Nevertheless, many economists still seem not to under-stand that a combination of circumstances in the 1980s made it very easy to loot a financial institution with little risk of prosecution. Once this is clear, it becomes obvious that high-risk strategies that would pay off only in some states of the world were only for the timid. Why abuse the system to pursue a gamble that might pay off when you can exploit a sure thing with little risk of prosecution? (Akerlof & Romer 1993: 4-5).
Step back and ask yourself why we have to pay plutocrats immense bonuses just to decrease the risk that they will screw the shareholders. Why wouldn't a CEO making $400,000 annually act in the interests of shareholders? Why do the shareholders have to bribe the CEOs not to loot the shareholders -- and why is the bribe required to get the CEO to act as if he were honest have to be so huge? What has become so despicable about elite CEOs' character that they need massive bribes simply to do their jobs honestly?
"Further punishing" -- Dimon was paid $11.5 million in 2012 despite being the guy in charge of JPM when it became public that the bank had committed the greatest financial crime spree in history. The issue, as framed by JPM's board of directors, was not whether to demand his resignation and his repayment of all past bonuses. That would have been the ethical thing to do. JPM's board never considered doing the right thing. The board framed the issue as whether to pay Dimon $11.5 million or over $20 million for 2013. To paraphrase Tevye again, "May the Lord smite me with [this "punishment'] -- and may I never recover!"
We don't need no stinkin' Ethics! (or use of the "F" word)
Stewart, like Deal Book and Politico, manages to discuss a subject in which ethics and morality are the core considerations without every using or discussing those words. Stewart also manages to avoid the words "fraud," "violation," or "crime." He says that Dimon clearly deserves to be paid a huge bonus because JPM's fraud spree, net, has proved profitable. Sadly, Stewart is not writing a deliberate parody.
Dimon is "the One"
Assume for purposes of analysis that Larcker is correct -- Dimon is "the top commercial banker in the country, if not the world." I call this Larcker's hypothesis (aka, "Dimon is "the One'"). What would the analytical implications of that "fact" be? The first implication is that we should put every systemically dangerous institution (SDI) in receivership immediately. If every CEO of the banks that are so large that the administration is telling us that when they fail it is likely to cause a systemic financial crisis is even more incompetent and/or even more unethical than Dimon then the financial system is in imminent danger of its next collapse.
(For the purpose of analyzing the implications of Larcker's hypothesis, I am taking the most favorable possible view of Dimon's abilities and character given JPM's epic financial crime spree. I assume, arguendo, that he had no knowledge of the frauds and no involvement in creating the perverse financial incentives and the unethical tone at the top that led to the world's most destructive series of financial crimes at a bank. I do not find those assumptions credible.)
The Implications of "Too Big to Manage"
An alternative hypothesis about Dimon's abilities and character might initially seem more favorable to Larcker's hypothesis -- it is possible that Dimon is "the One" but that it is impossible for even the best bank CEO in the world to run an SDI in a manner that does not lead to endemic fraud by the SDI's officers. JPM could be so "too big to manage" that it became a massive criminal enterprise despite the leadership of the best CEO in the world. But that situation would actually damn Dimon. As the best CEO in the world he would have realized years ago that JPM was vastly too large to manage and that his inability to manage it lead to endemic fraud. He would be legally and ethically culpable for failing to alert JPM's board of directors and its regulators to that fact and dramatically shrinking JPM.
What Dimon actually did was to vastly expand JPM and use executive compensation systems for the officers and employees that created the perverse incentive systems that gave him "plausible deniability" while enriching him by inducing endemic accounting control fraud. Many of these frauds cost JPM billions of dollars rather than enriching them, but others do create very large profits. Larcker could not be more wrong that in his bland assurance that paying Dimon in a manner that "aligned" Dimon's interests with those of the shareholders he was enriching through JPM's frauds would be a good thing for the world. Indeed, the OCC should making placing any bank that creates that form of alignment in receivership a top priority.
Listen to Larcker's Research
We know that Larcker knows better, for he and co-authors documented the key points in 1999 -- and the research since then has greatly added to the strength of those points.
"CEOs earn greater compensation when governance structures are less effective. We also find that the predicted component of compensation arising from these characteristics of board and ownership structure has a statistically significant negative relation with subsequent firm operating and stock return performance. Overall, our results suggest that firms with weaker governance structures have greater agency problems; that CEOs at firms with greater agency problems receive greater compensation; and that firms with greater agency problems perform worse."
John E. Core, Robert W. Holthausen, David F. Larcker, Journal of Financial Economics 51 (1999) 371-406, "Corporate governance, chief executive officer compensation, and firm performance."
JPM is the classic example of the firm with "weak governance structures" that results in the CEO "receiv[ing] greater compensation" when he should be summarily fired for JPM's epic fraud spree. Some forms of control fraud enrich the firm, but accounting control causes firms and shareholders, once the frauds are discovered, to suffer reduced profits and potentially catastrophic losses. Larcker and his co-authors' euphemism for fraud is "agency problems." The word "fraud" does not appear in their article and they do not cite Akerlof and Romer (1993).
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