JPMorgan’s CIO loss and the European Union are quietly conspiring to annihilate your bonus

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Jamie Dimon

Not so golden now

Yesterday Jamie Dimon appeared before the Senate Banking Committee. He, and other executives implicated in the bank’s CIO-related loss "feel terrible" about the entire episode, said Dimon. They will be trying to purge their negative emotions by seizing back the bonuses already paid to all involved. For senior people this should be quite possible: “You can claw back for even bad judgment. You can claw back any unvested stock, you can claw back for things like cash bonuses, so it’s pretty extensive,” Dimon said. 

Nevertheless, the loss at JPMorgan’s chief investment office may have broader implications – not just for those involved and maybe not just for bankers at JPMorgan.

Although Dimon said JPMorgan should produce a, "solidly profitable" quarter in Q2, analysts at Creditsights say the problem at the CIO could have big implications for the bank’s profitability in future.

Since the financial crisis, Creditsights estimates that the CIO generated anything from 25-30% of earnings at JPMorgan. This, they note, is worrying:

“If your estimates are somewhat correct, the question is: why did the best-in-class risk managed bank like JPMorgan need to rely on investing/hedging and trading-generated earnings for the past 2-3 years. We believe the possible answer is that the JPMorgan CIO is indicative of the broader challenges facing banks in generating core EPS in the current slow economic growth and regulatory ridden environment… banks are facing a challenge of how to generate appropriate shareholder returns, and it seems that some players such as JPMorgan may have been relying less on core banking activities to make their quarterly earnings goals.”

If Creditsights' concerns are correct, all the old fears about banks' profitability in the absence of proprietary trading revenues resurface. The implication is that earnings per share at a more cautious JPMorgan will be structurally lower in future - especially in challenging years for client-related businesses. Other banks,  similarly reliant upon ‘investing/hedging and trading-generated earnings,’ may suffer too as investors demand greater scrutiny of risk. Lower EPS will mean a need to make redemptive savings elsewhere. Lower pay will be the corollary. Bonuses will fall even further. Doom.

Anecdotally, headhunters in London say big bonus declines are already being seen as a given this year and for the foreseeable future. “People at Deutsche are being told the days of high compensation are over,” alleges one.

[caption id="attachment_102247" align="aligncenter" width="300"] Creditsights CIO earnings contribution[/caption]

Meanwhile, at the European Parliament

Separately, the Financial Times reports this morning that the European Parliament’s urge to restrict banking bonuses in relation to banking salaries across the European Union is now seen as a done deal.

All that remains to be established is the level at which the ratio is set. The EU wants it to be 1:1. Some banks are hoping to achieve 2:1, but one lobbyist tells the FT many banks are resigned to the 1:1 limit.

Either way, it will leave bankers’ compensation in the City of London massively out of kilter with compensation in places like Russia, which has yet to issue any edicts on banking compensation, and  where bonuses are more than five times higher than salaries at the top end.  As we’ve noted in the past, it will also lead to a big increase in banking salaries, an increase in fixed costs, and a resultant big decrease in jobs.

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