Macaskill on markets: A power vacuum at the court of King Jamie

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By:
Jon Macaskill
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Jamie Dimon’s failure to control the traders gone wild in JPMorgan’s chief investment office has dealt a serious blow to the standing of group CFO Doug Braunstein and investment bank head Jes Staley.

Braunstein and Staley were not directly involved in the credit derivatives trading losses, but their inability to act as a brake on the uncontrolled risk-taking at the CIO underscored their lack of influence at the Court of King Jamie.

Braunstein does not have a markets background – he was promoted to CFO after a career in corporate finance at JPMorgan.

That seems to have left him poorly prepared for the detailed case-building that would have been required to confront Dimon about the burgeoning risk being taken in the CIO under Ina Drew, a long-standing favourite of the group chief executive. Braunstein has also been having a bad crisis since the scale of the CIO problems became apparent. On the now-infamous first-quarter earnings call on April 13 when Dimon dismissed the trading issue as a "tempest in a teapot", Braunstein appeared to have been instructed to read out a statement about the function of the CIO that can be charitably described in retrospect as equivocal.

The earnings call was not filmed so it is impossible to say whether at any point Braunstein surreptitiously displayed a sign saying: "Help! I Am Being Held Against My Will."

When Dimon later put his direct reports on a battle footing after the multi-billion dollar loss emerged he gave former CFO and current treasury and securities services head Mike Cavanagh a lead crisis-management role, which was not exactly a ringing endorsement for Braunstein.

Staley has a more diverse background and has presided over JPMorgan’s rise to global dominance in sales and trading among banks. JPMorgan generated $19.3 billion of markets revenue last year, driven by $15 billion from fixed-income trading that was almost 50% higher than at any other dealer.

But Staley is still dogged by the perception that he got the job of investment bank chief executive because Dimon found him sufficiently pliable after the firing of Bill Winters in 2009 and the near-simultaneous retirement of Winters’ former investment bank co-head Steve Black.

Staley must have heard plenty of sniping from his own subordinates about the increasingly loopy trading strategies being pursued by the dealers in the chief investment office. JPMorgan’s credit trading business is number one among dealers by revenue generation, with over a million client trades a year, according to a presentation Staley made to investors in February.

Officials such as Guy America, the London-based global head of credit trading at the investment bank, must have delivered feedback that the CIO’s credit derivatives trades were distorting markets. But if Staley passed on this input to Dimon at global headquarters on Park Avenue in New York he did not make the case for a change in approach forcefully enough.

Now America and other investment bank business line heads face the prospect of spending the coming months trying to convince clients that JPMorgan is still the go-to house for trading and risk management, despite the spectacular demonstration by another wing of the bank of how not to handle a massive asset and liability mismatch.

Bankers such as America and Ashley Bacon, head of market risk for the investment bank who has been seconded to help clean up the CIO mess, might well get immunity from any fall in bonus payments at the end of this year related to the CIO losses.

This approach could quell complaints without restoring confidence in Staley and Dimon, and it is not clear if either official is at risk of being replaced. There are certainly no strong internal candidates for either group CEO or investment bank CEO. Matt Zames, the fixed-income co-head who was drafted in to replace Ina Drew as head of the chief investment office, is now being touted by the bank’s publicity machine as a highly capable operative. But Zames has little support from fellow managers.

There is a small but significant core of Bill Winters loyalists still at the bank, however, mainly in his London base. There is no prospect of the investment bank equivalent of the prince across the water making a comeback while Dimon remains group CEO in New York. Still, Winters acolytes can fantasize about a scenario where Dimon is ousted as the CIO scandal worsens and the call goes out for the return of Bill.