Yoshikami: JP Morgan and Taking Responsibility
The surprising news of a $2 billion loss at J.P. Morganis understandably shaking the markets and investor confidence.
It remains to be seen what the total losses will be related to this “egregious” loss; it may increase as market participants now know JPM's impacted positions which will create additional pressure for the bank.
One should not underestimate the impact that this loss will have on the bank's reputation as well as the current dialogue about proprietary trading.
Call it hedging or any other name, but when a bank incurs these types of losses, it certainly increases calls for more regulation of the banking sector. This is the last thing financial institutions are looking for in a post TARP world.
But despite today's headlines, one needs to take a more measured perspective about J.P. Morgan. This is a firm that has demonstrated in the past that it can navigate difficult conditions. There's a reason why this institution bought Bear Stearns; this bank is considered to be a solidly run organization. And in looking at the headlines of the day and how the issue is being addressed by Jamie Dimon, their response should give investors some comfort that management is not hiding or avoiding confronting this trading issue head-on.
In an unexpected conference call, Dimon again and again stated that there was no excuse for the losses and that the bank was fully responsible. He furthermore stated that he believed that systems failed on multiple occasions and that the bank would take steps to address these issues. He made no excuses and did not attempt to spin the bank's losses. In other words, he took responsibility.
How many times have you seen an executive attempt to blame market conditions or outside forces for their ills? How many times have you seen executives fail to take responsibility for corporate difficulties? Unfortunately, the standard procedure seems to be self-preservation in today's business world and less about standing up and taking responsibility. Companies should be accountable for mistakes but should also get credit for transparency. Taking responsibility is the hallmark of a sound management team. In my view, JP Morgan is taking responsibility and taking action.
Bank earnings will continue to accelerate as the US economy improves. And despite the problems in Europe, US banks are poised to recover in the coming years as loan growth restarts. Yes, margins will likely decrease as proprietary trading is limited, but the financial sector after years of stagnation and disaster, is finally beginning to recover.
As an investor, watch over the next couple days to see what the net consequence will be of the current trading issue at J.P. Morgan; the losses may grow. But when the dust settles, recognize the J.P. Morgan acted today in a way that increases one's confidence in bank management. And that's what you're looking for when you make an investment; a management team that doesn't make excuses, doesn't pass the buck, and is transparent even when the news is not so great.
Michael Yoshikami will be a guest on CNBC's "Closing Bell" to further discuss this isssue. His appearance is scheduled for today, Friday May 11 at 4:30pm/et.
Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of the DWM Investment Committee at Destination Wealth Management. Michael is a CNBC Contributor and appears regularly on the network. DWM is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutions and individuals around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009, 2010 and 2011.