p>One of the major stories from the corporate world so far this year has been the trading blunder at J.P. Morgan Chase & Co. that resulted in a loss of several billion dollars for one of the world’s largest bankers. The bank is now proceeding with an investigation of the matter by its own board of directors. Although I have no reason to doubt that the investigation will be thorough and conducted by competent individuals, this does have a feeling of the fox guarding the hen house. Wouldn’t shareholder and consumer confidence be best served by an investigation led by someone other than the bank’s own board of directors? After all, for the most part these are the same individuals that hired the bank’s CEO – the man who has taken responsibility for the mess.
What we known at this point, in regards to the trading blunder, is that trades emanated from J.P. Morgan’s Chief Investment Office (“CIO”) in London which is in charge of hedging the bank’s risk. It is understood that a trader in that unit took several bad positions on credit default swaps – by the time the scope of the trader’s bad decisions were realized, the bank had lost approximately $9 billion. In laymen’s terms, it was a screw-up of epic proportions. The fallout, beyond the obvious financial loss, has been significant for J.P. Morgan: employees have been fired, there has been a decline in stock price, as well as an appearance before Congress for CEO Jamie Dimon. The bank also conducted its own investigation of the debacle that found that employees under the CIO may have been seeking to avoid showing the full amount of the losses.
J.P. Morgan’s board of directors has now begun its own investigation of the matter through an ad hoc committee. According to the Wall Street Journal, Director Lee R. Raymond has been appointed chairman of the committee. He is the former chairman and chief executive officer of Exxon Mobile Corp., and by all accounts an extremely capable and reputable corporate board member. He is also known for being extremely tough and unlikely to shy away from a confrontation. The other members of the committee are fellow independent directors from J.P. Morgan’s board. Although the board has hired former Treasury Department General Counsel Robert Mundheim to assist with the investigation, make no mistake about it that the board will be the final say on the investigation’s findings.
I do not in any way intend to infer that J.P. Morgan’s board of directors will produce a report that is anything but complete, honest and supported by the facts. But the fact that the investigation is not conducted by an independent third party only causes more questions. Why couldn’t J.P. Morgan’s Board take the path that Penn State’s Board did with the Jerry Sandusky matter? Their board’s hiring of former FBI Director Louis Freeh was an appropriate and well thought out decision (unfortunately, one of only a few that the Penn State board has made through the entire affair) that sent a clear message to law enforcement, the NCAA and the entire Penn State community that the board was committed to investigating the matter in a thorough and straight-forward manner free from bias that would leave no doubt as to its extent and accuracy.
With its decision to lead the investigation, J.P. Morgan’s board of directors has left themselves susceptible to criticism and suspicion – and once again America is left to question the corporate governance of its public companies.
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