J.P. Morgan Chase has revealed losses of at least $2 billion resulting from hedge trading at its London office, conducted by Bruno Michel Iksil, a trader with the ominous and inelegant nickname of “The London Whale.” These trades were made as part of standing instructions from company executives to offset anticipated losses from the worsening European market. Eurozone troubles have been the basis of another high-profile financial industry crisis, the collapse of MF Global led by former governor/senator/Goldman Sachs chief Jon Corzine.
The news has wiped out billions of dollars of value for J.P. Morgan Chase, reflected in the trading blunders themselves and the sudden drop of its stock value. It has also wiped out the argument to halt or roll back regulation under Dodd-Frank, the sweeping legislation meant to tame the financial industry following its 2008 collapse. A leading voice to curb Dodd-Frank has been Jamie Dimon, J.P. Morgan Chase’s CEO, heralded as the rare banking chief executive who understood media relations and government relations (including past praise from this writer.)
Dimon has traded the catbird seat for the hot seat. The SEC has launched a probe into J.P. Morgan Chase’s disastrous London trading. Dimon himself has been targeted for anger and ridicule. He has offered mea culpas in keeping with his communication style, more prompt and forthcoming than often seen from CEOs of major companies. As part of his initial apologies, he said sardonically that he should have paid more attention to newspapers in the run-up to J.P. Morgan Chase’s debacle, as early reports questioned the company’s practices and called out The London Whale. Ironically, Dimon jabbed the newspaper industry earlier in the year for paying what he called unwarranted salaries while it assailed financial industry executives for the size of their compensation. (The old maxim of not picking a fight with someone who buys ink by the barrel still applies in the age of the pixel.)
J.P. Morgan Chase’s crisis stems from public relations errors as well as financial miscalculations. These PR issues include:
Never mistake superior reputation for invulnerability. Johnson & Johnson has learned this hard way, going from PR gold standard during the 1980s Tylenol crisis to “just another company” beset with product recalls and public mistrust.
Conduct PR risk analysis as well as financial risk analysis for every corporate activity. J.P. Morgan Chase should have scrutinized The London Whale in this manner. No decision should be based solely on dollars and cents.
Act quickly on initial media reports. The Wall Street Journal red-flagged The London Whale a month before the story broke on the $2 billion loss. It may have been too late at this point to stem the monetary damage but a proactive PR approach would have helped J.P. Morgan Chase take charge of its media destiny through early disclosure.
Understand the responsibility of being an industry spokesperson. While other financial industry leaders stumble in the spotlight or shun it all together, Jamie Dimond welcomes visibility and has acquitted himself well until now. However, being an industry spokesperson entails the added responsibility of setting a constant example. Extreme risk and inadequate oversight violate this responsibility and make a subsequent fall from grace that much harder.
In the end, J.P. Morgan Chase has given a gigantic gift to the opposition. Any softening of Dodd-Frank is now extraordinarily unlikely. Jamie Dimond may still be held in higher regard than other industry CEOs such as Goldman Sachs’ Lloyd Blankfein and Bank of America’s Brian Moynihan, but he has lost his unique ability to push back against politicians and critics, a shortfall that may overshadow the $2 billion consumed by The London Whale.
J.P. Morgan Chase is likely to recoup its trading losses relatively soon. However, the damage to its reputation and the effects of Dodd-Frank untrammeled will last for years to come.