received a pass. In a separate 18-page report released on Wednesday, the board aimed to clear itself of any wrongdoing, claiming that directors “discharged their duties with respect to the oversight of the firm.” The board’s report noted that problems were “not timely elevated” to its attention.

The main report from Mr. Cavanagh, while somewhat critical of Mr. Dimon, leveled some of its harshest attacks on the executives who oversaw the trade, a complex credit derivatives bet. “Responsibility for the flaws that allowed the losses to occur lies primarily with C.I.O. management,” the report said.

Ms. Drew, a once-lauded leader of the chief investment office who helped steer the bank through the financial crisis, received the brunt of the blame.

“Ina Drew failed in three critical areas,” the report said, pointing to lax controls, her underestimate of the “magnitude” of the problem and her breakdown in ensuring that her team “understood and vetted the flawed trading strategy and appropriately monitored its execution.”

The management missteps also ensnared Barry L. Zubrow, a former chief risk officer, and Douglas L. Braunstein, formerly the bank’s chief financial officer who is now a vice chairman at the bank.

The Task Force also believes that Barry Zubrow, as head of the Firm-wide Risk organization before he left the position in January 2012, bears significant responsibility for failures of the CIO Risk organization, including its infrastructure and personnel shortcomings, and inadequacies of its limits and controls on the Synthetic Credit Portfolio. The CIO Risk organization was not equipped to properly risk-manage the portfolio during the first quarter of 2012, and it performed ineffectively as the portfolio grew in size, complexity and riskiness during that period.

As the Firm’s Chief Financial Officer, Douglas Braunstein bears responsibility, in the Task Force’s view, for weaknesses in financial controls applicable to the Synthetic Credit Portfolio, as well as for the CIO Finance organization’s failure to have asked more questions or to have sought additional information about the evolution of the portfolio during the first quarter
of 2012.

While the task force takes aim at the top rungs of the firm in New York, the report largely centers on a breakdown at the chief investment office in London. The group was created to invest JPMorgan’s own money and offset potential losses across the bank’s disparate businesses. But a group of traders and executives in the group lost their way early last year.

In response to adverse moves in the markets and regulatory changes, the group made a series of aggressive derivatives trades. As these bets began to sour, the London team doubled down rather than exit the trade, according to the bank.

“The trading strategies that were designed in an effort to achieve the various priorities were poorly conceived and not fully understood” by Ms. Drew and others. The chief investment office, the report added, was “excessively optimistic” when discussing the positions with the firm’s senior management in New York.

The report portrays traders intent on “defending their positions,” even as those positions spun out of control.

Yet the architects of the trade are conspicuously absent from the report. Javier Martin-Artajo, a manager who oversaw the trading strategy from the bank’s London offices; Bruno Iksil, the trader known as the London Whale for placing the outsize bet; and Achilles Macris, the executive in charge of the international chief investment office; were not mentioned by name. The bank said British privacy laws prevented it from naming certain people in the London office.

The report did, however, reiterate earlier concerns about this group’s motivations.

“In the course of the task force’s ensuing work, it became aware of evidence – primarily in the form of electronic communications and taped conversations – that raised questions about the integrity of the marks,” the report said, adding that the bank restated its first-quarter results to reflect that the traders may have underestimated their losses by $459 million.

The Federal Bureau of Investigation is now examining whether the traders falsified records to hide the problems from executives in New York. The investigation is continuing.

This post has been revised to reflect the following correction:

Correction: January 16, 2013

An earlier version of this article referred incorrectly to a former leader of JPMorgan Chase’s chief investment office. The former executive, Ina R. Drew, is a woman.

Article source: http://dealbook.nytimes.com/2013/01/16/jpmorgan-report-on-trading-loss-takes-aim-at-top-executives/?partner=rss&emc=rss

Filed Under: Global Business Tagged With: federal agents, jin lee, road map

You’re the Boss Blog: Step by Step With an Automated Start-Up

September 8, 2011 by NewsMaker Leave a Comment

Courtesy of Hari NYC.Hari Kaur: mixing yoga and jazz with a start-up.

Tech Support

What small-business owners need to know about technology.

In my last post, I described a Web-based service called Wicked Start that can bring a measure of automation to the process of getting a new business off the ground. Wicked Start lays out a sort of template for each of 10 major steps in starting a company, suggesting ways to proceed, pointing out what might be overlooked, and offering various resources and advice. I also briefly mentioned a Wicked Start user: Hari Kaur, a yoga instructor who four months ago opened her own jazz-yoga studio in Manhattan, called Hari NYC. Ms. Kaur tried the Web site at the suggestion of one of her yoga students, who just happens to be the founder of Wicked Start, Bryan Janeczko.

I thought it might be interesting to take a closer look at how Wicked Start proved useful to Ms. Kaur, so for this follow-up post I asked her to walk me through some of the steps that the site took her through. Wicked Start’s 10-step program is laid out on a single Web page called “the Road Map.” At the top of the road map is a progress-tracking bar that tells you at a glance how close you’ve come to completing the entire process. Ms. Kaur’s tracker indicates that she’s 60 percent complete. She noted that she had jumped around among the 10 modules in the road map that represent the 10 start-up steps — Wicked Start doesn’t pressure you to do things in order, or to do all the steps, or to do any of the steps in a particular way. But let’s take them in order, anyway.

The first step, “Starting Block,” asks basic questions like, “What is your idea?” “What is your business model?” and “Who is your competition?” Ms. Kaur said that, having been in the yoga business for 20 years, she was able to breeze through this step. Same for Step 2, “Industry,” which prompts you to identify your industry, network with knowledgeable people, and get some experience. Wicked Start tracks progress in each of the modules, and Ms. Kaur has completed 100 percent of these two steps.

For each suggested action within a module, the site provides the option of checking off a “not applicable” box, so that the program won’t nag you about completing it. If you’re creating a truly solo company, for example, you don’t need to get up to speed on hiring. When Ms. Kaur came to Step 3, “Prototype,” which pushes you to think through and create sample versions of your product or service, her first impulse was to give it an N.A. “I’ve been teaching classes a long time, I didn’t think this applied to me,” she said. “But I decided to try it as an exercise in being more concrete about my plans.”

The results were eye-opening. Ms. Kaur had vaguely imagined that in contrast to typical yoga studios, where classes are back-to-back and large enough to keep as many students moving through the studio as possible, her studio would be a more relaxed, intimate place where a smaller number of students could sit around and talk before and after class. But when the prototype questions pushed her to fill in details like the number of classes, class length and size and how the space would be used, Ms. Kaur realized that keeping revenue high enough could be a problem if she weren’t careful about managing the talk. “I hadn’t been thinking about the concept as a product,” she said. “I realized I needed help in figuring out what I had to do to meet my business needs and still keep my idea.” That help would come in other modules.

Step 4, “Corporate Structure,” seemed simple enough. She already used an accountant to help her with taxes, and she figured she’d just do the routine accounting herself by hand in a book, as she always had as an instructor.

But Step 5, “Business Plan,” got Ms. Kaur thinking again. She said she thought it mostly applied to someone who needed to raise money — she’s self-financing — or who was setting up a more complex manufacturing business. But she followed the prompt to come up with vision and mission statements, and got business-plan religion. Her vision statement emphasized nurturing creativity through a blend of yoga, the arts, and service to those in need, and that in turn led to a mission statement that made music and theater performance and a formal program of volunteer service part of her business plan. “It helped me to see how the different parts of my vision could be connected,” she said. “I hadn’t realized until then how well yoga, jazz and service to others go together.”

A screen shot of Wicked Start’s financing page.

Ms. Kaur skipped Step 6, “Funding,” and went to Step 7, “Business Infrastructure,” though with some trepidation. “The nuts and bolts of a business are not my strength,” she said.

But the module pulled her through setting up her office one step at a time. It nudged her to plan out how her space would be laid out, helping her to realize she needed to create a welcoming, efficient entrance area differentiated from the active class space. It also guided her through choosing computers — she’s getting a MacBook Pro for the office, so it can be folded and placed beneath the desk when not in use to make the front area less cluttered, and a lightweight MacBook Air to carry around.

Wicked Start also offers links at every step to a “resources” page that provides descriptions of and links to businesses that can provide relevant services, and the technology advice led her to Toktumi, a $14.95-per month Internet-based phone system with a number of features tailored for small businesses. “I didn’t know that kind of service existed,” she said. “It looks wonderful, I’m signing up.”

One action item in the infrastructure module prompted her to set up financial controls and a budget, and though she had a budget and was keeping accounting books, she decided she needed to do more. “We weren’t keeping good track of our expenses and budget on an ongoing basis,” she said. Now she’s signing up for Intuit’s QuickBooks online accounting service. She’s been putting off setting it up, but Wicked Start pushed her to enter a deadline for the action. She has selected Sept. 30 and is planning to stick to it. She now has a completion level of 57 percent for the module.

Step 8 is “Hiring,” and the revelation here for Ms. Kaur was that she should set up a board of advisers. “I love this idea,” she said. “I need help understanding how I can plan out my classes to build in talk time, I need help with finance, and I need help with how I can set up a volunteer network of students.” Now she’s inviting a mix of business and non-profit executives and entrepreneurs to join her board, and already has some takers who she thinks will be sources of great advice.

“Operations” is Step 9, and Wicked Start led her to decide to take on Basecamp, the online project-planning and collaboration service. “I love chaos, so I tend to push the limits of not planning,” she said. “But I think this will really help with my long-range training programs and community projects.”

Finally, there’s “Marketing,” Step 10. Ms. Kaur felt this module mostly served to reinforce the strategy she had intuitively adopted, namely to promote herself via word of mouth, especially online. She built her Web site herself via WordPress – it’s pretty impressive, considering — and started three blogs, along with Twitter and Facebook accounts. The module also prompted her to think about her branding, and that led her to speak to a branding specialist who helped her focus on the homey aspects of her studio compared to other yoga studios, and on her interest in being of special help to women.

But she still needs to act on Wicked Start’s suggestions that she open a merchant account and set up a formal process for dealing with customer service — she has them marked as “in progress.” Fair enough. When is a business owner ever 100 percent done?

You can follow David H. Freedman on Twitter and on Facebook.

Article source: http://feeds.nytimes.com/click.phdo?i=cfe42b2f6090f570444d85e10e244e8c

Filed Under: Small Business Tagged With: boss, road map, yoga studio

Without Its Master of Design, Apple Will Face Many Challenges

August 25, 2011 by NewsMaker Leave a Comment

But the Apple team, analysts say, will face a far greater trial in achieving continued success without Mr. Jobs in charge.

Mr. Jobs, who said Wednesday that he was stepping down as Apple’s chief executive, said in an interview shortly after he returned to the company in 1997 that his leadership style had changed over the years, as he matured.

In his early years at Apple, before he was forced out in 1985, Mr. Jobs was notoriously hands-on, meddling with details and berating colleagues. But later, first at Pixar, the computer-animation studio he co-founded, and in his second stint at Apple, he relied more on others, listening more and trusting members of his design and business teams.

In recent years, Mr. Jobs’s role at Apple has been more the corporate equivalent of “an unusually gifted and brilliant orchestra conductor,” said Michael Hawley, a professional pianist and computer scientist who worked for Mr. Jobs and has known him for years. “Steve has done a great job of recruiting a broad and deep talent base.”

At Pixar, with a solid leadership team in place, the studio never missed a beat, and it continued to generate one critically acclaimed and commercially successful hit after another, including “Finding Nemo” and “Wall-E,” long after Mr. Jobs had gone back to Apple.

It is by no means certain, analysts say, that things will go that smoothly for Apple. Mr. Jobs, they note, was far more in the background at Pixar, where creative decisions were guided by John Lasseter. Pixar was sold to Disney for $7.4 billion in 2006.

At Apple, Mr. Jobs’s influence is far more direct. He makes final decisions on product design, if not in detail. No immediate changes, analysts say, will likely be discernible.

“The good news for Apple is that the product road map in this industry is pretty much in place two and three years out,” said David B. Yoffie, a professor at the Harvard Business School. “So 80 percent to 90 percent of what would happen in that time would be the same, even without Steve.”

“The real challenge for Apple,” Mr. Yoffie continued, “will be what happens beyond that road map. Apple is going to need a new leader with a new way of recreating and managing the business in the future.”

Mr. Jobs’s hand-picked successor, Timothy Cook, who has been the company’s chief operating officer, has guided the company impressively during Mr. Jobs’s medical leaves. But his greatest skill is as an operations expert rather than a product-design team leader — Mr. Jobs’s particular talent.

At Apple, Mr. Jobs has been the ultimate arbiter on products. For example, three iPhone prototypes were completed over the course of a year. The first two failed to meet Mr. Jobs’s exacting standards. The third prototype got his nod, and the iPhone shipped in June 2007.

His design decisions, Mr. Jobs explained, were shaped by his understanding of both technology and popular culture. His own study and intuition, not focus groups, were his guide. When a reporter asked what market research went into the iPad, Mr. Jobs replied: “None. It’s not the consumers’ job to know what they want.”

The notion of “taste” — he uses the word frequently — looms large in Mr. Jobs’s business philosophy. His has been honed by a breadth of experience and by the popular culture of his time. When he graduated from high school in Cupertino, Calif., in 1972, he said, “the very strong scent of the 1960s was still there.” He attended Reed College, a progressive liberal arts school in Portland, Ore., but dropped out after a semester.

When discussing Silicon Valley’s lasting contributions to humanity, he mentioned the invention of the microchip and “The Whole Earth Catalog,” a kind of hippie Wikipedia, in the same breath.

Great products, Mr. Jobs once explained, were a triumph of taste, of “trying to expose yourself to the best things humans have done and then trying to bring those things into what you are doing.”

Mr. Yoffie said Mr. Jobs “had a unique combination of visionary creativity and decisiveness,” adding: “No one will replace him.”

Article source: http://feeds.nytimes.com/click.phdo?i=52a84083003182878e7bf92fbe4c9732

Filed Under: Business News Tagged With: final decisions, john lasseter, road map

Utility Starts Filtering Water at Stricken Japanese Nuclear Plant

June 17, 2011 by NewsMaker Leave a Comment

The filtering equipment, hastily cobbled together by several foreign and Japanese companies, is urgently needed because the storage facilities at the power plant are glutted with tens of thousands of tons of radioactive water, and are expected to overflow as soon as next week if nothing is done.

If that occurs, Tokyo Electric, known as Tepco, will be forced to dump thousands of tons of even more tainted water into the ocean, and would probably bring down even more criticism on the embattled company and the government, which has been attacked for its handling of the crisis.

Hoping to avoid releasing any more contaminated water, Tepco in late April set out an ambitious nine-month road map for stabilizing conditions at its nuclear reactors. The plan includes setting up a sprawling water treatment facility that is expected to cost about $663 million. Built under the supervision of Toshiba and Hitachi, the filtration system is meant to sift out oil, and then cesium and other radioactive elements, before desalinating the remaining water.

The system is expected to process about 1,200 tons of water a day, which will be stored in tanks, some of which are being brought to the compound. Some of the filtered water will be reused to cool the reactors, reducing the need for fresh supplies. Tepco plans to filter water for about a year, according to Junichi Matsumoto, a spokesman.

Tepco originally planned to begin operating the facility in July, but it sped up construction because contaminated water had been produced faster than expected at the nuclear plant. A leaky valve halted testing of the system on Thursday, and there were several more delays on Friday, before it finally got running. Tepco acknowledged that the system could falter again and have to be shut down for repairs.

While the filtration system was being built, Tepco reduced the amount of water it was pouring into the plant’s stricken reactors to avoid filling up its storage facilities.

The beginning of the rainy season this month has complicated efforts to slow the creation of toxic water.

“It is something like a chemical plant constructed in a rush, so we have to go by trial and error,” said Hidehiko Nishiyama, deputy director general of the Nuclear and Industrial Safety Agency, referring to the repeated problems that have plagued the project. “We have had to do this in a hurry, so conditions have been very severe.”

In all, about 500 tons of water is newly contaminated at the plant each day, adding to the 105,000 tons of highly radioactive water that is already stored on the site, mostly in the trenches and basements of the turbine and reactor buildings. Many of these areas are perilously near full to the brim. In the trenches at the No. 3 reactor, for example, there was just seven inches to spare on Friday.

Critics contend that while the filtration system will delay the runoff of radioactive water for a while, Tepco will continue to face water disposal problems because it may take years to fully cool the reactors at the plant.

“It’s just a matter of time before it overflows,” said Satoshi Sato, a nuclear engineer who formerly worked for General Electric at the reactors in Fukushima. “It’s an endless game.”

The water stored at the plant is contaminated with cesium 134, cesium 137 and iodine 131 with a total radioactivity estimated at 720,000 terabecquerels, more than the amount of radioactive material that has been spewed into the air at the plant so far.

The new filtration system still faces many hurdles. The companies operating it, including Areva from France and Kurion from the United States, have little experience working with seawater. And Tepco must still dispose of the radioactive material that is being sifted out of the waste water; it is mixed with a chemical agent to create a toxic sludge.

During the summer, Tepco will bring 370 tanks to the Daiichi plant to store an extra 40,400 tons of radioactive water. A mega-float that can store yet more water is moored near the plant.

The contaminated water has been an unavoidable side effect of Tepco’s “feed and bleed” strategy for dealing with the four destroyed reactors at Fukushima Daiichi. To cool them for eventual dismantling, the company is pouring huge volumes of fresh water and sea water directly onto the highly radioactive reactors, which contaminates the water, creating an environmental headache.

The devilish consequences of the company’s efforts became clear in April, when rivers of contaminated water seeped through cracks in drainage pits and flowed directly into the Pacific Ocean. While that leak was plugged, a lack of storage for contaminated water soon forced Tepco to deliberately release an additional 11,500 tons into the sea.

The dumping led to an international outcry. In waters near the plant, a variety of fish and seaweed were found with higher than normal levels of radioactivity, prompting a ban on the sale of marine products harvested from parts of Japan’s Pacific coast.

Several workers at the plant have been burned around their feet and ankles after they stepped in highly radioactive water. Reducing the amount of water in and around the power plant will make it easier for workers to undertake other repairs.

Yasuko Kamiizumi and Kantaro Suzuki contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=5881c469b8bfae3b41f8efb9c9530c67

Filed Under: Business News Tagged With: filtration system, matsumoto, road map