The Rake

Guest Post by Ben Hunt

In a poker game, the rake is the cut that the casino dealer takes out of every pot. It’s usually a couple of dollars per hand … barely noticeable, certainly not noticeable to a casual poker player like me.

But what if the dealer started taking 18-25% out of every pot as his rake? Would you notice then?

That’s what JP Morgan management does with its “return of shareholder capital” through stock buybacks.

Cramer: Jamie Dimon, when questioned about $31 million pay, should have said he’s worth it   [CNBC]

“I would’ve said, ’Look I know you think that I may be overpaid but I do point out that others have shared in the wealth,” the “Mad Money” host says.

In 2018, JP Morgan bought back 181.5 million shares of stock for $20 billion. Also in 2018, JP Morgan issued 32 million new shares to management (18% of buyback). Those newly issued shares were worth $3.5 billion then, and are worth $4.2 billion today.

In 2017, JP Morgan bought back 166.6 million shares of stock for $15.4 billion. Also in 2017, JP Morgan issued 31 million new shares to management (18% of buyback). Those newly issued shares were worth $2.9 billion then, and are worth $4.03 billion today.

In 2016, JP Morgan bought back 140.4 million shares of stock for $9.1 billion. Also in 2016, JP Morgan issued 38 million new shares to management (27% of buyback). Those newly issued shares were worth $2.5 billion then, and are worth $4.94 billion today.

Were these newly issued shares spread evenly throughout the company, perhaps as part of an employee stock ownership program (ESOP)?

No. In each year, there were fewer than 1 million shares issued for the JP Morgan ESOP program, less than 3% of the dilutive issuance. Senior management received more than 97% of the newly issued shares.

Today, Jamie Dimon owns more than 7.8 million shares of JP Morgan, worth more than $1 billion. Some of these shares were purchased by Dimon on the open market. Most of them were not.

There are 12 other JP Morgan senior executives listed on Form 4 who are centimillionaires from their stock holdings. Many more than that are decamillionaires.

One day we will recognize the defining Zeitgeist of the Obama/Trump years for what it is: an unparalleled transfer of wealth to the managerial class.

Not founders. Not entrepreneurs. Not visionaries.

Nope … managers.

Fee-takers.

Asset-gatherers.

Rent-seekers.

Rakes.

Here’s JP Morgan’s stock performance over these three years.

Not bad. Up 48% over the three years versus the S&P 500 up 23%. On a total return basis – which includes dividends (a true return of capital to investors IMO) reinvested in JPM – it looks even better … up 59% versus the S&P 500 up 30%.

Are Jamie Dimon and team good managers?

I think you’d have to say yes, although it’s also … difficult … to overlook the various felony charges and billions in civil settlements that have been assessed against JP Morgan during Dimon’s long tenure.

Did you know that Jamie Dimon and team are taking an 18-27% rake from the multi-billion dollar stock buybacks that JP Morgan announces every year?

I bet you didn’t. And no, it wasn’t always this way.

Are Jamie Dimon and team worth the 18-27% rake they take from the multi-billion dollar stock buybacks that JP Morgan announces every year?

I don’t think so. I think it’s obscene.

I think the way in which corporate management teams like JP Morgan’s have captured their compensation plans to enrich themselves at the expense of shareholders is a micro-version of the way in which Oligarchs have captured monetary policy and tax policy and trade policy and antitrust policy and securities policy to enrich themselves at the expense of citizens.

What is rent-seeking?

It’s setting the RULES – in big ways like tax policy and in small ways like compensation policy – to benefit the rule-setters over the people the rules are supposed to benefit.

And because it’s the RULES … well, you don’t even notice it.

Particularly if it’s masked by a compelling narrative like “Yay, Stock Buybacks!”.

What is rent-seeking?

It’s the rake.

I think these obscene rakes should be stopped and rolled back. Sadly, I think these obscene rakes are so ingrained in our economy and our politics that they are immune to incremental policy measures. Sadly, I think we have to take a flamethrower to these rakes to change any of this.

But that’s just me.

I understand and appreciate that you may feel differently about both the appropriate level of compensation for corporate management and – even if you agree with me about its obscenity – you may disagree with me about what actions should be taken to address this, and by whom. For example, Rusty and I disagree about a LOT of this on the policy/regulatory intervention side. Amazingly enough, we can disagree on this without accusing the other of lacking basic math skills. Yes, this is a subtweet.

Recognizing that well-meaning people can disagree on the urgency of the problem and how to redress it, I want to suggest three non-flamethrower policies that I think (hope) can get wide agreement. They all stem from this quote by Jamie Dimon in last Sunday’s 60 Minutes interview, when Leslie Stahl asked him if he thought his compensation was “appropriate”:

The Board sets my pay. I have nothing to do with it.

The Chairman of the JP Morgan board of directors is … Jamie Dimon.

And don’t @ me about independent directors and compensation sub-committees and all that. Just don’t. Don’t even start. Because you KNOW that’s bullshit. And so does Jamie Dimon.

So here are my three non-flamethrower policy proposals. These can all be legislated or regulated into existence tomorrow if there were political will to do so.

1) Require by law that the board Chair of publicly traded companies may not also be the CEO. [and if you really want to get serious about this, require that the board Chair be an independent director]

2) Require by law that board directors may only receive cash compensation for their services and are not eligible for any form of stock-based compensation.

3) Require by law that board directors may not exercise any form of previously granted stock-based compensation while they serve on the board.

Do these proposals go far enough? I don’t think so.

But they’re a start.

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