Has JPMorgan Succumbed to Peer Pressure?
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When the “London Whale” story broke, JPMorgan Chase’s (NYSE: JPM) CEO Jamie Dimon’s initial reaction was to refer to the incident as a “tempest in teapot.” The reaction played very poorly in the press and Mr. Dimon quickly changed his tune, going into damage-control mode. A few quarters of earnings later, and with the appointment of some new blood to the executive management suite in the rearview, what investors should take away from the experience is that you should trust the gut of skilled professionals. The incident continues to provide negative press for the bank, and may have been the basis for recent hiring decisions. Without disparaging the professionals who have accepted these new roles, you must wonder if JPMorgan is being driven by peer pressure.
After all the dust has settled, the Whale trade is estimated to have cost the bank in the neighborhood of $6 billion. I maintain the belief that the precision of this number will always be subject to debate, but not for the reasons that most believe. If the trade was really a hedge against a myriad of other positions, then measuring how much the “trade” cost is meaningless out of the context of the other positions it hedged. This begs the question of why would JPMorgan not fight to get this message out there. The simple answer is that to “explain” the hedge, the company would have to disclose huge amounts of proprietary trading information – likely inviting Congressional hearings – and educate the public on many of its trading strategies.
This is not how professionals conduct business. Better to take the PR hit then give up a range of successful strategies. When you consider the earnings results that the company has posted since the trade came to light, the wisdom of this decision is revealed.
At no time did JPMorgan post a negative quarter, and in the most recent earnings result, the company posted record earnings of $5.7 billion. Not only did this number blow away analysts estimates, it represented a 34% increase on a year-over-year basis. Not to suggest that a $6 billion loss is not significant or worthy of concern, but when the company can practically cover it in a single quarter, the level of panic seems excessive.
New Boss, Not Same as the Old Boss
The company recently named Marianne Lake as its new CFO. Why this announcement is of interest – beyond the fact that females continue to not hold many top spots amongst financial firms – is that she hails from the commercial and retail lending side of the business, as opposed to the investment banking and investment side. The speculation is that the company is making an attempt to put its conservative, “we have learned our lesson” side, forward. Coming off a quarter in which investment banking revenue nearly tripled to $1.4 billion, it is hard not to see the move as politically driven.
It is important to highlight that an other-than-investment background should not be interpreted as a lack of qualification; the distinction stands out but should not put a pall over Ms. Lake before she can demonstrate her ability. Time will tell how things will play out under her watch.
The Peers and the Trade
Relative to its peers, JPMorgan appears to be well positioned. Despite months of criticism, Bank of America (NYSE: BAC) was recently upgraded and looks like it is becoming interesting again. As it works through its mortgage lending issues, analysts are seeing a positive path ahead. Similarly, Citigroup (NYSE: C) is in the midst of its own shakeup, with the recent change of its own management. Citi is working on creating a new culture that can carry the bank into a new chapter. While these peers are becoming interesting, JPMorgan is tested and looks solid moving ahead.
Based on the strength of earnings and its overall position within the industry, JPMorgan is a buy for your core portfolio. It will be interesting to see if the company has picked strong leaders or been pressured into safe PR choices, but Mr. Dimon remains a central part of my attraction to this stock. As long as the company keeps performing, perhaps we can all leave the Whale for Captain Ahab.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool owns shares of Bank of America, Citigroup Inc , and JPMorgan Chase & Co. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!