Hubris on Wall Street

Strategic Perspective
René B. Azurin

Posted on July 26, 2012

The Wall Street “manager” is a myth, much like the abominable snowman. No sightings of such a creature can be verified. The latest claimant, JPMorgan Chase chief executive Jamie Dimon, has been unmasked as just one more impostor. Pathetically, Dimon claimed that he did not know what a direct subordinate was doing to incur huge trading losses now expected to reach $9 billion, effectively admitting that his vaunted capabilities as a manager existed only in the realm of imagination.

How could he not know? What the heck passes for management in these self-admiring Wall Street outfits?

Like other Wall Street executives called to testify before the US Congress, Dimon shamelessly washed his hands of the financial fiasco and pinned the blame for the bank’s huge trading losses on his chief investment officer. He seemed to have conveniently forgotten that he had specifically chosen Ina Drew to occupy that position of responsibility and had her reporting directly to him. He must have also forgotten that it was he who reportedly urged Ms. Drew to shift the bank’s investment portfolio from low-yielding government securities to higher-yielding credit derivatives.

Did Dimon, perhaps, also conveniently forget that management requires demanding the appropriate reports and actually understanding what is being reported to you? Was the extravagantly compensated Dimon claiming ignorance of the fact that his bank was heavily invested in credit derivatives basura or just confessing to an inability to comprehend its “complex” trading strategies?

Dimon had carefully cultivated a public image as a super manager who was great at controlling risks and who regularly conducted “exhaustive” reviews of every operation in his bank. The abrupt about-face toward ignorance and managerial incompetence is thus somewhat unexpected. But not wholly unexpected, since Wall Street executives will do anything to remain in their lucrative jobs.

In squirming away from blame and making his chief investment officer take the rap, Dimon said in a TV interview that his supposedly well-managed bank’s trading strategies were “poorly conceived and vetted” and that they were “flawed, complex, poorly reviewed, poorly executed, and poorly managed.” He also is reported to have said that senior managers -- meaning him? -- were not paying adequate attention. Ah. Hmmm.

OK, for allowing herself to be the sacrificial lamb in this public show of contrition, Ms. Drew was paid $32 million in bonuses and walk-away money. (She was paid $11 million in 2011.) If anyone still wonders why Wall Street executives behave in such reckless and irresponsible ways, he should look no further than the warped incentive system embedded in Wall Street culture. Getting paid $32 million for losing your company $7 billion -- and consequently wiping out some $39 billion in the firm’s shareholder value -- is not an example of a compensation scheme that rewards good management. What it does is promote unbridled personal greed, a quality well known to infuse the souls of Wall Street executives.

Still, Dimon, who seems to have been anointed by observers as Wall Street’s “best CEO,” had the hubris to claim, “Each of our businesses are among the best in the world.” And, as the self-appointed spokesman of opponents of more rules and regulations that force banks to curtail risk-taking, he has argued that this will harm not only badly managed banks but also well-managed ones, by which he obviously meant JPMorgan Chase. Well, clearly, if what had previously been considered America’s best-managed bank is “poorly managed” and apparently has no idea how to manage risk, then that argument should no longer hold any sway.

In fact, it should have been fairly obvious, at least since August 2008, that none of these big Wall Street firms are well-managed at all and that none of these highly paid chief executives actually know how to manage large financial institutions. What these Wall Street firms actually do is run the world’s biggest pyramid operation: they make and market pieces of inherently valueless paper to millions of gullible investors with the implicit promise that someone else will later pay more money for these same pieces of paper. Sadly, this remains a perfectly legal scam.

The reality is that the excesses of Wall Street executives that almost caused the global financial system to crash in 2008 have not been corrected. Massive bailout money has kept the system going and “too big to fail” institutions afloat, but the fundamental problems have not been addressed. The bailout money just distorted the already-warped incentive system even more and greedy executives who care only about lining their own pockets with millions in pay and bonuses continue to fly high and proud and unrepentant.

In articles written in 2008, I argued against US taxpayer money being used to bail out and prop up Wall Street institutions run by reckless, avaricious, and arrogant executives who caused the financial mess in the first place. I did not think it right that irresponsible individuals with already considerable bank accounts and political influence should be rewarded for grasping greed and managerial incompetence. I thought that the institutions they “managed” should be allowed to crash and burn so that the system would be purged of their rottenness and a naîve investing public would learn to act with greater care in choosing to whom to entrust their money.

Some observers have contended that Dimon could “manage risk better than anyone in banking.” Ah, if that were true, no one should have any confidence in any Wall Street manager being able to manage at all. My advice to would-be investors remains: Don’t buy anything Wall Street is selling.