Stress Test

Said the Fed to the banks in its purview:
"Sorry chaps, we don't mean to unnerve you,
But if panic should surge,
Our views would diverge
On the capital that would best serve you."

Punitive Measures

A six-billion loss dealt a blow
To the name of a bank's CEO.
To atone for this trade,
He merely was paid
A paltry ten million or so.

What do you take from the man who has everything?  That was the question faced by the board of JPMorgan Chase, which had to determine the consequences for CEO Jamie Dimon of the $6.2 billion loss from the "London Whale" trades.  The answer was a 50% reduction in Mr. Dimon's total compensation, from $23 million in 2011 to "only" $11.5 million for 2012.  (To be fair, the compensation package reflects a record year for the bank's profits, in spite of the outsized trading losses.)  The New York Times' Dealbook page, no doubt attempting to wrap its head around the fact that $11.5 million is only half of someone's compensation, believes that, in the face of such a striking management lapse, more radical changes are called for.  Suggests columnist Agnes Crane:

One could be to split the roles of chairman and chief executive. A well-chosen chairman provides a check on a chief executive’s powers. In one indication that this can work, GMI Ratings last year concluded that an executive pulling double duty can earn 50 percent more than the total pay of two people performing the top jobs separately.

It sounds as though, if governance is strong, compensation finds a more appropriate level as a matter of course.

No Pain - Or Gain

While bankers are prone to complain
That hedging is hard to explain,
It's fairly alleged
That you aren't really hedged
If you're also expecting a gain.

One of the many talking points employed by JPMorgan Chase CEO Jamie Dimon in his closely watched Senate testimony this week was that "this particular synthetic credit portfolio was intended to earn a lot of revenue if there was a crisis. I consider that a hedge; what it morphed into, I will not try to defend." The Chief Investment Office's loss - $2 billion and rising - on its London Whale position was simply well-intentioned risk management gone bad. In this, Mr. Dimon deliberately muddied the waters and his senatorial inquisitors failed to impose any clarity on the discussion. Anytime you say "I expect this position to make a profit if X happens," you are making a bet, not a hedge. The fact that market turmoil is expected to trigger the profits does not remove it from the realm of speculation. The only one who is truly hedged is the one who can say: "My results are locked in regardless of what the market does."

Dimon's Congressional Testimony

A high-ranking finance professional
Who was called to a hearing Congressional
To give his account
Of a massive amount
That was lost, made a searing confessional:

"My Office of Risk Diminution
Found a newfangled hedging solution,
Which no one construed
Nor checked, nor reviewed,
Nor subjected to sound execution."

"But in spite of my solemn admission
(Which I make with humblest contrition)
That we bungled our bets -
We are hiring vets
And expanding our lending position."

"So before you propose regulation
To limit our trade fluctuation,
No federal commission
Could outmatch our mission
To aid the American nation."

J.P. Morgan Chase CEO Jamie Dimon has been called to testify before the U.S. Senate Committee on Banking, Housing and Urban Affairs, to answer for the infamous and still-growing loss from derivative positions in the bank's Chief Investment Office. For those of you too busy to review the full text of the CEO's prepared testimony, I humbly offer the foregoing summary in verse. The rest of you may draw some insightfully ironic enjoyment from Mr. Dimon's deft attempt to deflect criticism of the bank's errors and omissions, and to convince the Senators that the bank is its own best overseer.

On the Down Low at the Roadshow

An analyst had a quick word
With investors his bankers preferred:
"We've cut our projections
For those with connections,
But won't tell the rest of the herd."

The fallout from the Facebook IPO continues. On Tuesday a spotlight was shown on the practice of IPO underwriters' not disclosing their analysts' estimates of companies' earnings, except to a small group of large institutional clients. Already a troubling practice, these quiet revelations appeared to skirt the letter of the law in the Facebook case. Analysts for Morgan Stanley and the other underwriters all made substantial cuts in their Facebook earnings forecasts during the pre-IPO roadshow, evidently based on information quietly provided by the still-private company. Joining Goldman Sachs in contempt for the retail "muppets" clamoring for $FB shares, the Morgans - J.P. and Stanley - have still not disclosed their estimates, as indeed they may not until 40 days after the IPO date. Reuters finance blogger Felix Salmon gives a full explanation of the issues and facts of the case, in a post that is worth the time of those who would like to gain insight into the world of stock underwriting.

A Whale of a Tale

Said the boss of a trading facility,
Whose job was to crimp volatility:
"While I'm away jettin',
Be sure you don't threaten
The global financial stability."

Though much has been written about JP Morgan's "London Whale" and the $2-billion-and-growing loss that arose from his credit index trades, there has not been much focus on the interpersonal management dynamics of the case, until yesterday. The New York Times' Jessica Silver-Greenberg and Nelson Schwartz looked into the story and concluded that "Discord at J.P. Morgan Unit is Faulted at Loss." In a modern, highly-leveraged twist on "when the cat's away, the mice will play," it appears that the egos and ambitions of Bruno Iksil (the Whale) and his boss Achilles Macris could not be contained once the bank's chief investment officer, Ina Drew, was out sick for an extended period. Without Ms. Drew's "coolheaded, steely resolve", the internecine tensions between the CIO's New York and London offices devolved into daily screaming matches with no clear leader to to set limits and keep discipline.

Reversal of Fortune, Part II

There once was a trading technician
Who failed in his primary mission;
The bank, for this drawback,
Attempted to claw back
The bulk of his trading commission.

In reading of the fallout from the $2 billion derivative trading loss at J. P. Morgan & Co., and the bank's closing ranks around embattled CEO Jamie Dimon, I was struck by the mention of possible clawbacks in the compensation of those, such as the "London Whale" Bruno Michel Iksil and his erstwhile boss Ina Drew, who had direct responsibility for the loss. This got me to wondering: in our world of Too Big To Fail, moral hazard and golden parachutes, is the clawback of ill-gotten bonuses something that actually happens? I put the question to you, oh ye denizens of Wall Street!

Betting One's Hedges

There's a false sense of immunization
In many a hedge operation;
Positions one places
On ill-conceived bases
May end up as wild speculation.

JP Morgan Chase CEO Jamie Dimon stunned investors on Thursday with the announcement of a $2 billion trading loss in the bank's risk management unit. Some reacted with schadenfreude, in view of Mr. Dimon's previously dismissive attitude toward reports of the firm's massive credit default swap positions. The Chief Investment Office's head trader, Bruno Michel Iksil, had been dubbed "the London Whale" for his huge, market-distorting CDS bets on the so-called CDX IG 9 index of the credit risk of 125 companies. Mr. Iksil sold protection on the index during the first quarter, essentially writing an insurance policy that the indexed companies' credit would not deteriorate.

Based on his limited knowledge of this case, Dr. Goose is at a loss to explain how the selling of credit protection constitutes a risk management function for a bank (one would sooner expect them to be buying credit protection). Nevertheless, even the most well-intentioned hedge position can go awry if the underlying assumptions do not hold, and many a "hedge" entered into on the basis of a particular market outcome is just speculation by another name.