Wall Street's Leadership Vacuum
Wall Street, still reeling from public outrage and increased regulation, is in search of a new senior statesman. The indisputable champion of American high finance had been JPMorgan Chase Chief Executive Officer Jamie Dimon—at least until multiple investigations and a $5.8 billion trading loss from wrong-way bets on credit derivatives at his bank diminished his stature. His peers at other big U.S. lenders are hobbled by poor performance, tarnished reputations, or a reluctance to step into the breach. “What you’re seeing in the financial-services industry is a lack of any kind of credible statesmen,” says Rakesh Khurana, a management professor at Harvard Business School. Dimon’s reduced ability to defend the industry publicly “basically leaves a vacuum,” he says.
This would be less of a concern if things were placid. As it stands, the industry confronts the most vigorous onslaught of regulations since Congress separated investment and commercial banking with the Glass-Steagall Act in 1933. That coincides with the lowest level of consumer confidence in U.S. banks since Gallup began polling on the question in 1979. The percentage of Americans saying they had a “great deal” or “quite a lot” of confidence dropped to 21 percent in June, from 41 percent in 2007 and more than 60 percent in 1980.
Dimon, who gained prominence after steering his bank through the financial crisis without a quarterly loss, was sought out for his advice and assistance by U.S. presidents, Treasury secretaries, and regulators. He was unapologetic in his criticism of Washington policies and policymakers. He said former Federal Reserve Chairman Paul Volcker, for whom a new rule banning proprietary trading is named, doesn’t understand capital markets. Bankers will need psychiatrists to evaluate whether trades qualify as hedges, he said. Last year he took on Fed Chairman Ben Bernanke in a public forum, asking whether anyone has “bothered to study the cumulative effect” of regulation on the U.S. economy. Now Dimon is “stumbling like an ordinary mortal,” says Thomas Stanton, a former senior staff member for the Financial Crisis Inquiry Commission. “He’s no longer seen as a purely brilliant manager.”
Banks are still a powerful presence in Washington, even without a visible leader. Commercial banks spent $61.4 million lobbying Congress and regulators in 2011, almost double the $36.1 million spent in 2006, according to the Center for Responsive Politics. “They’re spending all this money because they know they are in the eye of the storm,” says Bob Biersack, a senior fellow at the nonpartisan, nonprofit campaign watchdog.
The lack of a commander leaves the industry vulnerable to more regulation, according to Greg Donaldson, chairman of Donaldson Capital Management, based in Evansville, Ind. “The banks have no moral authority at the moment,” Donaldson says. “Jamie Dimon had it, but that’s done. The government is piling on the banks. They’re just being hammered, and it doesn’t help our economy. Somebody has to fight the damn thing.”
The pool of successors is small, and all the contenders have their share of baggage. Bank of America CEO Brian Moynihan has struggled to contain losses from soured mortgages that have cost the Charlotte-based lender more than $40 billion. Citigroup CEO Vikram Pandit had his bank’s capital plan rejected by the Fed on March 13. Shares of the New York-based lender have tumbled 18 percent since, as of Aug. 21. Shareholders in May rejected Pandit’s compensation plan, which included about $15 million for 2011 and a retention agreement that could be worth $40 million. At Goldman Sachs, CEO Lloyd Blankfein retreated from making public comments in 2010 and 2011 as his company was sued by the Securities and Exchange Commission for its role selling subprime mortgage bonds, a case later settled for $550 million. Blankfein recently began an effort to reshape his image with television interviews and speaking engagements. This month the SEC and the U.S. Department of Justice ended probes of the company.
Morgan Stanley CEO James Gorman, whose firm announced job cuts on July 19 after missing analysts’ estimates amid a 48 percent drop in trading revenue, doesn’t fit the Wall Street titan stereotype. For black-tie events the Australian prefers a rumpled tuxedo he bought as a business school student in 1980 to Armani, and he stocks Vegemite in the executive kitchen. John Stumpf, CEO of Wells Fargo, has the respect of his peers, and his San Francisco-based bank, the largest in the U.S. by market value, has posted annual profits for more than a decade. Still, he works far from Wall Street and is “allergic” to the role of industry statesman, says Nancy Bush, an analyst and contributing editor at SNL Financial, a research firm based in Charlottesville, Va. “Part of Jamie’s fitting into that role was his natural brashness as a Wall Streeter and New Yorker, and that is not John,” Bush says. “He’s self-effacing, he’s quiet as a manager, and his company is naturally quiet. It’s not a role that will naturally fall to him, though I think it should.” Spokesmen for Wells Fargo, JPMorgan, Bank of America, Citigroup, Goldman Sachs, and Morgan Stanley declined to comment.
Wall Street has had no shortage of public leaders, beginning with John Pierpont Morgan, who founded the company that bears his name and played a major role in halting the banking panic of 1907. More recently, Walter Wriston, who ran Citigroup predecessor Citibank from 1970 to 1984 and is credited with introducing automated teller machines, helped New York City avoid bankruptcy in the 1970s with a financing plan he devised with another industry leader at the time, Felix Rohatyn at Lazard Frères. The dearth of leadership on Wall Street now is “really problematic,” says Harvard’s Khurana. “When an institution or industry loses its legitimacy, it loses the benefit of the doubt.”