JPMorgan Looks for the Right Mix of Cost-Cutting and Compensation
The future holds more cost-cutting for America’s largest bank by assets. People familiar with the matter told the Financial Times that JPMorgan Chase & Co. (NYSE:JPM) plans to lay off at least 2,000 more people from its mortgage business, a unit that has already experienced deep cuts due to evaporating demand. The announcement could come on Tuesday, during JPMorgan’s annual investor day.
The layoffs are indicative of the evolving post-crisis financial and economic landscape. After the housing bust, the U.S. Federal Reserve went on overdrive and began its first round of quantitative easing in late 2008. This, as planned, kicked off a decline in long-term interest rates that spurred borrowing — and in particular, mortgage borrowing and refinancing. Banks like JPMorgan, Wells Fargo (NYSE:WFC), and Bank of America (NYSE:BAC) met the demand by expanding their mortgage businesses, a windfall for many financial services employees whose employers toed the line with collapse during the crisis.
But as interest rates rise — in January, the average commitment rate for a 30-year fixed-rate mortgage was 4.43 percent, up from 3.41 percent in January 2013 — demand for the services supplied by the mortgage businesses diminishes, and so does the need for labor within those businesses. JPMorgan has already slated as many as 15,000 positions to be cut, and the mortgage units at Wells Fargo and Bank of America are in similar boats. Both banks have laid of thousands of mortgage works as they scale back those businesses and undergo general reorganization.
As significant as the layoffs are, they have been background noise compared to the cacophony of regulatory issues the bank is working through. Wall Street has pretty much been a regulatory punching bag ever since the financial crisis, and there are few better poster boys for Wall Street than JPMorgan Chase Chairman and CEO Jamie Dimon. As chief executive, Dimon has had to serve as chief negotiator and deal maker with regulators over allegations of fraud and mismanagement related to the financial crisis — and, just to add some icing to the cake, related to Bernie Madoff.
JPMorgan turned the page on 2013 with nearly $20 billion in settlements and is facing a nondeductible $1.7 billion charge thanks to Madoff legacy issues. The silver lining is that most of the big settlements should be over with, and the bank can begin putting its house back in order instead of focusing on damage control.
Dimon has navigated it all with a relatively cool hand, a feat for which JPMorgan’s board of directors decided was worthy of a 74 percent raise for 2013. The decision didn’t come easily, though. Dimon’s pay was cut by half in 2012 in light of the London Whale fiasco, and with the cross hairs of regulators and an irate public squared firmly on the bank, it reportedly seemed inappropriate to some members of the board that Dimon should get a raise.
At best, increasing his compensation sends mixed signals; at worst, it sends the wrong signals. The board is no doubt sensitive to the ongoing debate about executive-level compensation in the financial sector, but at the same time, they have an obligation to incentivize executives, such as Dimon, to bring their A-game.