The snap resignation Friday of
finance chief was so uncharacteristic of the buttoned-down types that run Morgan that you have to wonder whether something's up.
Peter Hancock is quitting after only 14 months as chief financial officer at the nation's fifth-largest bank. Around two hours after
The Financial Times'
Web site, reported that Hancock was leaving, New York-based Morgan put out a press release at 8:20 p.m. EDT saying the forty-something Brit was leaving to "pursue longstanding entrepreneurial interests." The release added that Thomas Ketchum, the bank's chief administrative officer, would assume Hancock's duties, in addition to his own, effective immediately.
Judging by the jarring nature of his exit, Hancock either had problems with the bank and was just desperate to get out, or the bank pushed him out. The weirdness of the event will have many on Wall Street looking for causes. The bank didn't immediately return a call seeking comment.
People's first instinct has been to look for a connection between Hancock's leaving and the current chatter that Morgan is about to be taken over. This past week, the favored acquirer was Germany's
; the week before it was
. The feeling in some quarters now is that exploratory talks with potential buyers have cooled off, at least for the time being. Maybe Hancock thought selling out was the best way forward for Morgan, and resigned in frustration when negotiations fizzled out.
On the other hand, Hancock may have wanted out before any merger takes place to avoid the rancorous battles over turf that often follow financial sector tie-ups. But if a deal is afoot, Hancock would be crazy to leave on his own volition at this point. A headline-grabbing, high-level departure like this would damage any attempts by Morgan to sell out at the highest possible price. As a big holder of Morgan options, Hancock presumably would want to get the best price possible. By leaving like this, he probably jeopardizes sizable parts of his pay package, which totaled a nifty $3.8 million last year. Also, he wouldn't get access to the huge pool of cash that any acquirer of Morgan would have to make available to persuade top executives to stay.
Hancock did have something to say Friday, but it hardly amounted to an explanation. In the press release, he says: "I count myself fortunate to have been part of J.P. Morgan through two eventful decades of transformation and growth, and leave with great confidence in the firm's future. I'm also very excited to be exploring opportunities to apply my experience in new ways. For me, the time was right to do it."
Despite that statement, this wasn't a carefully planned affair. It happened on a Friday evening -- the time of week when only the dodgiest of firms choose to slip big news out, hoping (of course, vainly) that few will notice.
In addition, the press got this negative item out well before the bank, always a sign that management is struggling to keep up with developments. In addition, Morgan didn't have a permanent replacement waiting in the sidelines. Hancock hasn't said exactly where he's going. And, to cap it all, the bank's release appears contradictory. It says Hancock's going to "pursue longstanding entrepreneurial interests." But, if they are so longstanding, why does the bank then say "his plans are not yet definite." Instead, the release merely mentions that Hancock "is exploring alternatives that include several private ventures in which Morgan hopes to invest."
The best possible scenario for Morgan is that Hancock is leaving for personal reasons that have nothing to do with the bank's operations.
The worst possible scenario is that Hancock has screwed up hugely in his role as finance chief. Being CFO of Morgan is a daunting job, with its enormous trading operations and active presence in many high-risk emerging markets. Hancock was also head of the bank's all-important risk management committee, overseeing the bank's continuing push to reduce its risk levels. The need for this effort was made evident last year when the bank lost $123 million gambling with its own money, an activity called proprietary trading.
Most sell-side analysts believe that Morgan's risk-reduction strategy is going just fine, and were rapturous when the bank's second-quarter earnings came in well above their expectations. But a closer look at those numbers showed, rather depressingly, just how dependent Morgan still is on trading, as opposed to investment banking fees or asset management income.
In fact, a stunning 53% of the bank's $819 million in second-quarter pretax earnings came from trading and trading-related activities in bonds, equities and derivatives, which are complex financial instruments. Around 28%, or $230 million, came from bad old proprietary trading. What's more, well over half of that $230 million came from what the bank mysteriously labeled "other" trading revenue. The bank's public filings say only that the quarter's trading profits were partly attributable to so-called market neutral strategies. That sounds kind of reassuring until you remember that the "market neutral" approach was favored by
Long-Term Capital Management
, the gigantic hedge fund that crashed in 1998 and nearly brought down the whole financial system -- literally.
When a bank like Morgan is this reliant on proprietary trading, and fails to give a clearer idea of what strategies are working so well, investors shouldn't be surprised if one quarter's big gain swings to a big loss in the next.
Let's be clear, though: There's
to suggest that Hancock's leaving was sparked by a big trading loss or, God forbid, accounting irregularities. But when the chief numbers man all of a sudden bolts -- or gets booted out -- the guessing games inevitably start. Morgan better do some explaining. By Monday morning -- at the latest.