Senators Carl Levin (Dem.) and John McCain (Rep.) questioned current and former executives at JPMorgan Chase (JPM) about the massive losses incurred from the bank's London trading office at their congressional hearing Friday. While it was already known that the activities there led to a $6 billion loss, questioning by Levin and McCain revealed what should concern investors of the bank even more than the loss itself: the deceit surrounding the bank's losses. As company executives for JPMorgan involved in the loss attempt to skirt responsibility for the careless and deceitful practices, the senators were able to close in on the truth. The significant drop in the stock price last May was a direct result of this ongoing issue and the headline risk has not evaporated with Ina Drew's resignation. Investors should have even more concern about the bank's future now that it is blatantly obvious that exceeding expectations outweigh integrity at the bank, an exchange that yields major downside potential.
Levin grilled Ina Drew, the former Chief Investment Officer for JPMorgan Chase, who on one hand, wanted to take full responsibility for the trades occurring under her watch and on the other, wanted to shift the responsibility to her team which she indicated was covering its tracks and minimizing or miscalculating the impact in their reports to her. Levin and McCain were able to reveal through Ms. Drew that the office was either too incompetent to know the trades' impact that led to the enormous loss or was simply deceitful and unaccountable in reporting their activities.
But executive Michael Cavenaugh really pulled back the curtains and surprised with his answers about the massive discrepancies in reports of losses to the Office of the Comptroller of Currency or OCC where losses were minimized to nearly half of their actual amount. Joined by former CFO Doug Braunstein, he implicated current CEO Jamie Dimon, saying it was his call to not clear up the discrepancy right away. Many considered the losses a result of lack of understanding by the traders and lackadaisical oversight, but the questioning revealed the deceitful nature of JPM management and their outright lack of accountability.
The last time Bruno Iksil put the bank on the front page with this errant, severe loss, the responsibility seemed to be pinned on him as a lone, aggressive now former London trader known as the "London Whale" as he put the bank's entire risk management team in question. Then it was Ina Drew, the former Chief Investment Officer, that took responsibility as she supervised the activity. Investors sold off their exposure to JPMorgan Chase last May, but earnings beats attracted investors back to the company. The woes of the London office under Ina Drew not only threatened earnings but also the integrity of a company that thrives on a reputation as a business comprised of keen, experienced professionals. After Drew resigned and the internal investigation completed, many investors seemed content with placing nearly the entirety of the responsibility on former employees. The bank is no longer able to use Drew and Iksil as scapegoats; the congressional investigation revealed that the bank should be scrutinized further and as more failsafes are proven faulty and the CEO is potentially pulled deeper into the investigation, investors have a great deal of fresh uncertainty with more downside risk than upside potential.
JPM endured significant downside as the news broke about the loss, down over 25% from May 2nd, 2012 to May 21st, 2012. That was when investors thought the loss was only $2 billion. An investor should not take a matter of deceitful reporting of this magnitude lightly, yet the stock is trading higher now than it did just before the loss and even since the financial crisis nearly to its all-time high. Investors were willing to forgive an honest loss since the company is an industry leader and has absorbed the loss and even beat earnings expectations in the last four quarters by an average of over 25%. However, the future of the company's success is now cloudy and the stock is already trading 1.92% down on Friday's close.
Levin and McCain provided investors with all the information they need to start scrutinizing this bank, one should not look at this company through the same lens now that it is clear living down the London Whale is going to take a lot longer than stakeholders hoped. From Steven Gandel's article about the hearing,
"it wasn't that the risk limits were wrong," said Levin. "It was that risk managers didn't manage the risks they knew they had."
Goldman Sachs (GS), however, has comparable success since the financial crisis without the careless trading and false reporting recently seen at JPMorgan, and has beat earnings expectations by more than 38% in the same time frame. Although both are potentially expensive at these levels, JPMorgan is practically giving investors an excuse to sell against its competition. The culture at JPMorgan Chase marred by incompetence and coverup continues to damage the brand, image and reputation as a result of this hearing and will cost investors. Should investors bail out on the stock as they did 10 months ago due to this congressional investigation, short positions would be profitable in the near term.
Additional disclosure: I am not a professional advisor; my interpretations of the market are independent and should not be construed as advice