Finding Perspective in JP Morgan’s Stunning Loss
If a young boy left for school in the morning with $10 and returned at the end of the day with $9.90, no one – including the boy – would be terribly alarmed.
Whether the boy lost the money by accident (a hole in his pocket), carelessness (converted his $10 bill into change and didn’t count the coins) or poor judgment (lost a 10-cent bet), most rational adults would shrug their shoulders and say, “No big deal – it was just a dime.”
So why the worldwide uproar about JP Morgan’s loss of $2 billion? Two billion, to the bank, is the equivalent of the boy’s dime.
1 Percent Loss
JP Morgan has equity of $183 billion. JP Morgan’s $2.3 billion loss was just over 1 percent of the company value – just as the boy’s loss was 1 percent of his $10 bill.
On the income statement side – last year’s pre-tax income of JP Morgan was almost $27 billion. The company’s $2.3 billion loss represents just above 8.6 percent of that amount. This is equivalent to about one month of earnings for the company.
Practical vs. Emotional Response
Yes, $2 billion is a lot of money. And, yes, we should hold CEOs to higher standards of money management than we do children. But it’s important to put the loss in perspective, to view in it practical business terms rather than irrational outrage.
JP Morgan’s loss is similar to a mid-size company with $10 million in equity losing $100,000. It wouldn’t be a fun experience for the CEO or the company investors. But the loss doesn’t put the company at risk.
JP Morgan investors, with more right than anyone to be aghast at the company’s loss, seem to understand this.
Indeed, when JPMorgan Chase CEO Jamie Dimon faced investors May 15 at an annual shareholders meeting in Florida, shareholders rejected a proposal to remove Dimon for the company’s blunder. And, as Forbes reported, investors spent little time grilling Dimon about the $2 billion loss.
They had more important concerns, such as the bank’s lending practices regarding mortgages and foreclosures.
Every company will face an unhappy event proportionately similar to JP Morgan’s loss. When you run complex organizations, you will, over time, face upsides and downsides. It is unavoidable.
The question is how you manage the downside, how you learn from your mistakes and use your experience to get better at what you do. Mistakes are learning opportunities. It is a shame to waste them by dismissing CEOs for the sake of public relations. If a CEO learns from and recovers from a financial error, he will become a better leader than a CEO who has never weathered a financial misstep.
Dimon, for his part, readily admits that the $2 billion trading loss was poorly conceived, poorly executed and never should have happened. According to Forbes, Dimon assured shareholders that clients did not suffer as a result of his mistakes and that policies and procedures were underway to make certain that a similar mistake never occurs.
There are many challenges to our banking system that we need to address after the 2008 crisis. But this event is not one of them Making Repairs.
Little boys and big corporations make mistakes. If a child takes responsibility for losing a dime and takes steps to prevent future losses – sews the hole in his pocket or counts his change – he learned a valuable lesson. If JP Morgan takes corrective action, it will emerge stronger than ever from this misstep.
If you’re a CEO or investor, you will make mistakes that will cost you money. Learn from the mistakes and you will more than recover your losses. A 1 percent loss, understood and corrected, could easily turn into a 10 percent – or greater – gain. Ignore your mistakes and a one percent loss could double or triple – or spiral into bankruptcy.