Clawbacks at JP Morgan

Yuriy A's picture
Rank: Orangutan | 287

JP Morgan could potentially issue clawbacks against some of the senior staff at the Chief Investment Office for their role in the recent losses on Euro corporate index CDS trading. Jim Cramer's website thestreet.com reports that during JPM's Friday earnings call JPM could announce that top execs from the CIO, including Ina Drew (Eddie's article has Drew pay details here) could potentially be forced to give back some of their earnings.

During his senate banking committee hearing, Jamie Dimon mentioned that if any clawbacks are issued, they will be the first in JPM history. And although he most likely thinks that a verbal apology is sufficient, on Fast Money the traders brought up the idea that Dimon should be penalized internally to officially take responsibility for the executive oversight of the CIO losses. Earlier this week Bob Diamond forfeited 31 million of deferred stock upon his resignation stemming from the LIBOR price manipulation scandal at Barclays.

I think that the JPM case is a good example of when clawback rules should be used at a big bank and that Dimon should also take a financial loss for this as well, if to at least set a precedent that the CEO is ultimately responsible for what happens under his/her watch. What do you guys and gals think should happen here with regard to clawbacks?

Comments (9)

Jul 12, 2012

Personally I'm not too sure that there should be clawbacks. They didn't do anything illegal, they just got a bit carried away. The people personally involved in the CIO office, the relevant risk managers and Dimon should take a financial hit but nobody else.

Jul 12, 2012
Asatar:

Personally I'm not too sure that there should be clawbacks. They didn't do anything illegal, they just got a bit carried away. The people personally involved in the CIO office, the relevant risk managers and Dimon should take a financial hit but nobody else.

I'm asking this for clarification. You think people should only have bonuses clawed back if they do something illegal. Doing something legal that torpedos years of profits for your group should not result in you personally losing some of you bonus money from that time period?

If I had asked people what they wanted, they would have said faster horses - Henry Ford

Jul 12, 2012
happypantsmcgee:
Asatar:

Personally I'm not too sure that there should be clawbacks. They didn't do anything illegal, they just got a bit carried away. The people personally involved in the CIO office, the relevant risk managers and Dimon should take a financial hit but nobody else.

I'm asking this for clarification. You think people should only have bonuses clawed back if they do something illegal. Doing something legal that torpedos years of profits for your group should not result in you personally losing some of you bonus money from that time period?

Yeah happypants is right. On the one hand clawbacks probably reduce morale and make your talent want to work elsewhere. On the other hand, if you don't do it when people lose money (legally) then their incentive system will be all mixed up

Jul 12, 2012
happypantsmcgee:
Asatar:

Personally I'm not too sure that there should be clawbacks. They didn't do anything illegal, they just got a bit carried away. The people personally involved in the CIO office, the relevant risk managers and Dimon should take a financial hit but nobody else.

I'm asking this for clarification. You think people should only have bonuses clawed back if they do something illegal. Doing something legal that torpedos years of profits for your group should not result in you personally losing some of you bonus money from that time period?

My post was very unclear rereading it. I meant there should only be clawbacks for the CIO office, the relevant risk management team and Dimon. All employees should not have to suffer some form of clawback as a result of what 5-10 people in London did.

My second point which was slightly merged with my one about clawbacks is that all this media frenzy around JPMorgan is overdone. They didn't do anything illegal, didn't lose any client money, didn't break any ethics code etc.

Apologies for the confusion.

Jul 12, 2012

On paper, Dimon did his job and punished (or will) the responsible parties, this includes termination and clawbacks. Could Dimon be punished? Sure, but I don't really think it's going to change anything. He's just a public whipping boy unless there's actual evidence of him tampering with the trades. When I'm conspiratorial, I think he sent that group to London to beat the laws here, put up a small oversight office for plausible deniability, and said to himself "fuck the new laws, I'll do whatever the hell I want."

Diamond having his pay frozen over at Barclays is probably a better example of a CEO who actually did something criminal...and it's proveable. The JPM Risk CIO is gone, and well they should be for screwing their numbers up, but I also don't think that risk's job is to fall on their sword for trading. If that's the case, risk is now the brains of the operation and trading is nothing more than an a glorified execution desk / wire cage. They were up, decided against calling it in and went for broke, then got screwed...that's their fault. Again, there's a small, paranoid part of me that says Dimon told risk to fudge the numbers so his pet trading desk could rake in a killing, thus explaining the CIO's huge severance for keeping their mouth shut, but there's zero evidence of this at the moment. So, it comes down to Dimon's job being to punish people for not doing their jobs.

Also: Clawbacks are in every industry and they are part of the incentive system: if you make money, you get some, and if you lose money, it hurts your paycheck. The "Eat What You Kill" mindset only holds water if there are consquences for actions. Does it SUCK when you lose money? Yeah, but who does anyone think they're fooling when they say that say clawbacks are always bad? They're only bad for someone who's stupid and loses money, while costing other people money. It's really good for the rest of the people at the firm who DID THEIR JOB AND MADE MONEY. If my pay is threatened because some dolt on the other end of the building blew up a ridic bet, hell yeah you claw back his shit. Fuck them, I did my job, fuck you, pay me.

Dimon apologizing is what annoys me the most. If he is indeed entirely what the record indicates so far, he should be grandstanding the fact that he's THE MAN for readjusting CIO, clawing back the pay of losing traders (why should they be paid for losing money?) and having structured the company in a way that $2BB in losses actually doesn't hurt them as much as, say, UBS. That he's grovelling suggests to me that he's somehow complicit...but again, that's just a personal theory and not as of yet documented.

Jul 18, 2012

TLDR version: Dimon and Diamond are formally responsible for two different things. Suggesting the same remedy is absurd. The worst that will happen to Dimon is that his compensation takes a hit for this year, but it's highly unlikely that he steps down.

Jul 12, 2012

I think comp absolutely should be clawed back. I also am absolutely fed up with Deal Breaker's Matt Levine. So I actually have two points to make. Feel free to skip to the normal answer below.

(Begin falling asleep)
Matt Levine version:
Traders and portfolio managers live and die by the P&L; both their personal record, and the group's (and often the firm's). Assuming this was the arrangement in the JPM CIO, guys like Iksil get paid via some formula based on their trading performance.* Which is great: pure meritocratic compensation. Except they get paid at the end of a period, and their positions are often open across more than one period. So, take this (maybe) realistic scenario: Iksil starts building his 'Whale' position in FY11, and kicks ass -- returns 15%.** JPM hands Iksil $10mm for being a genius*** (and the rest of the CIO gets some sugar too). In FY12, the 'Whale' position gets hammered -- Iksil is down 40% YTD (or whatever). So, since he lost a bundle in FY12, he (and the other CIO-ers), like, won't get his (and part(or all) of their) performance bonus(es).

Can you spot the problem? Iksil still made (2%)*(P&L) for placing the 'Whale' trade (the entire CIO probably maybe benefited too (at least a little)). So, from a, like, um, conceptual, ah, level, his remuneration doesn't reflect his trading performance. This doesn't mean that traders should have their entire pay over the last 5 years wiped out if they fuck up a little.**** The whole point is they are employed by JPM to trade for JPM, not themselves; risk & reward, etc (or, like, whatever). But -- if last year's awarded comp directly reflected the awesome performance of the first half of a trade, and then the trade ended up sucking (a lot) after that. Well, you get the idea. He got away with (financial) murder,***** and (at least some) other CIO employees benefited (theoretically) too (maybe).

So, maybe comp should, like, be clawed back. I mean, at least insofar as we want comp to be meritocratic. Or, whatever.

*I.e., based on his return. Say 2%, or whatever. And it's deferred over 2-4 years. Probably.

** N.B.: figures are sourced directly from my ass.

***Technically the Whale Trade was a hedge, not a position. Point is, JPM paid Iskil (and the CIO) doing his job really good.

****Or a lot.

*****Okay, not really. But he got away with something.

/End notshuttingthefuckup

TL;DR: performance-based pay for a successful trade doesn't work if you pay people for their performance before they close the trade. Iskil did well, got his base+bonus, and then ended up effing up. He therefore doesn't deserve the portion of his bonus which reflected the trade that went bad.

Also, Matt Levine clearly didn't have his 10-year-old smartass ass kicked frequently enough.

Jul 12, 2012
Sandhurst:

I am absolutely fed up with Deal Breaker's Matt Levine.

HunrgyIntern, is that you?

Jul 12, 2012
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