NEW YORK (
)-- After what could be a $5 billion trading loss at
and a market manipulation penalty that cost
ex-CEO Bob Diamond his job, clawbacks of executive bonuses are becoming a real prospect on Wall Street.
JPMorgan is planning to claw millions in stock compensation from top executives as it prepares to disclose the extent of a trading loss in its 'Chief Investment Office' in second quarter earnings on Friday, according to reports from
The Wall Street Journal
Reports of JPMorgan's claw back plans and Barclays' Diamond's forfeiture of $31 million in deferred stock bonuses on his recent ouster related to a Libor manipulation probe both signal that ill-earned multi-million dollar bonuses may be pulled back by investment banks, amid widespread concern over executive pay levels and industry trading practices.
The Wall Street Journal
reports that JPMorgan is planning to take back millions in stock compensation granted to executives like former CIO head Ina Drew and others at the heart of a trading loss on illiquid credit products. According to the reports, JPMorgan may announce any claw backs in its Friday second quarter earnings, where it will also detail its trading loss on illiquid credit products - known as the 'London Whale.'
CIO head Drew, who resigned in May amid the disclosure of a $2 billion loss and concerns about the accounting and management of the bank's risk, was given a $14.7 million in stock-based severance, $2.6 million in pension benefits and almost $10 million in deferred compensation, according to
Other top CIO lieutenants like 'London Whale' trader Bruno Iksil, and group managers Achilles Macris and Javier Martin-Artajo who've all recently stepped down or have been stripped of trading duties, may also have bonuses clawed back, according the
Overall, JPMorgan may announce a trading loss of $5 billion related to its CIO in second quarter earnings due on Friday, as it unwound what was reported to be a near $100 billion position in obscure corporate credit indices, according to
The Wall Street Journal
. Since the position may not yet be fully unwound, those reports indicate JPMorgan stands to lose up to an additional $1 billion.
According to the 2010
Dodd Frank Wall Street Reform and Consumer Protection Act
, banks are now required to disclose their clawback policies and adopt a policy to recover current and former executive bonuses, in the event of an earnings restatement that would have impacted incentive-based pay. Clawback provisions for executive bonus can now be triggered for up to three years after an earnings restatement.
In testimony to a U.S.
Senate Committee on Banking, Housing and Urban Affairs
, Dimon told lawmakers that the trading loss was a result of a strategy that, "was poorly conceived and vetted." Dimon added that when the unit's trading position soured, the bank's traders, "incorrectly concluded that those losses were the result of anomalous and temporary market movements, and therefore were likely to reverse themselves."
"In hindsight, CIO's traders did not have the requisite understanding of the risks they took," said Dimon, adding that the losses culminated from a strategy that went largely unknown to the firm's management and risk teams.
JPMorgan shares were little changed in Wednesday trading, gaining just under 1% to $34.52. The nation's largest banks shares are off over 13% since it disclosed its trading loss on May 10.
For Barclays, a June $451 million settlement with regulators in the U.S. and U.K. on its
of short-term interest rates led to the resignation of its chief executive Bob Diamond and his voluntary forfeiture of nearly $31 million in deferred stock bonuses.
"It is my hope that my decision to step down and today's agreement on my remuneration will help close this chapter and allow Barclays to move forward and prosper," said Diamond in the statement on Monday.
According to regulators the
U.S. Department of Justice
Commodity Futures Trading Commission
Financial Services Authority
, Barclays traders and employees responsible for determining the bank's short-term funding costs attempted to manipulate or falsely reported benchmark interest rates to bolster profits or minimize losses on derivatives trades. Starting in 2005 Barclays's manipulation "occurred regularly and was pervasive," said the CFTC, in announcing the late June fine, which was the biggest in its history.
The FSA alleged in its fine that the bank may have violated so-called 'Chinese Walls' between its trading desks and treasury units to collude in manipulating lending rates on hundreds of occasions, and with other banks. Barclay's chief operating officer Jerry del Missier also resigned with Diamond and the bank's chairman Marcus Agius is expected to step down after finding a CEO and COO.
If a regulatory probe into the setting of Libor and other short-term interest rates finds other instances of market manipulation, claw backs and top executive departures may just be beginning. Regulators around the world, including the DoJ, FSA and Japanese and European agencies are investigating manipulation of the setting of the benchmark rates, which are a key part of opaque credit and interest rate derivative markets that have roughly $350 trillion in outstanding market value.
A manipulation of the rates may have unfairly impacted the borrowing costs of homeowners, governments and corporations around the world, as the bank allegedly tried to profit or curb losses tied to floating interest rates at the height of the financial crisis.
Other large banks that set short-term rates may be brought into the fray of an ongoing manipulation probe by the DoJ. Reports indicate that large cap banks like
Bank of America
Lloyds Banking Group
that are part of the Libor and short-term interest rate setting process all may be subject to an ongoing regulatory and criminal probes.
For more on bank earnings, see
during second quarter earnings season. See why
Warren Buffet shuns investment banks
For more on Barclays' Libor scandal, see why Diamond's
-- Written by Antoine Gara in New York