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JP Morgan chief counts the cost of 'London Whale' loss as bonus is cut by half

Directors say he held 'ultimate responsibility' for trading blunder

Nikhil Kumar,Nick Goodway
Thursday 17 January 2013 00:23 GMT
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The “London Whale” loss has swallowed half of Jamie Dimon's pay, with the JP Morgan Chase chief executive losing his crown as Wall Street's highest-paid bank boss as a result of the $6.2bn (£3.8bn) trading blunder.

The bank's profits during the final quarter of 2012 rose by more than 50 per cent, according to an update today, but Mr Dimon's pay package plummeted after the company's directors concluded that he bore "ultimate responsibility for the failures" connected to the ill-fated bets placed by Bruno Iksil, the trader nicknamed the London Whale.

Mr Dimon, who earned $23m for 2011, making him the top-earning bank chief on Wall Street, will be paid $11.5m for 2012. His base salary, at $1.5m, remains the same, but the loss means his bonus has gone from $21.5m for 2011 to $10.5m for last year.

The board has also delayed valuable share options which were awarded to Mr Dimon in 2008 – which he could have cashed in later this month – until July 2014.

The investigation found that the losses, which involved outsized credit derivatives positions that Mr Iksil took for the bank's chief investment office, the division responsible for investing and managing excess cash, seriously damaged JP Morgan's reputation and has led to a series of court cases against it. Earlier this week US regulators ordered the bank to tighten its controls.

A report into the blunder by a management task force, while holding Mr Dimon to account, put much of the blame on a triumvirate of senior executives. The former chief investment officer, Ina Drew, was blamed for failing to properly oversee the trades, while the former head of risk, Barry Zubrow, took the blame for failures in the way the risk operation was set up. Former chief financial officer Douglas Braunstein was also blamed for weakness in financial controls.

It emerged last night that the bank had reached an out-of-court settlement with Mr Iksil's former boss, Javier Martin-Artajo, who had been named as a defendant in a case filed by the bank in the High Court in London in October. The legal move had come after the bank said it would attempt to claw pay money from those whom it held responsible for the blunder. Today, a source familiar with the case told Reuters that the action against Mr Martin-Artajo had been settled, though no further details were available.

With attention in the post-financial crisis world increasingly focused on whether the promise of big bonuses drives traders to make risky bets, the JP Morgan task force said it had "considered whether compensation might have played a role in these matters". But after spending about eight months scrutinising the blunder, it claims to have found that "the firm's compensation system did not unduly incentivise the trading activity that led to the losses".

Initially dismissed by Mr Dimon as nothing more than a "tempest in a teapot", the loss fed calls for greater regulation of banks in the post-crisis world. But not long afterwards, as more details emerged, Mr Dimon admitted that his initially assessment was "dead wrong". Today, he said the blunder was "one huge, embarrassing mistake".

Despite the London Whale losses, JP Morgan posted its third consecutive year of record profits, with after-tax income rising from $19bn to $21.3bn on flat revenues of $99.9bn. In the fourth quarter, net income stood at $5.7bn, up more than 50 per cent, on revenues of $24.4bn as the mortgage market continued to improve. Announcing the figures, Mr Dimon, who in a conference call said he respects the board's decision to halve his pay, spoke of "favourable credit conditions across our wholesale loan portfolios and strong credit performance in our credit-card portfolio".

The Nomura banking analyst Glenn Schorr said: "All in, we think it's a good quarter for [JP Morgan], and underscores their solid earnings power. Solid earnings progression, capital build & return and reasonable valuation should make '13 another good year in the stock."

In a filing with the US Securities and Exchange Commission, where it disclosed Mr Dimon's pay cut, the JP Morgan board said that while he shouldered some of the blame, he had acted swiftly once he became aware of the gravity of the situation.

"Importantly, once Mr Dimon became aware of the seriousness of the issues presented by the CIO (chief information officer), he responded forcefully by directing a thorough review and an extensive program of remediation," read the bank's statement.

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