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Dimon Jubilee

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You know you're old (or worse) when you look forward to televised congressional hearings more than you do to Alien prequels (or Mad Men finales). My enthusiasm in this instance was new -- in the past I've not made time to see Jeff Skillings' or Fabrice Tourre's Washington Q&A, nor even Roger Clemens' or Charlie Rangel's. But after catching the Murdoch's in Parliament last year my priorities have shifted.

In that U.K. hearing James Murdoch gave a dire performance, equal parts obsequious and evasive. And while it ultimately cost him his future at News Corp., who could blame him? He had a secret he needed to hide (his knowledge of the extent of the phone and computer hackings), and having been handed his role at the company as opposed to earning it, he had no real confidence to fall back on -- hence evasive and obsequious. Dimon is nothing if not confident, so the question was does he have anything to hide?

In the buildup to the hearing Jim Cramer sounded like Forrest "box of chocolates" Gump or Chauncey "tend to your garden" Gardner in repeating the mantra "What about the runs, Jamie"? Meaning, the daily risk reports Dimon receives would have shown the outsized risk, why didn't he do anything about it before it was too late? Cramer's question is a fair one, though Cramer assumes that the runs actually showed the risk.

What I took away from the hearing is that the run didn't show the risk. The problems at JPM started when the CIO desk was told to reduce its short credit hedge of JPM's loan book. However, in attempting to reduce the hedge the CIO's office, rather than simply buying back the short credit position, instead went long a credit product related to a different set of companies. It's akin to a trading desk that wants to reduce its short position in Coca-Cola buying shares of Pepsi instead of Coke. My impression from Dimon's testimony is that the JPM model that estimates risk assumed that Pepsi and Coke would track each other very closely. As it turned out the Pepsi the CIO desk bought acted more like Facebook in terms of its similarity to Coke, and inevitably the position proved far more risky than the runs indicated.

The fact that it went so awry is at least partially related the fact that the large size they were doing telegraphed to others that they were building up a relatively massive position that they would someday need to exit and the sharks started circling. When the press first reported the outsized and (therefore) troubled positions Dimon testified that he called Ina Drew, who ran the group, and that he was "mislead." I would imagine the conversation went something like, "Hey Ina, do we have a real exposure here? Who is right, our risk report or the press"? And when she said, "the risk report" he believed his highly successful lieutenant who had generated substantial profits for him in the past rather than journalists. He didn't have a third party dig into it further, which was the mistake. Dimon said as much when he said the lesson here is to not give anyone, no matter how successful, so much trust. But to be sure it is a "mistake" that happens every day at any large bank. Even too big to fail banks have finite resources. And as such Dimon didn't feel the need to be evasive on his role in the fiasco, repeatedly admitting guilt in a matter for which he couldn't really be considered all that guilty.

Btu why did the traders do it, offset Coke with Facebook, and take such outsized risk? Dimon was asked if compensation was a factor. In his worst moment of the hearing Dimon hesitated and said, "No, don't think it was a factor." A political insider once said in the run up to the second Gulf War, "This isn't about human rights, it's about oil. And if it's not about oil then Bush is even dumber than we thought." If this trade wasnt about compensation....

The traders in the CIO were trying to generate profits -- they thought buying Pepsi was cheaper and therefore more lucrative than buying back the Coke -- and were willing to take big risks to do it. They surely knew for the possibility of mis-tracking -- in fact they were counting on it in their favor. And why not take big risks? If it worked they'd be paid a fortune and if it didn't they'd lose their jobs (and soon be rehired elsewhere). If the traders' risky actions weren't about compensation, what were they about?

The follow-up question to Dimon asked about clawing back past compensation from the fired CIO personnel. Dimon said that those avenues were being explored. It would have been enjoyable if Dimon were then asked if he too might be clawed back since he, like the CIO traders, had been compensated in the past on their profits. Alas, that question was never asked, though the idea of it is perhaps why Dimon couldn't bring himself to admit compensation played a part when it so clearly had. The asymmetrical compensation is why Wall Street has been such a popular destination for so many talented people since the 1980s when investment banks started going public and were no longer partnerships. And if it were to go away the job as head of JPM is materially less attractive. Overall Dimon gave a very good performance -- as it turns out he doesn't have much to hide regarding the trade in question. But he has a tidbit he'd rather keep private about compensation at the banks.