Sunday, April 12, 2015

Keeping bankers honest

UPDATE: In case you think I am mistaken about the dishonesty and incompetence of bankers in general and JPMorganhase in particular, read this.

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I don't know whether to laugh or to cry over this Bloomberg News story about how the world's biggest bank is going to use a computer screen to find "rogue employees."

A February memo from executives including Chief Operating Officer Matt Zames urged employees to flag compliance concerns to managers and reminded them that scandals hurt bonuses for everyone. Dedicated whistle-blower phone lines and e-mail addresses were created for workers to raise issues anonymously.

“The problem we saw last year in FX and the other unacceptable events have implications beyond just a one-time fine,” according to the memo, a copy of which was obtained by Bloomberg News. “They damage our reputation.”
The only meaningful words in those paragraphs were  "scandals hurt bonuses for everyone."

If we look back at notable Wall Street scandals, we find that few were not obvious to anyone who bothered to look. No subtleties that only a computer could spot were involved.

Let's stroll down memory lane and recall some moral plagues of finance:

In the early '90s, Prudential-Bache was revealed to have bilked hundreds of thousands of mostly unsophisticated investors by selling them corrupt limited partnerships. The victims, of course, were surprised, but the managers? Hardly. The head of partnership sales had a record of accepting unethical side deals from general partners, and one of the principal general partners was an ex-con who served time for embezzling from a bank.

A bit later, Nick Leeson destroyed Barings Bank with fraudulent derivatives trades. Were the executives surprised? They shouldn't have been. Leeson had been refused a broker's license in the UK for fraud on his application. So Barings sent him to Asia and put him in charge.

About 10 years after that, AIG failed, but was buoyed up by the Treasury. The problem was in a unit that had written insurance on debt swaps that totaled hundreds of billions of dollars. Were the executives surprised? They shouldn't have been, since they were never asked to set aside any reserves for these policies.

In all three of these examples, the misbehavior was in units that were reporting large profits. The executives supposed to oversee these departments were enjoying bonuses based on the hot performance.

I don't care if Jamie Dimon does hire 2,300 "compliance officers." In most big financial scandals, somebody in compliance had asked questions. Somebody who didn't get on the bonus gravy train. In each case, that somebody was ignored (and sometimes disciplined or dismissed) by someone who was in Wall Street's bonus army.

So what Dimon is doing is a waste of money ($730 million, according to Bloomberg). If Dimon was serious about playing by the rules, he would do two things:

 He would call off his jihad against Congress which is trying (part of it, anyway) to write reguations to control financial fraud.

And he would modify JPMorganChase's bonus. I suggest a three-year delay before any part of an annual bonus vests, and then a gradual payout over 10 years, with automatic clawbacks when bonus babies are found to be crooks.

Dimon won't do that because he's a big bonus baby himself and like all the other chiefs of the big banks, he's incompetent.

How incompetent, you ask. Well, you just read the reasons why anybody who cared to look could have halted the frauds that are daily behavior on Wall Street. If he had done that simple, obvious, easy thing, he'd have saved his company $36,000,000,000 in legal expeses for his bank's misbehavior,

It isn't easy to see why a board of directors would not dismiss a chief executive who racked up $36 billion (about 75 Solyndras) in unnecessary costs.




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