JP Morgan, Jamie Dimon and Trust
JP Morgan's 2.3 billion dollar trading loss has led to a
media furor and questions about trust in the financial system but
lets put things in perspective. First, the JP Morgan's loss has not put
the company in a precarious financial position, much less
the entire financial system. Second, JP Morgan immediately disclosed
the trades to regulators and the press and was very open in admitting that
a) they were to blame and b) that the root cause was poor management. From
a transparency and trust perspective this makes JP Morgan very
different than News Corp, Lehman Brothers, Toyota and many other companies that
have had major trust violations but failed to carefully examine the systemic
root causes in a transparent manner. Third, there is
concrete evidence that the company is holding poor managers accountable
(Ina Drew resignation) and fixing flawed aspects of their management systems
(change in value at risk model).
Jamie Dimon has been particularly singled out as
having fallen from his high trust perch but lets not rush to
judgment. Isn’t it possible that the transparency and accountability in
response to this surprising loss and volatility are further examples that JP
Morgan is really a better managed bank than the others which is why they moved
away from the toxic financial instruments for which they were the innovators
and why they faired well during the financial crisis? All
organizations that innovate and take risks will have losses. It is a violation
of trust if firms serve themselves but put the wider group of stakeholders at
risk (e.g., main street and taxpayers) and if deception or fraud is involved.
At the moment, there is no clear evidence that this is the case with
the JP Morgan trades.
The larger question is have we made
the financial system safer yet and why was Dimon critical of Dodd
Frank and the Volker rule. I think the answer is that just like Sarbanes Oxley
did not solve the problem of Enron like fraud, Dodd Frank has not made the
financial system safe yet. Dimon has been critical of the Volker rule because
hedging has been BOTH a source of profit for banks and a way
to manage risk. Many have argued, including Sheila Bair former head
of the FDIC, that exactly how the Volker rule can be operationalized to contain
systemic risk and allow large banks to operate in fast moving global markets
has NOT been adequately clarified yet. Dimon and others have said that
regulation is part of the answer to restoring trust but it has to be
the right amount and type of regulation. He is right and the failure of
Sarbanes Oxley, which added many rules and costs to the system, to protect
investors during the financial crisis of 2008 is proof of this. As my
colleagues and I have written in our chapter on trust and the
global financial crisis in the Oxford University Press book
"Restoring Trust," sustaining trust requires a foundation of
trustworthiness. Regulation is a necessary but not sufficient component of
establishing trustworthiness but it must be effective and this requires
evaluation and correction of unintended consequences and flaws. Knee jerk
reactions and accusations will not get us closer to restoring trust. I wish
that Senator Carl Levin was as outspoken about the legal corruption in
Washington but he is right that we have a lot of work to do to restore trust in the financial system. My purpose here is not to defend banks, JP Morgan or Jamie Dimon but to think critically about trustworthiness of people, companies and systems. The restoration of trust will not get done with smoke and mirrors, bluster or
rushing to judgment. Real trustworthiness takes time, self-examination and
great management. Call me a skeptic, but given how they reacted to this crisis,
I am not yet convinced that JP Morgan isn’t a key part of the solution to the
trust crisis in banks.
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