JPMorgan Chase: Shades of Enron, Including Criminal Probe
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JPMorgan Chase (NYSE: JPM), unlike Enron, is not going to fold. Its capital position is strong and we believe its chief executive officer (CEO) Jamie Dimon when he forecasts that a lot more money will be earned. However, there are striking parallels.
Smartest, Highly Paid Kids in the Room
The most obvious, of course, is the classic case of the smartest kids in the room. There is an anecdote that when former Enron president Jeff Skilling was interviewed for admission to Harvard Business School he was asked if he was smart. His reply was supposedly a yes, underscored with an expletive. Dimon seemed to enjoy much too much exhibiting evidence of his high intelligence.
Even before the $2 billion trade gone bad, The Street had been rewarding the lower profile, less intellectually overwhelming leadership of CEOs like Christopher Connor at Sherwin-Williams (NYSE: SHW). He guided the company through the lead paint public nuisance litigation, which could have bankrupted it, and global expansion. The stock is at 120.54, with a 52 week range of 69.54 to 125.20. Note that Berkshire Hathaway (NYSE: BRK) head Warren Buffett cultivates the persona of Midwestern common sense, not East Coast Ivy League high IQ. The stock is at 121,675, with a 52 week range of 98,952 to 123,868.
If Dimon is ousted, this could be the end of the charismatic CEO, at least for decades. Also, activist shareholders against what they see as excessive CEO pay could get their way. A sign of these defensive times for CEOs in financial institutions, Citigroup (NYSE: C) has its annual meeting far from New York in Dallas. Its head Vikram Pandit has become a symbol of over-the-top compensation. The stock is at 28.14, with a 52 week range of 21.40 to 43.06.
Push for Reform
There is also the same push for reform. Enron brought Sarbanes-Oxley. This mess could bring in zealous enforcement of the Volcker Rule and Dodd-Frank. There could be even more kinds of controls placed on financial institutions.
Why this scandal will result in such oversight and the News Corp (NASDAQ: NWS) one hadn’t is that this is perceived as a sign of a lack of control both internally and how financial markets are allowed to operate. Since News Corp’s troubles were contained within the newspaper segment what went on could be positioned as an isolated error. That is even though in England the Office of the Dept of Public Prosecutions has decided to take action against former company leader Rebekah Brooks. The stock is at 20.40, with a 52 week range of 13.83 to 20.94.
Damaged Careers of Employees
In addition, the employees’ reputations are hurt. After Enron’s collapse just about every specialization and rank found it difficult to find jobs. It was assumed they knew what was going on or should have if they were competent business professionals. Since JPMorgan is still operating, employees will be handicapped in their ability to hold or get the trust of clients.
The same damage is happening at Goldman Sachs (NYSE: GS). Its public relations problems went high profile with former trader Greg Smith’s THE NEW YORK TIMES expose about a culture of greed and disinterest in customers. Concerns about its inability to control its people and its operations likely will be reinforced if its CEO Lloyd Blankfein testifies about alleged leaks within Goldman Sachs in the securities fraud trial of former McKinsey head Rajat Gupta, beginning on May 21. Its stock is at 99.77, with a 52 week range of 84.27 to 142.30.
Criminal Probes, Possible Prosecutions
As with Enron, there could be criminal prosecutions. The mob is hungry for heads. The success of prosecutors with the insider trading at the former Galleon Hedge Fund has emboldened the federal government. If it gets a conviction in “U.S. v Gupta,” all financial institutions should be shaking in their boots.
Meanwhile, Bloomberg reports that the U.S. Justice Department and the FBI in New York have begun a criminal investigation of the trading loss at JP Morgan. In addition, the SEC and the group which oversees derivatives the Commodity Futures Trading Commission are also probing into the bank's trading practices. At the company's shareholder meeting, Dimon admitted to a flawed trading strategy but not breaking any laws.
Like all major crises, this one will eventually pass but not without being a game-changer. Investors can get the edge if they figure out the myriad other ways the value of public companies could be affected, not just banks.
janegenova has no positions in the stocks mentioned above. The Motley Fool owns shares of Citigroup Inc and JPMorgan Chase & Co. Motley Fool newsletter services recommend Goldman Sachs Group and Sherwin-Williams. 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.If you have questions about this post or the Fool’s blog network, click here for information.