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Lessons from headlines of the Chase Whale and the IRS egg

News today inevitably gets wrapped up in the emotions of the moment. But there's an old adage to the effect that learning from the experiences of others--viewed directly or at a safe distance--saves us our own pain. What can bankers learn of lasting value from two recent headline generators?

Speculation concerning whether Jamie Dimon, CEO of JP Morgan Chase, would continue to hold the three titles of chairman, president, and CEO has some interesting parallels in another contemporary story. I'm thinking about the ultimate fallout of the IRS profiling activities and how these two front-page news stories seem related.

It's evident from the reports surrounding JP Morgan's continuing fallout of the London Whale story that the regulatory community, especially the Comptroller's Office, the bank's primary regulator, is not happy with the bank's level of risk management nor internal compliance with a variety of issues. It's hard to evaluate just how deep and intractable these matters are or whether the press is making more of them than they perhaps deserve.

But the level of smoke is indicative of a fire that must be dealt with. And the IRS situation continues to unfold, as the billows surround that matter.

Getting to essentials

There are practical consequences in such situations and, where a bank is involved, they revolve around the perception of whether the bank is proactively dealing with its problems.

During the debate over titles, JP Morgan's institutional investors (large stockholders) were making their judgments about whether to recommend separating the functions of chairman and CEO. The board of directors is simultaneously concerned about whether the bank's management is seriously and effectively dealing with matters of regulatory concern.

Overlaying all of these issues, some simple and some very complex in their respective detail, is the impact of reputation risk and how negatively such matters have fallen on banks.

The Internal Revenue Service has been dealing with a very difficult series of disclosures indicating serious lapses in judgment--perhaps involving illegal profiling. Reputation risk for the agency has been severe. Clearly there are actions that urgently need to be taken to restore an appropriate level of trust.

What do bankers' collective experience with the occasional "culture gone awry" suggest are reasonable and effective responses?

How a bank navigated shoals of regulation and reputation

In my own work experience, I ended up as an outside hire to repair the frayed relationships between and among the principal constituencies of a problem bank.

The prior management had become adversarial with examiners, including OCC and the Kansas City Federal Reserve Bank, the principal supervisor of the bank's holding company. Relationships requiring trust and mutual respect had unraveled.  The problem eventually spread to the board, executive management, regulators, and, to a degree,  to the depositing public.

Things were a mess, but fortunately, the basics weren't badly broken. There was a fundamental level of credit quality. And the bank had a long and mutually beneficial relationship with its community constituents.

My job was to undertake corrective initiatives and to convince the principals that we were making sustainable, sure progress in rebuilding the interpersonal relationships.

In this sense, the regulators held the high cards. They could authorize or withhold dividends to shareholders; exert influence on the level of the allowance for possible loan losses; and exercise veto power on many acts of management. This was all due to the administrative agreements that had been imposed on the bank and its parent company.

Yet, in some ways, the regulators were the best partners. They knew what to look for and had the reporting requirements in place to keep a careful eye on month-to-month progress.

My colleagues and I did nothing extraordinary in those several initial months after I arrived. We worked on the basics--clarifying our policies, tightening our procedures, introducing new internal controls to block a repetition of previous lapses, and putting some new faces in some of the positions interacting with us in important areas of supervision and regulation.

We also imposed a public sort of accountability on those associated with certain activities we were cleaning up. We were consistent, thorough, and deliberate. We went about these tasks in ways that would be noticed and understood.

I also took every opportunity to talk to community constituents and worked constantly to be available for questions and dialogue. I have often said that as CEO, I could be out every night of the week on bank business. In those early days, I seem to remember that I was.

Making it work versus making it popular

Not everybody within the bank agreed with what we were doing. I learned--and relearned--two key lessons:

1. Consensus is elusive.

2. Someone has got to take charge.

Among the executive managers taking charge had to be a shared responsibility.

• First, the staff members to a high degree appreciated the fresh focus and attention on the issues that ultimately made their jobs less complicated and difficult.

In my early days, I marveled at how many officers and managers of virtually all levels who came to me with their issues and wanted guidance and assistance. In some cases it was simply for an "OK, let's do it." In other cases we had to deal with problems that had grown into more serious issues. All that was needed in most cases was the nod to get on with the solutions--which were usually obvious.

When matters began to return to normal it was gratifying to see the internal staff attitudes change. I could see it in their demeanor and their energy levels, and both were wonderfully apparent to our customers.

• Second, we paid very careful attention to what the regulators told us they wanted.

If we didn't agree, we didn't "bow our backs."  Instead, I negotiated with them on several issues and was often able to obtain a more satisfactory result for us to implement than the first draft of their "requirement." 

In one case, I travelled to Kansas City to meet with the Federal Reserve. My proposal was significant and important to our board.

The Fed officials could have laughed me all the way back to the airport and sent me home. But they listened. They didn't immediately say yes--but significantly they didn't immediately say no. This occurred about nine months into the repair job and at that moment I had a clear signal that we were collectively making real progress.

• Third, we completely rewrote the credit policy.

The new policy said many of the same things that the old one did. But the language and format were new. It looked different and the credit committee was encouraged to use it where possible as a tutorial to the lenders seeking credit approvals. It worked--or at least it helped a lot.

• Finally, we made staff changes.

There was no "black Monday" or anything like that. But over time, faces changed and promotions and new hires reflected that things were different.

Make remedies transparent and genuine

Neither Mr. Dimon nor the new IRS commissioner need much advice from you or me but here's what I'd say to either of them if asked. They and their coworkers need to be serious--and very publicly so--about necessary changes.

It's not a matter of the bureaucracy outlasting the bosses. It's that everyone from managers to the bureaucracy really gets it and are serious and committed to change.

That takes strong doses of transparency, along with internal firmness and consistency in dealing with staff.

It also demands a reaffirmation of internal controls and "ruthlessness," if necessary, to see that changes are made and ongoing activities are monitored for continuing compliance.

What must be done is not hard to figure out. Doing it with credibility, firmness, and managerial deftness are what the circumstances call for. Bankers have been accustomed to deal with matters like these for generations.

Why do you suppose it's so difficult to accomplish lasting change? 

 Could it be that we are too focused on the rules? And insufficiently focused on how to communicate the principles of sensible as well as ethical behaviors? 

It's a sad commentary on the business when the most direct route to the top of our industry seems to be through the labyrinth of compliance.

Ed O’Leary

Banking Exchange Contributing Editor Ed O'Leary, a veteran lender and workout expert, spent nearly 50 years in bank commercial credit and related functions, working with both major banks as well as community banking institutions. His last job before retiring was as the CEO of a regional bank headquartered in Alburquerque, N.M. He earned his workout spurs in the dark days of the 1980s and early 1990s in both oil patch and commercial real estate lending. O'Leary began his banking career at The Bank of New York in 1964, and worked at banks in Florida, Texas, Oklahoma, and New Mexico. He served as a faculty member and thesis advisor at ABA's Stonier Graduate School of Banking for more than two decades, and served as long as a faculty member for ABA's undergraduate and graduate commercial lending schools. Today he works as a consultant and expert witness, and serves as instructor for ABA e-learning courses. You can e-mail him at [email protected]. O'Leary's website can be found at

In mid-2016 O'Leary's "Talking Credit" blog received a bronze excellence award for the Northeastern Region from the American Society of Business Publication Editors.

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