The New York Times – by JESSICA SILVER-GREENBERG and MICHAEL CORKERY
The surprise departure of a top JPMorgan Chase executive for a giant private equity firm underscores how financial regulations are forcing a shift in the balance of power on Wall Street.
Considered a likely heir to Jamie Dimon, the bank’s 58-year-old chief executive, Michael J. Cavanagh announced on Tuesday that he would resign as JPMorgan’s co-head of investment banking to take on the role of co-chief operating officer of the Carlyle Group. Mr. Cavanagh’s decision to give up a chance at eventually running JPMorgan signals how running a large bank has become less attractive, considering the regulatory hurdles and heightened scrutiny that have dogged Wall Street since the aftermath of the financial crisis.
While it is not uncommon for bank executives to leave for other jobs — at least 10 senior executives have left JPMorgan in the last two years — Mr. Cavanagh’s departure was surprising, in part, because of his prominence at JPMorgan and his reputation within the bank as what one executive referred to as a “lifer.”
His move also shows that the siren call of private equity and hedge funds, financial industries that promise eye-popping compensation with far lighter regulatory burdens, is growing louder.
The news of Mr. Cavanagh’s departure caught even some of the bank’s senior-most executives unaware, according to people with direct knowledge of the matter. Among those startled by the exit was Mr. Dimon, who has worked with Mr. Cavanagh for two decades, the people said.
In a companywide memo, Mr. Dimon wrote, “This is a regrettable loss for our company as Mike has been a part of the fabric of our organization for the last 14 years.”
Mr. Cavanagh, who called the decision to leave one of the most “wrenching” he has had to make, told Mr. Dimon about his decision over the weekend, according to the people. By Monday, murmurs about the news were already setting off a new round of speculation about who could ultimately succeed Mr. Dimon, who has held dual roles as both chairman and chief executive since 2006.
Eduardo Munoz/ReutersGordon Smith is now a possible successor to Jamie Dimon.Among the potential successors who have emerged, for example, is Gordon Smith, the head of JPMorgan’s consumer bank. Just a few years ago, it was considered largely impossible for someone without leadership experience within the investment bank to take the reins of JPMorgan, according to the people.
That is not true anymore. The inclusion of Mr. Smith, people close to the bank say, further reflects the growing importance of retail banking focused on credit cards, auto loans and mortgages over the complex trades and deal-making that Mr. Cavanagh oversaw.
Other possible candidates who could take over include Matt Zames, the bank’s chief operating officer; Marianne Lake, its chief financial officer; Mary Erdoes, who heads the asset management business; and Doug Petno, who runs the commercial bank.
The shift in power has broader implications beyond the inevitable Wall Street parlor game of placing bets on who will be the next ascendant banker. Industry analysts worry that the lure of private equity firms and other players could siphon some of the most capable executives away from overseeing banks that are critically important to the economy.
“Investment banking is going through incredible change right now and faces increasing competition,” said Peter Nerby, a banking analyst with Moody’s Investors Service. “If intellectual capital starts getting drained out of the industry, that is something we will be paying attention to.”
Perhaps more than most bank executives, Mr. Cavanagh has had a front-row seat into the regulatory headwinds battering JPMorgan and the broader industry. Now 48 years old, Mr. Cavanagh had been with the bank through some of its toughest periods. He was the chief financial officer and then its head of Treasury securitiesservices through the 2008 financial crisis.
But it was his role at the helm of an internal investigation into the bank’s big “London whale” trading loss that may have offered him the clearest picture of the grim realities facing the industry. Since the trading loss, stemming from a soured bet on complex financial contracts, was first unearthed by the bank in May 2012, JPMorgan, once a favorite in Washington, has seen its reputation tarnished and its chief executive under intense scrutiny. Last year, JPMorgan paid nearly $20 billion to settle several investigations into the trading losses and other issues, like the sale of questionable mortgage securities in the lead-up to the financial crisis.
Together, the latest travails have taken their toll. In weighing his choices, Mr. Cavanagh winced at the idea of facing similar scrutiny one day if he became chief executive, according to the people who insisted on anonymity because they were not authorized to speak publicly.
It is a far cry from the time — just a few years ago — when top executives of the biggest banks were seen as brash, globe-trotting deal makers. Spots within investment banking, a unit that mixed high finance with big personalities and even bigger profits, were especially coveted. Some of that swagger depended on the investment bank’s ability to take risks through lending and facilitating trades.
Recent regulations drastically curtail that risk-taking and increase the cost of doing business. Among the most significant shifts, analysts say, are the rules requiring banks to set aside larger capital cushions against any losses. As part of the so-called Volcker Rule — a regulation that has come to epitomize a tamer Wall Street — banks are also prevented from making large bets with their own money.
While no bank has been spared, JPMorgan, as the nation’s largest, in some ways grapples with the most stringent requirements. Under the regulations, for example, JPMorgan has to maintain a bigger capital cushions than its peers, a metric that helps determine whether the bank can increase its payments to shareholders.
Private equity firms, though, face few of those burdens, allowing them to leapfrog their more heavily regulated banking peers. Firms like Carlyle can take far more risk than banks and ultimately net more profits.
The bounty is already showing up in payouts to top private equity executives. The three founders of the Carlyle Group received $750 million for their work in 2013, while another private equity titan, Kohlberg Kravis Roberts, gave its co-founders more than $160 million each for 2013. The hefty payouts dwarf the compensation at banks, including JPMorgan, where Mr. Dimon received $20 million in total compensation for the same year.
“When it comes to private equity, the grass is both figuratively and literally greener,” said Mike Mayo, a banking analyst with CLSA. “It is a sign of the times.”