Business

John Gapper

London is acquiring a dangerous reputation for US financial institutions.

The financial crisis in 2008 was set off by the London-based derivatives unit of American International Group, which was insuring potential losses for banks. Now, JP Morgan Chase finds itself in trouble over a $2bn hedging/trading loss in London.

As the FT reports this morning:

Ina Drew, the head of the Chief Investment Office, Achilles Macris, head of the London-based trading team, and Javier Martin-Artajo, another member of the team, are all set to depart, according to a person familiar with the situation.

Among questions being asked internally is whether it was right to base the unit in London, at a distance from the bank’s New York headquarters.

Compare this with what happened at AIG Financial Products in London, as described by Gretchen Morgenson in the New York Times in September 2008:

In the case of AIG, the virus exploded from a freewheeling little 377-person unit in London, and flourished in a climate of opulent pay, lax oversight and blind faith in financial risk models. It nearly decimated one of the world’s most admired companies, a seemingly sturdy insurer with a trillion-dollar balance sheet, 116,000 employees and operations in 130 countries.

London’s role in credit derivatives is not surprising since, as my colleague Gillian Tett described in her book Fool’s Gold, the credit derivatives market originated in London – and JP Morgan played a large part in inventing it.

And, of course, large investment banks now operate fairly seamlessly between London and New York, with trading desks that span the Atlantic. JP Morgan’s CIO was one of them, since Ms Drew was based in New York.

Nonetheless, if I were running a big US bank, I would want to check carefully on what those people in London are up to.

John Gapper

JP Morgan’s sudden conference call to disclose, and to try to explain, the $2bn trading loss that it racked up in only six weeks was one of the most absorbing bits of live financial theatre since the 2008 crash.

The star of the show, naturally, was Jamie Dimon, the bank’s ebullient and outspoken chief executive, who has been out in front leading the industry’s defence of “too big too fail” banks and pushing back against new capital requirements.

Oops.

Mr Dimon isn’t given to mincing his words and he certainly didn’t this time, as I noted on Twitter while listening:

"Bad strategy, badly executed and poorly monitored" that was intended to hedge against stressed credit markets
@johngapper
John Gapper
Lost $2bn in six weeks. "We made these positions more complex. This strategy was badly executed and badly monitored."
@johngapper
John Gapper
"Could easily get worse this quarter and there will also be a lot of volatility next quarter . . . my general counsel is sitting right here"
@johngapper
John Gapper

John Gapper

Ron Johnson, the former head of Apple Stores, who is now trying to revitalise J.C. Penney, the historic US department store chain, has started with a good idea – eliminating sales commissions.

The Dallas Morning News reports that J.C. Penney hourly workers at its 1,100 stores have been told that commisions are being eliminated and they will instead receive a higher hourly rate (via Business Insider).

The idea is to get away from sales staff  simply pressing customers to buy whatever item they will get the most from selling. This is an noticeable problem in electronics and big box stores, as well as J.C. Penney.

Ron Johnson explained his approach in the Harvard Business Review:

“People come to the Apple Store for the experience — and they’re willing to pay a premium for that. There are lots of components to that experience, but maybe the most important — and this is something that can translate to any retailer — is that the staff isn’t focused on selling stuff, it’s focused on building relationships and trying to make people’s lives better.

That may sound hokey, but it’s true. The staff is exceptionally well trained, and they’re not on commission, so it makes no difference to them if they sell you an expensive new computer or help you make your old one run better so you’re happy with it. Their job is to figure out what you need and help you get it, even if it’s a product Apple doesn’t carry.

Compare that with other retailers where the emphasis is on cross-selling and upselling and, basically, encouraging customers to buy more, even if they don’t want or need it. That doesn’t enrich their lives, and it doesn’t deepen the retailer’s relationship with them. It just makes their wallets lighter.”

Implementing this at J.C. Penney has not pleased everyone:

Some employees who earn commission said Tuesday that their hourly pay will be increased significantly, but they will be given fewer hours and will no longer be full-time workers. That means some will not be eligible for health insurance.

Others said the new pay scale is based on last year’s averages. But with hours and commissions being cut, many of them are calculating that they will make significantly less under the new structure.

Mr Johnson’s initiative is nonetheless right. One of Apple’s great innovations is to turn stores in to places in which staff are helpful, rather than pressing you to buy stuff. The details must be fair, but the principle is correct.

Andrew Hill

Spare me the “shareholder spring” allusions. Not only does the parallel devalue the genuine sacrifice of those who took part in the popular revolts of the “Arab spring”, it misrepresents the nature of the shareholder rebellions that have now defenestrated three UK chief executives, including, today, Andrew Moss of Aviva.

Andrew Moss - no longer lord of all he surveys

Andrew Moss - no longer lord of all he surveys

The natural assumption is that high pay is the root cause of investors’ disgruntlement, whereas tone-deafness on remuneration was merely a symptom of a wider concern about Trinity Mirror, AstraZeneca and now Aviva. What really did for Mr Moss (apart from his habit of letting himself be photographed looking out over the City, like a jut-jawed lord of all he surveyed) was his performance not his pay.

I admire the chief executive who once described his attitude to the quarterly earnings report to me like this: “We spend three days before and one day after getting busy – and then we go back to running the business as usual.”

Andrew Hill

Shortly before Mario Draghi started his press conference at the European Central Bank’s meeting in Barcelona on Thursday, his predecessor Jean-Claude Trichet was addressing a more sympathetic audience at the St Gallen Symposium in Switzerland. If anything, Mr Trichet was probably the cagier of the two.

In spite of some robust questioning from the BBC’s Stephen Sackur, the former ECB president came across as unrepentant about the ECB’s role during the eurozone crisis. He argued, for example, that 14 years ago, 99 per cent of observers would have dismissed as impossible that the euro would keep its value amid low inflation – a performance that he said bettered that achieved by the national central banks in the 15 years before the single currency’s birth. “Had I added that this [performance] would be observed after five years of the worst crisis ever, [the sceptics] would have been 100 per cent,” Mr Trichet said. The nearest he came to admitting to flaws in the eurozone project was when he said the financial crisis had been “like an X-ray or scanner that reveals the problem you might have”.

“You’re going to need a bigger boat,” says the police chief played by Roy Scheider in the film Jaws, when he first catches sight of the shark. Faced with cancer, diabetes and Alzheimer’s, we need a bigger investment vehicle.

John Gapper

Chairperson of the Congress-led UPA government Sonia Gandhi (L) talks with Indian Prime Minister Manmohan Singh. Getty Images

Chairperson of the Congress-led UPA government Sonia Gandhi (L) talks with Indian Prime Minister Manmohan Singh. Getty Images

India does not get a lot of love compared with other Bric countries – particularly China and Brazil. As far as many western investors are concerned, it can be a protectionist, bureaucratic market with plenty of political risk.

That was certainly the mood at the Milken Institute conference in Los Angeles on a panel of private equity investors. David Bonderman, a founding partner of TPG Capital, put it most forthrightly:

“We stay away from places that have impossible governments and impossible tax regimes, which means Sayonara to India.”

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This blog is mainly about business and strategy and how and why people who run companies take the decisions that they do.

Most of the time, John Gapper is in New York and Andrew Hill is in London. We occasionally debate business issues between us, but your comments and criticism are welcome.




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About John and Andrew

John Gapper is an associate editor and the chief business commentator of the FT. He has worked for the FT since 1987, covering labour relations, banking and the media. He is co-author, with Nicholas Denton, of All That Glitters, an account of the collapse of Barings in 1995.

Andrew Hill is an associate editor and the management editor of the FT. He is a former City editor, financial editor, comment and analysis editor, New York bureau chief, foreign news editor and correspondent in Brussels and Milan.

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