It usually goes that the better a Chief Executive performs, the more likely he or she is to get a raise. However, J.P. Morgan (JPM), which just rewarded its Chief Executive Jamie Dimon a huge raise, despite the bank's facing billions in fines over the past decades under his watch appears to operate in a parallel universe.
Read about ANY major bank fraud since the turn of the century, and it's likely to include J.P. Morgan, often accompanied by the smiling image of Mr. Dimon.
Initially, J.P. Morgan's board followed tradition with regards to corporate raises. After the blowup of the multibillion-dollar London Whale trading debacle last year, Mr. Dimon's paycheck was slashed in half, bringing it down to $11.5 million, and instantly changing his status as one of the best paid bankers in the world. However, the bank's Park Avenue headquarters delivered a new message: Mr. Dimon would, in fact, be rewarded for pacifying government regulators investigating bank fraud and possible violations of the Foreign Corrupt Practices Act.
While few directors did not think a raise for Dimon appropriate, in light of the nearly $20 billion the firm faced in penalties, the majority pointed out how artfully Mr. Dimon prevented recent disasters! For example, Dimon negotiated a $13 billion settlement with Attorney General Eric H. Holder Jr. to avert a lawsuit over the mortgage-backed securities scandal, and a $2 billion settlement with US attorney Preet Baharaover the Barnard L. Madoff scam. (In the latter case, J.P. Morgan failed to report to the authorities Madoff's $50 billion dollar Ponzi scheme, which occurred under the bank's nose. See a previous article on J.P. Morgan's history with Madoff Securities here.) Those in favor of giving Dimon a raise for such finesse also pointed out that despite the heavy fines, profits exceeded losses, and stock prices had risen over 22 percent in the past year. In 2013 alone, the bank made $17.9 billion.
While board members may have found a way to prevent alienating Dimon, J.P. Morgan may be sending conflicting messages to regulators, shareholders and the American taxpayers who only a few years ago bailed Dimon out. Will the bank continue to pay its way out of alledged fraud? Does it have little regard for ethics?
Investors Who Own J.P. Morgan Stock Should Take Profits Now
It is not clear how much Mr. Dimon's total pay package will be in 2014. It probably won't return to the $23.1 million figure he made in 2011; however, it will likely be disproportionate to the returns we believe he will deliver to his shareholders in calendar 2014. Just over the past 10 days his stock is down about 7% which far exceeds the minor correction in the overall market.
We believe JPM's stock is likely to be continue to underperform the S&P 500 in 2014--just like it has since the first day Jamie took over as CEO on December 31, 2005.
Investors must also be wary of the titan financial institution's inner workings and carefully consider alternative, more transparent picks for long-term success. In our experience, financial institutions that constantly has criminal and civil investigations usually has poor stock performance and inferior dividends for its shareholders.
The huge amounts of fines that JPM continues to pay the United states of America is a big tell in our opinion.
We will feel more comfortable with JPM when the bank and its directors are more focused on outperforming the S & P index and paying their shareholders a growing dividend rather than spending their time approving multi million dollar settlements that the bank's CEO has negotiated with the United States government to avoid criminal and civil trials.
How Should Investors Invest The Proceeds
The financial sector will continue to recover in 2014 and many institutions in the sector should provide investors with solid results.
As interest rates continue their modest rise, banks will be able to increase their margins. Also, the delinquency rates and foreclosures will continue to fall in 2014 allowing banks to lower their reserves and increase their dividends.
Banks like U.S. Bancorp (USB), Berkshire Bank (BHLB) and PNC Financial (PNC), which have proven management, pay their shareholders a solid dividend, and don't have the legacy issues of banks like JPM should be good investments in 2014. See our prior story on Berkshire Bank here.