Jamie Dimon's Raise Proves U.S. Regulatory Strategy is a Joke
After a year of multi-billion-dollar penalties, JP Morgan Chase rewards the guy in charge
If you make a big show of punishing someone, and when you're done they still don't think they have a behavior problem, you probably picked the wrong punishment. Every parent on earth knows this implicitly – but does the Obama White House finally get it, too, now, after Jamie Dimon's raise?
When the board of JP Morgan Chase gave its blowdried, tirelessly self-regarding CEO a whopping 74 percent raise – after a year in which the Justice Department blasted the bank with $20 billion in sanctions – it was one of those rare instances where Main Street and Wall Street were mostly in agreement.
Everyone from the Financial Times to Forbes.com to the Huffington Post decried the move. The Wall Street pundits mostly thought it was a dumb play by the Chase board from a self-interest perspective, one guaranteed to inspire further investigations by the government. Meanwhile, the non-financial press generally denounced the raise as a moral obscenity, yet another example of the serial coddling of Wall Street's habitually overcompensated executive class.
Both groups were right. But to me the biggest news was how brutal an indictment Jamie's raise was of the Obama/Holder Justice Department, which continues to profoundly misunderstand the mindset of the finance villains they claim to be regulating.
Chase's responses to Holder's record penalties have been hilarious. Their first move was to make sure people outside the penthouse boardroom took on all the pain, laying off 7,500 employees and freezing salaries for the non-CEO class of line employees.
Next, Chase's board members sat down, put their misshapen heads together, considered the impact of this disastrous year of settlements, and decided to respond by more than doubling the take-home pay of the executive in charge, giving Dimon about $20 million in salary and equity.
In the end, the fines left the decision-making class of the company not just uninjured but triumphant. Dimon's raise was symbolic of a company-wide boost in compensation following the mass layoffs, as average per-employee expenses rose four percent overall, to $122,653, despite the $20 billion burden imposed upon the firm by the state.
There were a variety of reasons for the board's decisions, but one of the big ones, according to various reports, was that bank honchos wanted to send a message to the government that it believed the company had been unfairly treated. This was a notion Dimon himself snootily trumpeted just before his raise was announced.
So Eric Holder and his lieutenants thought they were getting tough on Chase by dropping a monster settlement on the firm, but actually all they did was a) inspire the company to punish thousands of low-level innocent employees, while b) doubly- or triply-reinforcing the mass-narcissistic delusion gripping the company's management that the bank's serial ethical violations – which ranged from providing see-no-evil banking services, to Bernie Madoff, to rigging retail electricity prices, to covering up billions in losses in the "London Whale" episode – were the fault of someone else.
Apparently the bank's board believed the Justice Department was simply caving in to anti-bank sentiment when it targeted Chase, not punishing real offenses. They seem to have decided their only "problem" was that the Justice Department lacked the political will to ignore the public's irrational cries for action.
Again, if you punish a firm, and its executives come out of the episode convinced their only problem was an irrational PR issue, your enforcement strategy probably needs tweaking. It doesn't exactly send much of a message when, mere months after you've imposed record enforcement penalties, the CEO of your target company is being led down Wall Street on a donkey, board members showering him with cash.
In contrast, when the LIBOR scandal blew up in England, British authorities essentially removed Barclays CEO Bob Diamond from office right away, in addition to levying fines and other penalties. We never heard about Bob Diamond getting a raise after LIBOR because as far as the world is concerned, there is no more Bob Diamond. He could be on the moon for all we know. It's not jail, but it's still more of a punishment than Eric Holder dropped on Chase and Jamie Dimon.
Moreover, when the Royal Bank of Scotland got caught up in the same LIBOR scandal, British and European regulators basically set up a base camp in the bank's backside, forcing the company to disclose all of its dirty laundry via a merciless long-term cooperation agreement that has already led to the exposure of another major scandal, the foreign exchange manipulation case.
Meanwhile, in the U.S., Eric Holder drops a bunch of fines on the Chase corporate entity from 20,000 feet and then watches as bank leaders give themselves raises, force low-level underlings to pay the tab, and publicly denounce the settlements as undeserved. And get away with doing it.
Well done, Justice Department! Way to flex those biceps!
There is a school of thought that the massive fines should have worked, if only in the sense that they should have provided Chase with an incentive to avoid future investigations. Adam Hartung at Forbes put it this way, in his critique of the Chase board's decision:
The Board of a troubled bank with billions in trading losses and billions in fines for illegal behavior decided to withhold employee pay raises, but double the CEO compensation, in order to snub the nose of the regulators who have been pointing out years of unethical, if not illegal, behavior? The same regulators who might well see this very action as a good reason to heighten their investigations . . . ? This is some pretty tortured logic.
Yes, that's tortured logic. But the whole point of this entire era of finance-sector corruption is that the leaders of these companies have not been logical. They've not only been depraved and antisocial from a corporate citizenship perspective, they haven't even acted in their own commerical interest.
People like Holder still don't understand that the leaders of these rogue firms have no problem blowing up their own companies and/or imperiling the world economy, so long as they continue to personally get paid.
Regulators have been blind to this for years, decades. It's why the Fed, the OCC, the OTS, the Justice Department and a host of other agenices missed incoming icebergs like the AIG and Lehman disasters, once upon a time.
In fact, since the days of Alan Greenspan and his halcyon dreams of a future of pure self-regulation, the notion that corporate leaders will always act in the interest of their own firms – that they'll behave according to the principled corporate egoism that was an article of faith both for Ayn Rand and acolytes like Greenspan – has been a core basis for broad policies of regulatory restraint.
Greenspan described his faith in corporate self-interest as the "whole intellectual edifice" guiding modern risk management. This edifice didn't admit the even theoretical existence of the corporate executive who behaves with capitalistically impure motives, i.e. the executive who treats his publicly-traded corporation like a mobster treats a restaurant, as a mark to be taken over and burgled for personal profit.
But as we all know by now, when business leaders can get paid tens or hundreds of millions upfront for deals that take years to pan out (or not), when personal compensation isn't tied to the long-term performance of the company, executives will tend to leverage their firms to the hilt in search of short-term profits, and they won't think twice about zooming past safety thresholds. This is irrational behavior from a corporate perspective, sure, but totally rational from a personal-greed perspective.
For instance, the men who ran Lehman Brothers, or the unit of AIG that sank that company, each walked away with hundreds of millions, rich forever. Angelo Mozilo pulled $132 million out of Countrywide in 2008 alone, even as all the rotten subprime loans he'd written over the years were collapsing and his company was losing $704 million that year.
Ultimately even Greenspan conceded that individual greed trumps corporate greed. "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity," he told the House after the 2008 crash, "are in a state of shocked disbelief."
So even Alan Greenspan figured this out eventually, but apparently Eric Holder and Barack Obama still haven't caught on. They decided last year to make a big show of punishing JP Morgan Chase as a symbol of bank corruption, then forgot to punish the actual people who oversaw the bank's misdeeds. This is a little like trying to rein in a class bully by halving his school's budget. It doesn't work. Crimes are committed by people, and justice has to target people, too. Or else the whole thing is a joke, as we found out last week.
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