Dimon Does Davos

by William K. Black, New Economic Perspectives

If, as an effort at satire, I had written the story that the New York Times’ “Deal Book” has just written about what JPMorgan’s board of directors has just actually done, people would have dismissed my piece as absurdly over the top. The board has decided to increase Jamie Dimon’s compensation substantially. The reason the board gives (in leaks to Deal Book) must have resonated with Deal Book because it is the theme song that Deal Book has been singing for months, another “‘somebody done Dimon wrong’ song.”

Recall that the title of Andrew Ross Sorkin’s country-western lament was that Dimon was the victim of “bloodlust” because Dennis Kelleher, the head of the NGO “Better Markets,” believed that Dimon should be fired for poor performance.

As a slight reality check, which Deal Book religiously avoids, Dimon led JPMorgan while it committed what government investigators have identified as over 15 frauds, most of them massive. As I’ve explained, Deal Book’s graphic laying out (very tersely) these frauds goes on for pages. These frauds represent the greatest financial crime spree the government has ever identified. I am not counting the frauds of Bear Stearns and Washington Mutual (WaMu).

Note, because Deal Book never will, the fact that Dimon’s key defense – Bear and WaMu were worse than JPM – confirms that senior leaders of three of the largest and most elite U.S. banks were serial criminals whose frauds are (we pray) without equal. If one were not familiar with Deal Book’s pathologies, one might suspect that Dimon’s defense would cause the Nation’s leading paper of record to be alarmed about the ethics, criminality, and safety and soundness of our financial systems. That alarm would lead to Deal Book demanding that the boards of directors, regulators, and prosecutors go into overdrive with far more vigorous efforts that would clean the Augean stables of Wall Street and the City of London. Instead, Deal Book never mentions the word “ethics” in the article.

Deal Book declared itself an “ethics free” and a “smoke free” zone. They refuse to discuss ethics or the cloud of oily smoke that has engulfed Wall Street and the City of London for over a decade. Similarly, the Deal Book article uses the word “fraud” only once – to describe Madoff’s frauds. JPMorgan, Bear, and WaMu’s frauds never get labeled frauds.

The Deal Book article is composed entirely of howlers – because it faithfully reports without any critical thought the (always anonymous) comments of JPM’s board. Deal Book reports that anonymous JPM board members say that Dimon’s “star has risen” as JPM’s frauds mounted.

“He has also solidified his support among board members, according to the people briefed on the matter, by acting as a chief negotiator as JPMorgan worked out a string of banner government settlements this year.”

So, the greater JPM’s frauds under Dimon’s leadership and the larger the settlements, the greater Dimon’s value as a negotiator in getting the government to settle cheap, and the more money that JPM should pay Dimon for helping it keep a big chunk of the fraud proceeds from the crime spree. Dimon and the board’s real rage is that the government disputes their demand that JPM should keep all of the fraud proceeds from Bear and WaMu’s even more intense crime sprees. Deal Book quotes Dimon as claiming that it is “unfair” that the government is seeking recovery from JPM of Bear and WaMu’s fraud proceeds.

The reality is that the fraud proceeds went largely to the senior officers and directors of JPM, Bear, and WaMu in the form of bonuses. What JPM’s board is really delighted about in Dimon’s performance as a negotiator is that not a single JPM director or senior officer has had to repay a penny of the huge fraud proceeds that made them wealthy (or far wealthier). The directors don’t bear the cost of Dimon’s bonuses. Dimon negotiations with the government ensure that the shareholders bear all the losses of the obscenity of giving Dimon a raise to reward the crime spree that occurred while he was both the CEO and chairman of the board of JPM.

Another side-splitting line from the anonymous board leaks is: “Yet cutting Mr. Dimon’s pay would, some board members feared, alienate the chief executive.” This too passes without analysis through Deal Book’s haze. Question: would an honest bank run by an honest board “fear” “alienat[ing]” a CEO who had led the bank into such a crime spree? JPM’s board has proven for years that it is spineless, unethical, and dedicated to Dimon’s interests. They should submit their resignations immediately, effective in eight weeks. Deal Book, unintentionally and unknowingly, demonstrates that the best members of JPM’s boards are hopeless.

“The debate pitted a vocal minority of directors who wanted to keep his compensation largely flat…”

What would it take for the “vocal minority” to make a motion to fire Dimon for cause and claw back his past compensation? Why didn’t they resign in protest when the majority to reward Dimon with a raise?

The banking regulators should have demanded the board’s resignations – and that includes Dimon – over a year ago based on the facts that the regulators have found. JPM demonstrate how abject the failure of governance and supervision remain over five years after the acute phase of the crisis at our most elite and essential institutions.

Deal Book, unintentionally and unknowingly, gives away the plot in this wondrous sentence.

“It is not unheard-of for chief executives to lose their jobs when their companies have been battered by regulators.”

First, JPM has been battered by its officers and directors, who have disgraced their offices – and became wealthy by doing so by presiding over the world’s most epic financial crime spree.

Second, Deal Book has no clue how competent banking regulators function. In the sentence I just quoted, Deal Book talks about “companies” (i.e., banks) “battered by regulators.” Deal Book writers cannot grasp the difference between the bank and the controlling bankers and the fact that bad bankers act in their interests, often at the expense of the bank and its shareholders, creditors, and customers. Our paramount function as financial regulators is to protect the banks from fraudulent officers and directors. Our goal, if we are competent, is never to batter the “bank.” The bank’s shareholders, creditors (which includes the FDIC), and customers are the people we are seeking to protect.

The regulatory and prosecutorial response to JPM’s crime spree has failed to hold a single senior officer or director personally accountable either civilly or criminally. The regulators have used feather dusters when it comes to elite bankers – and only actions against elite bankers matter. Fines against banks cannot deter frauds by officers. The officers who control the bank are delighted to use bank funds to negotiate deals in which there are large fines – but the government does not prosecute the officers or seek to claw bank their compensation and seek damages from them.

During the S&L debacle, we put officers and directors in prison. We bankrupted officers and directors through civil suits and enforcement actions that removed their fraud proceeds and fined them.

But do not lose sight of Deal Book’s admission, even when the regulators present evidence to bank boards that the CEO is looting the bank the central problem remains that the CEO handpicked the board for its loyalty to him and hostility to “the government.” It is child’s play for the CEO and his cronies to keep the support of such directors. Sure enough, Deal Book tells us that the anonymous board members most dedicated to further enriching Dimon believed that Dimon was the victim of “overzealous federal prosecutors.” Fraudulent CEOs are so good at playing the directors they select that Deal Book admits that it is rare (“not unheard-of”) for a fraudulent CEO to be forced to resign. Deal Book doesn’t mention that even in these rare cases the overwhelming norm is for the board to make the fraudulent CEO even wealthier by giving him a “golden parachute.”

But Deal Book, unknowingly and unintentionally, let another cat slip out of the bag in discussing this subject. Here is the fuller context of the quotation I have been discussing.

“It is not unheard-of for chief executives to lose their jobs when their companies have been battered by regulators.

But a crucial difference is that JPMorgan’s legal travails have not threatened the bank financially.”

What Deal Book let slip was the devastating role that “too big to fail” and “too big to prosecute” play in allowing Dimon to stay in power after a record that at any normal company would have seen him forced out by competent regulator years ago. Of course JPM’s settlements “have not threatened the bank financially.” The DOJ’s position is that it will not put large businesses into bankruptcy, regardless of how fraudulent their controlling officers are. JPM is the biggest bank in America. The DOJ’s position is that it will not “cause” any large bank to fail – no matter how fraudulent its operations. (Note that the fraud causes the failure, not the government sanction, but DOJ is a shambles when it comes to elite white-collar crime, particularly at systemically dangerous institutions (SDIs). JPM is the mother of all SDIs.) DOJ’s position requires that it will never fine a large bank a sum so large that it poses even a minor risk to the bank’s solvency.

Everyone on Wall Street knows that DOJ treats JPM as “too big to fail.” Everyone on Wall Street understands that this means that the DOJ will never require JPM to pay the full cost of its frauds and disgorge the full extent of its fraud proceeds if doing so could even come close to creating a concern that JPM would lack adequate capital. This gives Dimon a crushing negotiating leverage – the equivalent of always holding a Royal Flush while playing poker. JPM’s board is so impressed that Dimon wins when he always holds a Royal Flush that it is giving him a raise.

DOJ’s termination of the rule of law for SDIs removes any chance that they could ever impose a fine against them that would have any deterrent effect. They could, of course, avoid this trap by taking action against the officers rather than JPM. Deal Book has implicitly revealed the fraud that is “corporate governance” on Wall Street. Deal Book has also implicitly revealed why DOJ’s betrayal of the rule of law for SDIs and virtually total refusal to sue or prosecute elite bankers will prove so criminogenic and so destructive of ethics and integrity on Wall Street and at DOJ.

Because Deal Book and the banking industry are dedicated to constantly proving the truth of our family rule that it is impossible to compete with unintended self-parody, Deal Book and its anonymous board sources save the best for last. The people said:

“Mr. Dimon is also benefiting, the people say, from a view among some board members that the government’s assault on JPMorgan is driven less by the bank’s actual transgressions and more by a desire, stoked by anti-bank sentiment, to appear tough against Wall Street”

This passage is another illustration of why sleazy bankers chose sleazy board members predisposed to hate “the government.” That hate makes it easy for the CEO to manipulate the board members when regulators or the FBI detect insider fraud. The next falsehood is to describe the incredibly weak regulatory and prosecutorial response as an “assault” much less an “assault on JPMorgan.” However, by failing to hold JPM’s officers and directors personally accountable for their frauds DOJ makes it harder for citizens to see why such a statement is incoherent. Deal Book expands this error by referring to “the bank’s actual transgressions” rather than to the officers and directors’ transgressions.

Who are “the people” in the Deal Book quotation? “The people” overwhelmingly know that JPM and Deal Book’s memes are hilarious. Let’s get serious. There are zero prosecutions of any elite JPM officer or director. There are zero civil actions or enforcement actions that could claw back any elite JPM officer or director’s pay or remove and prohibit them from the industry. JPM’s frauds are huge, diverse, and target the weak.

The premise of this fantasy meme is that “anti-bank sentiment” (presumably they mean “anti-fraudulent banker sentiment”) has become so powerful that it has become essential for DOJ to “appear tough” against “banks.” The reality is that Attorney General Eric Holder has not secretly converted to supporting Occupy Wall Street rather than trying to destroy it. Holder knows that if he wants to “appear tough” the way to do it is to prosecute criminally and civilly elite JPM, Bear, WaMu, Bank of America, Citicorp, Wachovia, Wells Fargo, etc. officers and directors.

Calling Holder’s non-prosecutions “tough” and terming Kelleher’s call for Dimon to be fired “bloodlust” demonstrate that Deal Book desperately needs to purchase a dictionary and consult it for word meanings. I think Better Markets could do Deal Book and the Nation a service by delivering a Funk and Wagnall’s to Deal Book with the words “bloodlust,” “tough,” “ethics,” and “fraud” tabbed for easy reference.

Holder has zero prosecutions of the elite bankers whose frauds drove the three most destructive financial fraud epidemics in world history. Holder has zero civil cases, and the banking regulators have zero enforcement actions, that bankrupted an elite bank officer or director whose frauds helped drive those epidemics. When I played baseball as a kid, we didn’t consider anyone to be a “tough” hitter who batted .000 and who repeatedly left the bat on his shoulder and was called out on strikes. To sum it up, only corporate directors could call zero elite fraud prosecutions excessive. Deal Book has, unintentionally and unknowingly, revealed one of the most destructive pathologies that make even “independent” directors fraud allies instead of “independent controls.”

JPM’s, WaMu’s, and Bear’s boards of directors made the officers who led the frauds wealthy for over a decade through their executive compensation programs. JPM’s board has learned nothing positive from that experience. The question is whether the banking regulators will call an immediate “come to Jesus” meeting with the board and explain that they have lost confidence in the board and Dimon and require their resignations and waivers of any claims for golden parachutes. I fear that things have deteriorated to the point that no one at the OCC, the Fed, and the FDIC even thinks about taking such an act.