Tim Johnson, the chairman of the Senate Banking Committee, opened the hearing into the $2 billion trading loss that JPMorgan recently incurred. In his address, Johnson said “it was an out-of-control trading strategy with little to no risk controls that cost the company billions of dollars. …. we can, and must, demand that banks take risk management seriously and maintain strong controls. …. I expect Mr. Dimon to be able to answer tough, but fair questions today.  A full accounting of these events will help this Committee better understand the policy implications for a safer and stronger financial system going forward.”

Johnson made the objectives almost impossible to achieve from the outset, limiting each senator to 5 minutes. It was clear from the questioning that no strategy had been agreed between the Senators, and so a number of them were left with unanswered questions.

In Dimon’s prepared testimony, he ascribed the losses to a change of strategy, that instead of reducing risk, increased it.

It was a reporter for CNBC, not one of the Senators, that questioned Dimon on the email that he’d been copied notifying him of the change. “I paid virtually no attention to it. I didn’t think it was significant,” he said. The portfolio is worth $350 billion.

If that’s not significant, what is?

Dimon, at least, is open about his mistakes.

Dimon says that clawback provisions will be applied to recover some of the losses from responsible officers.

It’s a pity that the Senator’s salaries don’t have similar provisions.

More at:
Testimony of Jamie Dimon Chairman & CEO, JPMorgan Chase & Co. Before the U.S. Senate Committee on Banking, Housing and Urban Affairs Washington, D.C. June 13, 2012
Dimon Says Overconfidence Fueled Loss He Can’t Defend
Dimon Fires Back At ‘Complex’ System In U.S. Senate Grilling
Jamie Dimon of JPMorgan Chase leaves Senate banking committee in the dust
Senators Suck Up to Jamie Dimon, Get Paid for It
Top 20 Contributors Senator Tim Johnson 2007 – 2012
Senate Banking, Housing and Urban Affairs Committee
Dimon, JPMorgan Chase Have History with Senate’s Banking Panel
Jamie Dimon’s Risky Business
Dimon has now joined the Lou Club

Fooling all of the people

Jamie Dimon, the CEO of JPMorgan, took a different approach to the recent $2 billion trading loss the bank suffered. In the other cases: Barings (Nick Leeson), Société Générale (Jérôme Kerviel), UBS (Kweku Adoboli) it was blamed on the rogue trader. In JPMorgan’s case Dimon took responsibility. “We are sorry” he said. “We let a lot of people down.”

JPMorgan’s “fortress” balance sheet saw the bank through the 2008 crash and repay the $25 billion loan from the government in under a year.

Now things are a little different. Dimon is testifying to the US Senate Banking Committee, answering how and why the loss happened. How hard will he be grilled?

There is concern that he will get off lightly because the five most senior members of the Committee have a heavy reliance on campaign contributions from the politically connected New York bank.

The bank’s long political shadow hangs over the hearing, although several observers were skeptical that it will buy Dimon any favors in such a high-profile public setting.

“Contributions are useful, but they do not protect you when you have gotten in trouble in a high visibility way,” said Larry Sabato, director of the University of Virginia’s Center for Politics. “That description fits Dimon just now.”

The sub-text here is that if it weren’t such a high profile matter, JPMorgan would get special treatment because of the contributions.

There is a clear a conflict of interest, and members should have recused themselves. How will we know whether they have probed as deeply as they could. How do they, in their own minds, know that.

There is already a clue. A big question is whether the $2 billion figure covers the full extent of the losses. Dimon has successfully evaded the question, and the Senators have not pressed him. If he knows that the $2 billion is the total of the loss, there is no reason not to answer – so either he does not know – which is very bad, or he knows that it’s bigger and isn’t telling, which is worse.

The American voters have a right to something better.

More at:
JPMorgan Builds Vast Web of Staff, Financial Ties to Lawmakers
Charting the Cozy Connections between JP Morgan and the Senate Banking Committee
JP Morgan’s Jamie Dimon apologises for $2bn losses
Schumpeter A tissue of lies
Ina Drew Out At JPMorgan After $2B Trading Loss, Dimon Says Firm Still ‘Very Strong’
Where is the Money? Eye on the Bailout

Democracy damaged

Both kinds of democracy have recently been badly damaged. Democracy, the one with the capital “D” includes human rights, rule of law, freedom of expression, good governance, and the right of every citizen to have a say in the way that the country is governed. The other democracy, the one with a small “d” is about the right of every citizen to have a say in the way the country is run – often summarised as “one man one vote”.

The crime scene is Egypt. The crime – the presidential election.

The people of Egypt fought for, and some died for Democracy. The system of democracy that the International Community proposed has produced a result that will disappoint almost everyone.

Let’s analyse the result so far. The first round did not produce an outright victor, one that had more than 50% of the votes cast. The two men who prevailed, and will face each other in the run-off scheduled to take place on the 16th and 17th June are polar opposites. Muhammad Morsi, of the Muslim Brotherhood, promises to impose Islamic sharia law and radically to reform government. His rival, Ahmed Shafiq, served as Mr Mubarak’s trusted last prime minister, stresses a swift end to what he calls “revolutionary chaos”. Morsi canvassed 25% of the vote, and Shafiq 24%. The turnout was 40%. That means that at best, the eventual winner will have 10% support of the eligible voters.

The 40% turnout, in a country where there is such a vested interest suggests either voter fatigue or that the choices available are not appealing. With the two candidates on opposite ends of the political spectrum, the next round is more likely to indicate a vote against one candidate rather than a vote for the other, leaving the ultimate winner with an unconvincing mandate.

The Economist reports that Mr Mubarak’s powerful intelligence chief, Omar Suleiman, ominously suggested before the election that in the event of a Brotherhood victory the army would simply take over. Just as ominously, disgruntled revolutionaries rumble that if Mr Shafiq were to win, they would again take to the streets.

Democracy in Egypt will be badly wounded, perhaps mortally.

The system of run-off elections provides a solution to deal with the lack of an outright winner in homogenous stable societies, not those in the midst of upheaval.

The benefits of Democracy have been tainted by the failings of an unsuitable system of democracy.

More at:
Egypt’s election Two reasons not to be cheerful

Politics and money

As a student of the science of marketing, seeing how politicians get elected is both interesting and sad. The marketing professionals, who behind-the-scenes conduct the campaigns, are leaders in the field. They leave nothing to chance.

Understanding the target market – and ensuring that the product/service meets the needs and aspirations of the voters forms the core of these prime examples of marketing. In the case of politics the product is a person, and while psychologists will tell you that personality is formulated in the early years of childhood, it appears that with politicians this doesn’t apply. Because elections often focus on the person, and what they stand for, rather than policies, personality traits appear to be fungible. During the primaries in the United States, Republican candidate’s views move to the right, while Democrat candidate’s move to the left. Once the primaries are over both Republican and Democrat candidate’s ideas move towards the centre. Fungible! The politicians two-step.

Marketing is an expensive exercise, and political campaigns are no exception. The 2008 presidential campaign is estimated to have cost in excess of $1 billion, and now with the introduction of the super Political Action Committees (Superb PACs) the cost of the 2012 election campaigns are likely to cost even more. Where does all that money come from?

A recent episode of “This American Life” (#461) provided an interesting peek behind-the-scenes. The episode starts with a voicemail left on the telephone answering machine of a lobbyist by Eleonora Holmes Norton, a US Congresswoman sounding a lot like a telemarketer, asking for money.

It’s not an isolated incident. Here is a quote from the second in command of the US Senate, Dick Durbin, Democrat from Illinois.”I think most Americans would be shocked– not surprised, but shocked– if they knew how much time a United States senator spends raising money. And how much time we spend talking about raising money, and thinking about raising money, and planning to raise money. And, you know, going off on little retreats and conjuring up new ideas on how to raise money.”

Congress men and women complain that they don’t have enough time to read, study, and understand the issues that they are voting on. This in part explains why. There are numerous complaints that laws are not properly thought through, badly drafted, and biased towards specific interest groups. If the people who are supposed to be doing the work are too busy raising money, then perhaps one understands why.

The lobbying industry is said to be worth $3.5 billion per year, and the revenue comes from interest groups trying to influence lawmakers to change legislation in the direction the interest group would prefer. Often the interest group is able to measure the dollars spent on lobbying against the potential return if the proposed legislation follows their interests. Consider the American Jobs Creation Act of 2004. This was a piece of legislation that lots of multinational corporations spent a lot of time lobbying for because it got them a huge, one-time tax break. Some of the profits – the profits they made overseas – would be taxed at just 5% instead of the normal 35%. A massive windfall. This law caught the attention of a tax professor at the University of Kansas, Raquel Alexander who was able to calculate the return on investment: $220 in tax benefits for every lobbying dollar spent, a return of 22,000%. That’s not to say that interest groups get that kind of return every time. That the lobbying industry has not suffered a decline in the financial crisis suggests that the return on investment still justifies the amount of money being ploughed into the industry.

When the interest group gets its way, if the government is going to balance the budget, it needs to get the money from somewhere else, and if you’re not represented by a lobbyist, or a switched on politician, that’s going to be you. Of course, if the budget doesn’t balance, then your kids will pay for it.

Within the international community we try to influence the people of the developing countries that suffer the effects of kleptocracy, nepotism and corruption and suggest that they to adopt democracy, using the Western example. It’s not an easy job.

A better form of government?

In an earlier rant I suggested that the current form of democracy is an anachronism. So what?

In 1945, while he was attending the Potsdam conference, Churchill was voted out of power by the British electorate. The Potsdam conference was one of the most influential meetings of world leaders, attended by Churchill at the beginning (followed by Attlee), Truman who had succeeded FDR, and Stalin. The agenda was how to divide Germany and Austria between the powers, and the strategy to end the war with Japan. At the time, Stalin armed with intelligence gathered from spies within the Manhattan Project knew more about America’s nuclear weapons than did Truman. It was not opportune to lose the continuity of leadership. The British electorate thought otherwise.

In 1947, Churchill commented that “democracy is the worst form of government except all those other forms that have been tried from time to time”, as leader of the opposition making a speech in an attempt to prevent Attlee from disbanding the House of Lords.

Four years later the British public, perhaps appreciating the error that they had made, re-elected Churchill.

Already in 1947 Churchill understood that a better system of government in an increasingly complex world had become necessary. Now, 65 years later there has been little improvement.

So what would be better?

Firstly, if the people in government are qualified to do the job, perhaps they would do it better. Politicians are professionals at getting elected, not doing the job that they are elected for. The people running the government should be qualified to manage in the specialist roles: economics, finance, law, justice, education, defence, policing, tax, social services, communication, information technology, transport, energy, medicine and health, agriculture, mining, banking, art, history, and management.

Once the necessary qualifications have been obtained, the professionals would need to serve an apprenticeship, working with and supporting practising experienced professionals.

Then, after having served the apprenticeship, the next step is graduation to a professional consulting role, analysing working professionals and advising them on strategies that can resolve the issues that they face.

Respected consultants can then be promoted to junior roles in practice, where they themselves face the daily challenges and the responsibility of developing and implementing solutions. Candidates that establish a successful track record are promoted to higher responsibilities, while the less successful go back to consulting, or perhaps some other career.

Of course there are some practical issues. Where do the qualifications come from? Who sets the standards for the qualifications? Which organisation will manage this? Who appoints the professionals? How is their performance measured? Why would the existing politicians accept this change? Why would any country accept this change? Who pays?

This would ordinarily be a responsibility of the UN – but there are reservations. The functionality of the UN is something that William Shawcross in his books “Deliver us from Evil” questions because the Security Council is divided in principle. That won’t work.

So, if not the UN, who?

An alternative is the European Union – as an experiment to help some of its distressed members, as well as the potential candidates for membership.

To instigate the appointment of this government in any country, the electorate would have it as an alternatives to the other candidates on the ballot in an election. If elected, the voters can call for the system to be terminated by way of a referendum, which happens every five years (say) or if sufficient voters (say 5% of the registered electorate) call for one.

As soon as governance is established as a profession, the leading universities will respond to the demand from prospective students. The standards for qualification should be set by a professional body, as is the case with most other professions.

Initially, the EU will manage the process, with the intention of allowing it to devolve into an internationally recognised independent body. This same body will propose the candidates for various positions in the country. The country represented by an elected “Senate” will have the authority to select candidates from among those that are proposed by the International Body.

Measuring performance: growth in GDP, level of trade, (lack of) International conflict, (reduction in) crime rates, education performance, health, infrastructure, efficiency of transport, energy composition and supply, efficiency of government are all measurable and comparable with both past performance and the performance of other countries.

Existing politicians might be obliged to accept change as a condition of acceptance into the EU, or for financial support, or because the electorate demand it.

The electorate would want it because, once proven, it is seen as a better option to what is already on offer – in many countries it would be an easy choice.

Who pays – the country should, as they do now.

Some other thoughts – the government should not have the authority to declare war. That is under the control of the International Body, which also supplies the manpower, weapons and expertise.

Similarly the police and justice departments fall directly under the control of the International Body. This to prevent coups, and to get the benefits of scale.

Most importantly, the professionals have continuity, and their goal is promotion to a larger country, and higher pay and more prestige. Large countries will have proven leaders. Small countries will have leaders determined to succeed, so that they are promoted to lead the bigger countries. Leaders that don’t meet expectations will be dismissed.

Corruption, nepotism, and conflict become less likely.

Utopia – not by far, but it forms the framework for something to build on.

More at:
Technocrats Minds like machines