By Jonathan Weil
Two months ago, after Jamie Dimon held an emergency teleconference to fess up about a big problem with traders at the chief investment office of JPMorgan Chase & Co., he acknowledged that he had been "dead wrong" to have referred to press reports in April about the bank's London Whale fiasco as a "tempest in a teapot."
Here's another thing he was dead wrong about. The same day as that conference call, May 10, Dimon, JPMorgan's CEO, certified in the company's first-quarter report with regulators that JPMorgan's internal controls were effective as of March 31. JPMorgan's chief financial officer, Douglas Braunstein, certified the same. Both said they had disclosed "any change" that occurred during the first quarter "that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting." They also said the company's disclosure controls and procedures -- a related category of internal controls -- were effective.
Those statements were incorrect. It turns out some of the company's traders had been mismarking their books.
The internal-control certifications are a new strike against JPMorgan senior management's credibility. And what's worrisome about this one is there seems to be no good excuse for it.
By the time Dimon and Braunstein certified in May that the company's controls were effective, the company already had acknowledged that it had given false first quarter value-at-risk numbers for the chief investment office -- which was prima facie evidence that its controls had a serious weakness. Dimon and his executive team should have been on notice by that point that the numbers coming out of London couldn't be trusted -- and that they couldn't possibly have known everything they needed to know to sign off on them.
The timing of JPMorgan's decision to restate its financials for the first quarter also looks suspect. In its disclosure filing Friday with the Securities and Exchange Commission, JPMorgan said it had reached the decision to restate on July 12 -- as if it shouldn’t have been obvious to management before then that investors no longer should rely on the company's first quarter financial statements. The company said the restatement would reduce its first quarter net income by $459 million, or 9 percent, to $4.9 billion. Friday's disclosure included the statement that "management has determined that a material weakness existed in the firm's internal control over financial reporting at March 31, 2012."
JPMorgan shares were up Friday on the news that the company's London Whale losses aren't as bad as some had feared. But with federal investigations looming over the company's Libor submissions during the financial crisis, JPMorgan can't afford to be making a habit of getting disclosures wrong. Investors need to have confidence that Dimon knows what he's talking about when he speaks.
It was once inconceivable that Dimon might someday wind up like Barclays CEO Bob Diamond, who resigned last week after that company's Libor scandal broke wide open. It's not anymore.
(Jonathan Weil is a columnist for Bloomberg View. Follow him on Twitter.)
Read more breaking commentary from Josh Barro and other Bloomberg View columnists and editors at the Ticker.
-0- Jul/13/2012 20:34 GMT