Thursday, May 28, 2015

What Jamie Dimon Thinks of His Investors

What Jamie Dimon Thinks of His Investors

On more than one occasion in my career I chaired the proxy committee of a money management firm.   In most instances the committee’s work was routine.  We typically re-elected corporate directors.  On a few measures, such as staggered boards and anti-takeover measures, we usually opposed management.  During proxy season in the spring, thousands of matters required us to vote shares on behalf of our investors.  While we conducted extensive research on proposed mergers, spin-offs, and takeovers, we never had the resources to perform due diligence on more mundane matters.  Instead we hired a proxy advisor to lay out the issues and make recommendations. 

Jamie Dimon, Chairman of JP Morgan had some choice words for investors who rely on proxy advisors such as ISS or Glass Lewis:

God knows how any of you can place your vote based on ISS or Glass Lewis. If you do that, you are just irresponsible, I’m sorry. And you probably aren’t a very good investor, either.[1]

Why was Mr. Dimon venting?  ISS and Glass Lewis advised their clients to vote against Mr. Dimon’s compensation package, and a large number of investors followed their advice.  ISS and Glass Lewis had pointed out that Mr. Dimon’s cash incentives weren’t tied to specific performance metrics.  Although I haven’t always agreed with their conclusion, the recommendations of proxy advisors are usually well reasoned and researched.  In this particular instance, the proxy advisors got it right.

As my editor at the News & Observer pointed out, Mr. Dimon doesn’t appreciate it when capitalism threatens his pay package.  Like most imperial CEOs, Mr. Dimon prefers his investors to rubber stamp his proposals and sing his praises.  I guess in Mr. Dimon’s world a good investor is one who always agrees with him.   In my world a good investor would have insisted several years ago that Mr. Dimon seek employment elsewhere.

By the way, Mr. Dimon’s received his pay package, and the board of directors lauded his performance.  I’ll have more to say about Mr. Dimon, JP Morgan, and the bank’s recent felony conviction for currency manipulation in my column on Sunday.


Wednesday, May 27, 2015

Hypocrisy and Corporate Activism: Gamco

Hypocrisy and Corporate Activism: Gamco

On Wall Street, activist managers are supposed to be the investors wearing white hats.  Hedge funds and a few mutual funds have taken on the title in an effort to shake up companies, boost shareholder value, and drive up stock prices.  As I’ve written previously, some of these funds are interested in long-term change, while many others are merely trying to make a quick profit.  Steven Davidoff Solomon, the “Deal Professor” for DealBook, has exposed the hypocrisy running rampant at one mutual fund complex.  Gamco, owned by Mario Gabelli, has all the corporate policies that it attacks when it acts as an activist investor.[1]  If Gamco were a private company, Mr. Gabelli’s  investment strategy and internal practices might be slightly more defensible.  However, Gamco is a public company, just like the companies that he attacks.

I’ll summarize Mr. Solomon’s excellent column, but I recommend you read it.  Mr. Gabelli controls Gamco through a two-class share system.  He employs his children in the company.  The independent directors of Gamco aren’t really independent.  Mr. Gabelli draws compensation that is far in excess of Gamco’s peer group.  And yet, Mr. Gabelli crusades against entrenched management, excessive executive compensation, and poor corporate governance.

Money management isn’t the only industry steeped in hypocrisy, but no industry does hypocrisy better or more convincingly than money management.

Friday, May 22, 2015

Felony Plea and Dividend Increase: Business as Usual for JP Morgan

A Felony Plea and Dividend Increase:  Business as Usual for JP Morgan

Yesterday was a busy one for JP Morgan.  It pleaded guilty to a felony charge for currency manipulation and agreed to pay an $892 million fine.[1]  At the same time, the SEC waived a series of provisions in the securities laws, so that the bank can continue to do business even though it is a felon.  And, it agreed to increase its dividend by 10% to 44¢/shares, a nine-fold increase since 2009. 

As this week draws to a close, I leave you with a list of settlements by JP Morgan since 2011, which total over $38 billion.  To be fair some of settlements involved practices by companies, such as Bear Stearns, acquired by JP Morgan.  However, the list doesn’t include any settlements or fines under $100 million of which there were many.

I’ve also included a summary of the Board of Director’s assessment of Chairman Jamie Dimon’s performance in 2014, which was used to justify his $20 million compensation package.

It’s clear that Mr. Dimon should have been dismissed some time ago.  If you’d run a business unit with this many violations, you probably would have trouble getting another job in your industry, let alone retaining your current position.  That’s not how it works in finance.   As you’ll see, Mr. Dimon is lauded for his performance and “operating with fortress principles”.   Those pesky fines and violations aren’t worth mentioning.

Violation/Settlement                                                   Amount           Date
Misleading Collateralized Debt Investors                  $154 MM       6/21/11
Anticompetitive Muni Bond Bidding                         $228MM        7/7/11
Foreclosure Abuse                                                      $5.29 B           2/9/12
Misrepresentation of Mortgage Delinquencies          $270 MM       11/16/12
Additional Foreclosure Abuses                                  $1.8 B             1/1/13
Manipulating Energy Markets                                   $410MM         7/3/13
Illegal Credit Card Practices                                       $389MM        9/9/13
Fraud on Derivatives Trade (Whale Trade)                $920MM        9/19/13
Fannie Mae/Freddie Mac Fines                                  $5.1B              10/25/13
Mispriced Inst’l mortgage Securities                          $4.5B              11/15/13
Misleading Representations on Toxic Mortgages      $13.0B              11/19/13
LIBOR Rigging                                                          $108MM         12/4/13
Madoff- Violations Anti-money laundering               $2.6B              1/6/14
False Claims FHA and Veteran’s Mortgages             $614MM        2/4/14
Forced Placed Homeowners’ Insurance                     $300MM        4/3/14
Currency Manipulation                                              $1.3B              11/21/14
Alt-A Mortgage Settlement                                       $500MM        2/3/15
Currency Manipulation                                              $892MM        5/20/15

2015 Proxy Statement Justifying Mr. Dimon’s Compensation:

In addressing Mr. Dimon’s performance, the CMDC and Board focused on the Firm’s strong results in 2014, continuing its track record of successfully adapting to an evolving and challenging landscape. The 2014 priorities the Board set out for Mr. Dimon centered on building exceptional client franchises, operating with fortress principles and maximizing long-term shareholder value (emphasis added).              

Thursday, May 21, 2015

Three Gross Generalizations in One Column: Thomas J. Friedman

Three Gross Generalizations in One Column:  Thomas J. Friedman

I only have to produce two columns per month for the News & Observer, and at times it is hard to come up with material.  So I don’t envy Thomas Friedman’s task of putting together a column once a week.  However, in yesterday’s New York Times Mr. Friedman may have set a record by cramming three thinly supported generalizations into a single column.[1]  He begins by asserting that this presidential election cycle features the lowest level of policy discourse in history.  He then makes a broad economic assertion that “we are at the beginning of major shift on the question of what is worth owning.”  And he polishes of the column by asserting that the geopolitical world can be divided into the “World of Order versus the World of Disorder.”   I’ll leave it to political analysts and political scientists to pick at the first and third assertions in Mr. Friedman’s column.

I want to briefly examine Mr. Friedman’s economic notion that we are entering an economic period in which the salient question is what assets businesses should own.  He uses a catchy quote from Tom Goodwin at Havas Media to build his case:

Uber, the world’s largest taxi company, owns no vehicles. Facebook, the world’s most popular media owner, creates no content. Alibaba, the most valuable retailer, has no inventory. And Airbnb, the world’s largest accommodation provider, owns no real estate. Something interesting is happening.

To be sure, it’s a great quote.   However, the question of what assets business should own is as old as capitalism itself.  For decades companies have been trying to figure out how to generate the highest possible return on investor capital, while retaining effective control of their businesses.  Undoubtedly, the Internet and microprocessors have allowed Uber, Aliba, and Airbnb to achieve a high level of control of wide-ranging assets without having to own the assets.  Mr. Friedman has simply walked into a story that’s been unfolding for a long time. 

For example, in the hotel industry a major company like Hilton hasn’t had to own much more than its brand and trademarks.  One set of investors own the land and buildings, and another set of investors own the property and hotel management companies.   A hotel company might even be able to outsource the reservation system.  In the end, the hotel company controls a vast empire of properties through a series of contracts and licensing agreements. 

For decades McDonald’s and most major restaurant companies have controlled a majority of their U.S. restaurants without owning them.  Manufacturers have been shedding inventory through “just-in-time” systems for years.  I vaguely recall Mr. Friedman writing about these systems 25 years ago.  Most airlines don’t own their planes and often don’t own their commuter operations.   I could go on and on.

The world is extremely complicated, so we eagerly welcome anyone who can simplify and make sense of the chaos that surrounds us. However, Mr. Friedman is not doing us any favors when he makes claims that don’t stand up to scrutiny.  Moreover, I’m not expecting the presidential aspirants to answer Mr. Friedman’s or anyone else’s policy questions.  Those folks are too busy raising money from the people who will actually control America’s public policy.