An exchange between Alex Pareene and Maria Bartiromo on CNBC Friday encapsulates one of the most important debates in finance that too few people seem to be having.
The dispute boils down to this: Bartiromo and other panelists argue that Jamie Dimon is a great CEO because JPMorgan, the bank he leads, has been perhaps the most successful financial services juggernaut of the past decade, sidestepping the worst effects of the 2008 crisis and growing nicely since then. Pareene argues: Yeah, but JPMorgan's actions have been terrible for society, so he should be canned.
In their own words, here is Pareene: "I think that any time you’re looking at the greatest fine in the history of Wall Street regulation, it’s really worth asking should this guy stay in his job. In any other industry — I can’t think of another industry. If you managed a restaurant, and it got the biggest health department fine in the history of restaurants, no one would say 'Yeah, but the restaurant’s making a lot of money. There’s only a little bit of poison in the food.' "
And Bartiromo: "The company continues to churn out tens of billions of dollars in earnings and hundreds of billions of dollars in revenue. How do you criticize that?"
This is Mars vs. Venus stuff, in the sense that Pareene is coming from a different planet than Bartiromo and others who are creatures of the Wall Street world. The latter group sees Dimon as the most successful of the masters of the universe, as evidenced by the fact that he steered his bank around the calamities of 2008 and has kept it roaring ahead since. In this telling, some of the unpleasantness the bank has faced, like the $6 billion "London Whale" trading loss and potential $11 billion settlement being negotiated with the Justice Department as a fine for its involvement in shady deals for mortgage securities before the crisis, are just a cost of doing business.
On the planet inhabited Pareene (and some of his supporters among the commentariat, like Felix Salmon and Kevin Roose), the fact that JPMorgan has made gobs of money under Dimon, even after accounting for those losses, is almost irrelevant. JPMorgan had been one of the (allegedly) culpable parties in all sorts of chicanery (Tim Fernholz lists the investigations here), and the CEO must take responsibility for such broad problems.
The basic divide here isn't about the merits of these individual cases, or any personal culpability that Dimon might have in bad behavior by the bank (some of which even took place in Bear Stearns and Washington Mutual, companies that JPMorgan acquired as they were on the brink of collapse during the crisis).
The question is what obligation a mega-bank like JPMorgan, and its CEO, have to society as a whole as opposed to just the shareholders who own it.
The rise of "shareholder value" as the foremost goal of corporate leaders has been one of the biggest shifts in American business of the last generation. The measure of a CEO, in our times, is not so much whether he or she builds a company that makes great products, has a large and well-compensated base of employees and contributes to the betterment of society. It is whether he or she has generated positive return on equity higher than that produced by competitors or the stock market as a whole.
By this latter accounting, Dimon has been a wild success. By the former, his record is mixed at best.
The argument over whether shareholder value ought to reign supreme is interesting enough in the context of most businesses; read Steven Pearlstein's case for why the cult of shareholder value has gone too far. With banks, and especially the biggest banks, the case that shareholder value is the wrong thing to measure is even stronger.
If a paper clip manufacturer goes out of business, it affects the employees and customers and shareholders of that particular company, but has no broader ripples. If the last five years have taught us anything, it is how different big banks are from a paper clip company.
It was only five years ago that the demise of the fourth-largest U.S. investment bank spurred a global freeze-up in credit that caused the worst recession of modern times, a $700 billion bailout, trillions in emergency lending by the Federal Reserve and other central banks and the defining economic catastrophe of our times.
It is true that JPMorgan was one of the ports in the storm during this period, with a "fortress" balance sheet that meant it was only a reluctant acceptor of bailout money. But the experience is the clearest reminder one could imagine that giant banks play a fundamental role in making sure capital flows freely through the economy, and that when they take excessive risk or bilk customers or otherwise behave badly, the consequences are broad.
In that sense, to be the CEO of JPMorgan is more like running a major electric utility, say Washington-based Pepco, than it is our random paper clip company. The measure of whether a CEO of Pepco has succeeded is not just how shareholders do. It is how reliably electricity keeps flowing and how satisfied customers are.
There is a trade: An electric utility gets near-monopoly status in exchange for this role, and more or less guaranteed stable, if unexceptional, profits.
Similarly, the biggest banks enjoy an immense federal backstop; in normal times, they enjoy the ability to borrow emergency cash from the Federal Reserve and deposits that are guaranteed by the Federal Deposit Insurance Corp. In extremis, as we have learned, the government will move heaven and earth to keep them from failing.
That role comes with a cost. The cost is extensive regulation, including limits on how much borrowed money they can use (e.g., capital requirements), and sharp constraints on what businesses they can or cannot enter (e.g., the Volcker Rule). These will tend to depress the profitability of banks like JPMorgan over the longer run, making shareholders unhappy, yet also make them more stable and less likely to collapse, making the U.S. economy better off.
In that sense, Jamie Dimon's role at the helm of JPMorgan is not just one of satisfying the company's shareholders, but one with broad responsibility to steward one of the important institutions that supports economic growth. The CNBC video is evidence of how little, five years after the crisis, that sense of broad responsibility has permeated the world of Wall Street.