Who will take J.P. Morgan to task?July 12, 2012: 2:09 PM ET
Many of the frontline safeguards for our capitalist system are as weak now as they were a decade ago. Even worse, we seem tired of addressing what still needs to be fixed.
FORTUNE – For the last couple of weeks, it has been Barclays (BCS) CEO Bob Diamond's moment in the sun (or interrogation lights) -- until he rode off into the sunset, that is. But it will be J.P. Morgan (JPM) CEO Jamie Dimon's turn to take the spotlight on Friday for two hours of quarterly earnings announcements and questions.
The SEC and plenty others will be watching Dimon carefully. Disclosure is one of the bedrocks of our capitalist system, but J.P. Morgan's recent massive trading loss disclosures are putting our faith in the system to the test. Dimon reported $2 billion in losses in May, which contrasted starkly with the $6 billion figure Congressman Spencer Bachus told other members of Congress in Dimon's presence in June. And the loss could actually be as high as $9 billion according to media reports.
Part of what is happening feels like Enron all over again. Not just because of J.P. Morgan's refusal to turn over emails in an energy pricing manipulation investigation, or that there are so many ongoing investigations into the company's behavior -- including the possibility of Libor manipulation investigations -- but because many of the frontline safeguards for our capitalist system are as weak now as they were a decade ago. Worse, we seem tired, somehow, and even less willing now to focus our attention and really get a hold of what is going on.
It's not that we don't remember the past. We remember our history all right, but, at the same time, we are not fully aware; we seem stuck and unable to take action to change our course.
Given the opportunity, however, we should take a moment to observe the July 13 7:30 am call. In addition to seeing what Dimon has to say, I'll be looking to see whether the analysts are as subservient as the senators were during their June 13 session with Dimon -- or whether the analysts will pull up their suspenders and ask questions like earnest members of the House of Commons might ask the UK prime minister.
Intuitive analysts who can spot a scent and follow it would be welcome indeed. On April 6, the Financial Times and Bloomberg reported that J.P. Morgan "had amassed a big position in an index of credit default swaps, sufficient in size to move the markets," and that it was "distorting prices." J.P. Morgan CFO Doug Braunstein on the now infamous April 13 call said the chief investment office (CIO) invested "in high-grade, low-risk securities." But only one analyst, Bank of America's Guy Moszkowski, raised a question in response: "On the CIO question, which obviously you've addressed and has gotten so much attention in the press this week, can I just ask one further question…?" he began. In response to his questions, all Dimon had to do was say there was nothing to worry about and the matter was dropped. A spokesperson for J.P. Morgan declined to comment on the CIO update.
Behind the scenes in 2010, there had been warnings about the CIO, according to Bloomberg and Wall Street Journal reports. In March, the CIO risk limits had been hit, and in early April, the bank had notified regulators of the situation, Dimon later testified.
Dimon backtracked from his April 13 statements on May 10 and announced the $2 billion in losses, noting there had been smaller, less substantial losses in the first quarter.
Fortune's Stephen Gandel has speculated that Dimon could kitchen sink the second quarter, as some new CEOs are inclined to do. If he writes off all he can, delays one-time gains, adjusts pricing, or sets up large reserves, he could trash the quarter but set himself up to look like a hero later on. Or, Gandel suggests, he could do the opposite to minimize the loss. That is a familiar tactic called smoothing.
Dimon, however, might be more subtle than that. When he took over at Bank One, he didn't take all the hits to earnings at once. He spaced them over the early quarters, which created an unusually volatile earnings pattern. He built reserves, did write-offs, and even stopped credit card securitizations for a time, which made it easier to boost earnings later on. On May 10, he told analysts they could expect that "volatility for the rest of this quarter and next quarter or so will be high."
No matter what Dimon does, managing earnings could draw regulatory scrutiny. But will analysts take a closer look?
Post-Enron, Wall Street analysts continue to face pressures to get along with their subjects. Confronting an uphill road in getting information, they don't seem inclined to press them either. When you read the April and May J.P. Morgan transcripts, you can easily spot the analysts' deference to Dimon. When he says he isn't going to answer a question or that they already have the answer, analysts back off. And yet, analysts get paid big bucks to ferret out information on companies. It appears that, at least up until now, journalists are raising the alarms.
It's understandable to want to believe that once we take action (like the Wall Street settlements), we can cross it off the list for good. Congress passes a law, like Dodd-Frank or Sarbanes Oxley, and some people believe the problems should be fixed. And if they aren't, they blame the law. "Dodd-Frank isn't working, is it?" members of Congress asked Dimon last month.
If you live in the U.S., you are probably all too familiar with lawns. You mow a lawn and, lo and behold, a week later you must mow it again. Yet in the capital markets world, we always seem surprised to see unwieldy grass grow back again.
True, recognizing that a company needs a fix is difficult. But even if you can't see the problems coming, if there are people wandering around without a mower, you can bet we'll soon be stuck in the high weeds of the past.
Eleanor Bloxham is CEO of The Value Alliance and Corporate Governance Alliance (http://thevaluealliance.com), a board advisory firm.