Yves here. This has been such a busy week that I’ve been remiss about commenting on how Dimon’s board rewarded him despite the London Whale fiasco and the revelation of pervasive regulatory abuses. Clearly, they thought he bought the bank’s way out of trouble on the cheap, disproving the wailing in the financial firm toadying media that the Morgan bank had been ill-treated by the Administration.
By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Originally published at New Economic Perspectives
Andrew Ross Sorkin (and his “Deal Book” team at the New York Times) seemed to have built an insurmountable lead in the race to be declared the most unctuous panderer to the financial plutocrats who grew wealthy by leading the frauds that blew up our economy. As I wrote recently, Politico became my instant dark horse candidate for the Street’s sycophant-in-chief with Ben White’s fantasy that “In 2009, Washington went to war against big Wall Street banks.” I noted that the “war” consisted of the Treasury and the Fed dumping trillions of dollars on the biggest Wall Street banks and evoked Tevye in Fiddler on the Roof: “May the Lord smite me with [such a “war”]. And may I never recover!”
Stewart has Fallen to the Bob Woodward Stage of His Career: Praising Faux Maestros
Sorkin has kicked off a race to the bottom at the NYT and James Stewart has just penned the most obsequious ode to Dimon yet recorded. In a further proof of our family rule that it is impossible to compete with unintentional self-parody, Stewart’s brand for his column is “Common Sense.” Stewart’s version of “Common Sense” when it comes to Dimon reads exactly like Thomas Paine’s famous “Common Sense” would have read had it been written by a City of London banker in 1776. If we had listened to people like Stewart defending privilege rather than Paine’s annihilation of the pretenses of the British plutocrats we would not have become an independent Nation for another century.
The Real “Common Sense” as Penned by Thomas Paine
In his introduction to his third edition, Paine warned about the Deal Bookers of his day who accepted the legitimacy of the powerful dominating and plundering the people because it had always been that way. Paine decried the fact that this lazy failure to question the domination of the powerful led inexorably to a defense of their exploitation in the form of an unthinking reflex in favor of “custom.”
“[A] long habit of not thinking a thing WRONG, gives it a superficial appearance of being RIGHT, and raises at first a formidable outcry in defense of custom.”
Paine championed the need for the American people to pierce through the “pretensions” of the elites and exercise the peoples’ right to “reject” the usurpations of power by the King and the English parliament.
“[T]he good people of this country are grievously oppressed by the combination, they have an undoubted privilege to inquire into the pretensions of both, and equally to reject the usurpation of either.”
Lord Acton made famous the phrase: power corrupts; and absolute power corrupts absolutely. Paine’s pamphlet, long before Acton’s birth, shared the same key understanding.
“First. — That the King it not to be trusted without being looked after; or in other words, that a thirst for absolute power is the natural disease of monarchy.”
In our day, we see that “thirst” in what scholars have dubbed our “Imperial CEOs.” In Paine’s era, the King was the most powerful, but Paine refused to fawn over the powerful. He advised that if we had the sense to strip away the pomp and the myths spread by sycophants we would find a “plunderer.”
“[C]ould we take off the dark covering of antiquity and trace them to their first rise, we should find the first of them nothing better than the principal ruffian of some restless gang, whose savage manners of pre-eminence in subtilty obtained him the title of chief among plunderers; and who by increasing in power and extending his depredations, overawed the quiet and defenseless to purchase their safety by frequent contributions.”
Paine predated more conservative writers who would later echo his warnings, though often in the service of financial elites. Frédéric Bastiat understood the role that the James Stewarts of the world play in “glorify[ing]” those who use their great power to plunder.
“When plunder becomes a way of life for a group of men living together in society, they create for themselves in the course of time a legal system that authorizes it and a moral code that glorifies it.”
Stewart Glorifies Dimon’s Plunder
Do not think for a moment that Stewart is so naïve as to believe that any JPMorgan board member with a nanogram of “common sense” or integrity would (a) not have demanded Dimon’s resignation years ago, (b) would give Dimon a raise for leading a bank that committed the most epic financial crime spree in world history, and (c) would regret only that he lacked the courage to give Dimon an even larger raise.
Stewart’s tale tells us what everyone knows – Dimon, like all dominant CEOs after his initial selections, picks his board. He picks them for loyalty and for their identification with his interests. That last point means that they love to ratchet up the income of fellow Plutocrats. Their executive compensation firm (and everyone knows what reputation gets an executive compensation firm selected by CEOs) will use Dimon’s raise to justify other CEOs’ raises in “the great circle of life” for plutocrats. Stewart admits that he knows about this disgusting “back scratching” compensation dynamic.
Modern executive compensation was a leading creator of the criminogenic environment that produced the epidemics of accounting control fraud that destroyed the global financial system (until it was resuscitated by trillions of dollars that the Fed and the Treasury “carpet bombed” Wall Street with in 1989). Stewart has direct knowledge of how accounting control frauds use modern executive compensation and friendly boards of directors to create fictional income and loot the firm. He now claims that the eagerness of JPM’s board to make Dimon even wealthier represents financial “sophistication” on the part of JPM’s board rather than one of the most depraved and destructive dynamics in finance.
Stewart’s final phase of his career has reduced him to the status of yet another writer that “glorifies” the plutocrats’ plundering of the public. He thinks that is a “common sense” approach to the world.
Let’s look at how Stewart tries to make his readers believe that Dimon has no influence over his compensation. Note the small but telling spin of Stewart referring to Dimon as “a board member” rather than “the Chairman of the Board of Directors.”
“And these people stressed that Mr. Dimon had scant influence on the committee and board regarding his pay, and did not even know what it was the night before the decision was announced. (Although a board member, he left the room when the topic came up.)”
Seriously, that’s the best you’ve got? He left the room? The CEO always leaves the room. The average reader could pick seven folks and be confident that a majority of them would do right by you in giving away someone else’s money to you as generous compensation? Would you have to be in the room to be made wealthy?
In May 2012, Deal Book repeated Dimon’s threat to the Board of Directors to resign if they even dared to take the most elementary step in good governance – not allowing him to be both the CEO and the Chairman of the Board of Directors: “investors are factoring in the possibility that Mr. Dimon may resign if they vote to split the roles.”
Stewart doesn’t tell the readers about Dimon leaking the same threat in the run up to the 2014 board meeting that gave him his massive raise. Deal Book reported that “cutting Mr. Dimon’s pay would, some board members feared, alienate the chief executive.” Dimon wasn’t in the room, but his threats were in the room.
Stewart cites a professor who implicitly explains the power of Dimon’s threat: “‘What if you punish him and he gets angry and leaves?” The obvious answer to that threat, if the board were not a bunch of Dimon’s cronies is: “thank God!” The “punish him” bit is a might kinky. There was never the slightest suggestion from the board in its January 2014 meeting (according to the Board’s many press leaks) that they would “punish” Dimon. As I explain below, the only choices they entertained were whether to make Dimon far wealthier or much wealthier.
Stewart tells us that the board was “independent” of Dimon because the most famously anti-social businessman in America, a man who believes CEOs are entitled to massive pay and is wealthy because of that pay, chaired the JPM board committee that gave Dimon his massive bonus as a reward for managing JPM during its epic financial crime spree.
“Mr. [Lee] Raymond, the committee chairman, is famously independent — some might say insensitive. While at Exxon Mobil, his stands on global warming, gay rights and doing business in countries with repressive regimes led The Wall Street Journal to describe him in a profile as ‘a strikingly politically incorrect character for a modern-day, big-company C.E.O.’ While he was at Exxon Mobil, his compensation was routinely criticized as excessive, as was his retirement package valued at nearly $400 million.”
We need to begin with the four obvious points that Stewart doesn’t make about Raymond. Even Deal Book, which fawns shamelessly over Dimon, reported on May 12, 2003 that Raymond was a sedentary ally of Dimon.
“‘My perception is this is an old-fashioned board, Jamie runs the show and we don’t mind,’ said Christopher C. Grisanti, whose firm owns 246,000 shares of JPMorgan Chase worth roughly $12 million. ‘We don’t think the lead director at JPMorgan exercises that much power, and that is a positive because Jamie is one of the best C.E.O.’s in our portfolio.’
At the bank’s investor day this year, for example, Mr. Dimon jokingly tossed aside a question from an analyst by remarking, ‘I’m richer than you.’ These investors, who spoke on the condition of anonymity, say the moves by Mr. Dimon only augment his reputation as arrogant at a time when the bank is fast losing credibility in Washington.”
The Deal Book article noted that Raymond was a lead board member when the decision was made to make Dimon JPM’s leader. The first point, to make is that Raymond would be admitting a grievous blunder if he conceded that he made a mistake in putting Dimon in charge. Virtually all the roughly 15 major frauds by JPM that various governmental investigations have documented occurred during Dimon’s tenure.
I am not counting among these 15 major frauds the Bear Stearns and WaMu frauds, but readers need to know that Dimon was eager to acquire WaMu before it collapsed even though it was notorious for the extent of its fraudulent lending and fraudulent sales of fraudulently originated mortgages. JPM was perfectly positioned to recognize how endemically fraudulent WaMu was at the time Dimon sought to acquire it. If WaMu had agreed to the acquisition there would be no issue but that JPM was fully liable for all of WaMu’s contributions to the fraud epidemics that crushed the economy. Dimon has an excuse for WaMu solely because he was lucky enough to be turned down by WaMu’s managers.
Second, Raymond should have resigned (if he had any integrity).
Third, Raymond and Diamond should have been “removed and prohibited” (along with Dimon) by an enforcement action by the Comptroller of the Currency years ago. As the “lead” director who was most responsible for providing oversight from Dimon it was his responsibility to identify and stop the rot and the epic frauds. Raymond should have led the board effort demanding that Dimon resign and if that effort failed he should have resigned in protest. The failure of the OCC to act – the dog that won’t bite and has forgotten even how to bark – reveals how total is the destruction wrought by desupervision and how flagrant is the grant of de facto immunity from prosecution for elite bankers due to the rot at DOJ.
Four, Raymond, having failed to rein in Dimon and instead having repeatedly vouched for him, would be admitting error and cowardice were he to now admit that Dimon should be held accountable for the epic frauds committed during his leadership of JPM. The best case for Dimon is that he “merely” set an unethical “tone at the top” that signaled JPM’s executives that they had the green light to commit their epic frauds that have become public at this juncture.
In my January 24, 2014 column (“Dimon does Davos”) I explained that it simple for Dimon to manipulate other business executives who hate “the government” in general and President Obama and the Justice Department in particular. Raymond epitomizes that type of executive.
JPM’s directors are primed to believe that Dimon and JPM are the “victims” of the government. Stewart claims that we can be confident that JPM’s board did the right thing because Raymond, the Koch Brothers’ soul mate, despises “the government,” believes that the Department of Justice (DOJ) and President Obama are evil incarnate, led a corporation that violated the law and morality routinely in order to increase its profits, and was notorious for his grotesquely excessive compensation. “Common sense” indicates that Stewart’s assertion that putting Raymond in charge of Dimon’s pay proves that Dimon is underpaid is nonsensical.
Dimon does Davos
In an additional bit of hysterical hypocrisy, Dimon was in Davos, Switzerland as an honored participant in the annual World Economic Forum (WEF) while his cronies on the JPM board made him even wealthier. WEF is a glitterati event that overlays a right-wing effort to stop progressive governmental programs. WEF gathers many of the world’s most corrupt CEOs so that those plutocrats can lecture developing nations on how awful their officials are for accepting the bribes from the massive first-world corporations that the CEOs run. In Davos, the hypocrisy of the CEO is as stunning and “in your face” as the views of the mountains.
Dimon is vastly past the point where his income has any effect on his consumption. Giving him raises is simply an exercise in inflating his arrogance and ego. It hurts the shareholders but it does nothing for Dimon except feed the worst demons of his nature.
Raymond could not turn on Dimon without admitting that (1) Raymond was wrong all along and had failed in his fiduciary duties, his integrity, and his cowardice by refusing to end the corrupt “tone at the top” set by Dimon and (2) the DOJ and Obama were right and Raymond and Dimon were wrong. Given Raymond’s personality, which Stewart provides, the chances that Raymond would make those admissions was nil. Raymond was an ideal ally for Dimon.
“Punishing” Dimon by Paying him $11.5 Million for 2012
Just as Ben White called carpet bombing Wall Street with trillions of dollars of America’s money in 2009 an act of “war” against “Wall Street,” Stewart calls the idea that JPM’s board might only reward Dimon’s leadership of the most destructive financial frauds in world history with $11.5 million in compensation “punishing” Dimon. Indeed, Stewart uses the root word “punish” four times in the article. Here is the funniest and most revealing variant.
“Further punishing Mr. Dimon might satisfy some quarters, but it could well damage shareholders. ‘If you’re on the board, you’ve got a guy in Jamie Dimon who’s considered the top commercial banker in the country, if not the world,’ Professor Larcker said. ‘What if you punish him and he gets angry and leaves? You’ve got a gigantic hole. Who do you plug in? How much value do you destroy if you have to replace him, which could easily take six months? These are serious issues.’”
Stewart had already introduced his readers to “David Larcker, an expert in executive compensation and director of the Corporate Governance Research Program at Stanford University’s Graduate School of Business” and Larcker has praised JPM’s board for giving Dimon a huge raise as a reward for running a criminal enterprise profitably because the use of stock grants means that his “incentives are aligned with shareholders.” Larcker knows better. He knows that it is a “sure thing” for CEOs to use accounting fraud to vastly inflate reported (albeit fictional) earnings in order to receive such stock bonuses. The bonuses designed by JPM’s board have further misaligned Dimon’s already misaligned incentives and made him an even graver threat to JPM’s shareholders.
Nevertheless, many economists still seem not to under-stand that a combination of circumstances in the 1980s made it very easy to loot a financial institution with little risk of prosecution. Once this is clear, it becomes obvious that high-risk strategies that would pay off only in some states of the world were only for the timid. Why abuse the system to pursue a gamble that might pay off when you can exploit a sure thing with little risk of prosecution? (Akerlof & Romer 1993: 4-5).
Step back and ask yourself why we have to pay plutocrats immense bonuses just to decrease the risk that they will screw the shareholders. Why wouldn’t a CEO making $400,000 annually act in the interests of shareholders? Why do the shareholders have to bribe the CEOs not to loot the shareholders – and why is the bribe required to get the CEO to act as if he were honest have to be so huge? What has become so despicable about elite CEOs’ character that they need massive bribes simply to do their jobs honestly?
“Further punishing” – Dimon was paid $11.5 million in 2012 despite being the guy in charge of JPM when it became public that the bank had committed the greatest financial crime spree in history. The issue, as framed by JPM’s board of directors, was not whether to demand his resignation and his repayment of all past bonuses. That would have been the ethical thing to do. JPM’s board never considered doing the right thing. The board framed the issue as whether to pay Dimon $11.5 million or over $20 million for 2013. To paraphrase Tevye again, “May the Lord smite me with [this ‘punishment’] – and may I never recover!”
We don’t need no stinkin’ Ethics! (or use of the “F” word)
Stewart, like Deal Book and Politico, manages to discuss a subject in which ethics and morality are the core considerations without every using or discussing those words. Stewart also manages to avoid the words “fraud,” “violation,” or “crime.” He says that Dimon clearly deserves to be paid a huge bonus because JPM’s fraud spree, net, has proved profitable. Sadly, Stewart is not writing a deliberate parody.
Dimon is “the One”
Assume for purposes of analysis that Larcker is correct – Dimon is “the top commercial banker in the country, if not the world.” I call this Larcker’s hypothesis (aka, “Dimon is ‘the One’”). What would the analytical implications of that “fact” be? The first implication is that we should put every systemically dangerous institution (SDI) in receivership immediately. If every CEO of the banks that are so large that the administration is telling us that when they fail it is likely to cause a systemic financial crisis is even more incompetent and/or even more unethical than Dimon then the financial system is in imminent danger of its next collapse.
(For the purpose of analyzing the implications of Larcker’s hypothesis, I am taking the most favorable possible view of Dimon’s abilities and character given JPM’s epic financial crime spree. I assume, arguendo, that he had no knowledge of the frauds and no involvement in creating the perverse financial incentives and the unethical tone at the top that led to the world’s most destructive series of financial crimes at a bank. I do not find those assumptions credible.)
The Implications of “Too Big to Manage”
An alternative hypothesis about Dimon’s abilities and character might initially seem more favorable to Larcker’s hypothesis – it is possible that Dimon is “the One” but that it is impossible for even the best bank CEO in the world to run an SDI in a manner that does not lead to endemic fraud by the SDI’s officers. JPM could be so “too big to manage” that it became a massive criminal enterprise despite the leadership of the best CEO in the world. But that situation would actually damn Dimon. As the best CEO in the world he would have realized years ago that JPM was vastly too large to manage and that his inability to manage it lead to endemic fraud. He would be legally and ethically culpable for failing to alert JPM’s board of directors and its regulators to that fact and dramatically shrinking JPM.
What Dimon actually did was to vastly expand JPM and use executive compensation systems for the officers and employees that created the perverse incentive systems that gave him “plausible deniability” while enriching him by inducing endemic accounting control fraud. Many of these frauds cost JPM billions of dollars rather than enriching them, but others do create very large profits. Larcker could not be more wrong that in his bland assurance that paying Dimon in a manner that “aligned” Dimon’s interests with those of the shareholders he was enriching through JPM’s frauds would be a good thing for the world. Indeed, the OCC should making placing any bank that creates that form of alignment in receivership a top priority.
Listen to Larcker’s Research
We know that Larcker knows better, for he and co-authors documented the key points in 1999 – and the research since then has greatly added to the strength of those points.
“CEOs earn greater compensation when governance structures are less effective. We also find that the predicted component of compensation arising from these characteristics of board and ownership structure has a statistically significant negative relation with subsequent firm operating and stock return performance. Overall, our results suggest that firms with weaker governance structures have greater agency problems; that CEOs at firms with greater agency problems receive greater compensation; and that firms with greater agency problems perform worse.”
John E. Core, Robert W. Holthausen, David F. Larcker, Journal of Financial Economics 51 (1999) 371-406, “Corporate governance, chief executive officer compensation, and firm performance.”
JPM is the classic example of the firm with “weak governance structures” that results in the CEO “receiv[ing] greater compensation” when he should be summarily fired for JPM’s epic fraud spree. Some forms of control fraud enrich the firm, but accounting control causes firms and shareholders, once the frauds are discovered, to suffer reduced profits and potentially catastrophic losses. Larcker and his co-authors’ euphemism for fraud is “agency problems.” The word “fraud” does not appear in their article and they do not cite Akerlof and Romer (1993).
Concluding Thoughts Addressed to the Media and the Public
The question I end with for Larcker, Stewart, Sorkin, and White is what would it take? How many frauds does JPM get? When I note that JPM has been engaged in 15 separate violations of the law according to investigators, I do not mean that they have committed 15 felonies. Each of the 15 violations is very large and about half of them are among the largest fraud schemes in history. We are discussing a bank whose leaders have created the perverse incentives and corrupt tone at the top that have produced hundreds of thousands of felonies by JPM’s officers and employees. Tens of trillions of dollars in transactions were affected by their frauds.
I can understand why you have to carefully strip these realities from your reportage in order to serve as Dimon’s sycophants, but I ask you to stop. When you tell your readers that Dimon is the best bank CEO in the world how do you overcome your gag reflex? You cannot continue to make the coverage of Dimon and JPM an ethics-free and fraud-free zon. You do too much damage to the truth, the reputation of your employers, and our Nation. We cannot afford your continued race to the bottom. You need to commit to a competition in integrity.
Common sense would be an excellent starting point. Larcker’s carpenter father, my (deceased) carpenter father-in-law, my (deceased) weekend-carpenter father, and a carpenter who emailed me a message while I was writing this blog would/were all be outraged by Dimon’s raise. The evidence from the crisis abounds that orthodox economists’ dogmas are the problem. Michael Jensen, the intellectual godfather of modern executive compensation bemoans the catastrophic unintended consequences of his actions. The perverse incentives that led so many economists to ignore common sense and common decency and to pander to the plutocrats are obvious.
One of the first things I learned in dealing with Congress during the savings and loan debacle was that my unsophisticated relatives were spot on about the reality of Congress and lobbyists and that my “sophisticated” understanding of lobbyist and congressional behavior (based on “incentives” and “concern for reputation”) that I learned from some of the world’s top political scientists and economists was hopelessly naïve. The carpenters have proven vastly more accurate than the theoclassical and even neoclassical economists. If the idea of having to bribe a billionaire CEO with tens of millions of dollars annually in order to induce him to act as if he were moral and not to loot “his” bank sounds like an insane way to run a financial system to you – you have more common sense than any 3,000 theoclassical economists combined.
Jesus was a carpenter. If Jesus were let loose in JPM for thirty seconds does anyone doubt what he would do? Writing articles in which you remove fraud and ethics from an issue that should be almost entirely about fraud and ethics is an unethical journalistic practice committed by those who benefit from pandering to plutocrats.