The chattering classes are terribly excited about the upcoming annual meeting of JPMorgan Chase. True, the banking industry is generally not all that exciting, except when it is uncomfortably so. But JP Morgan Chase has much good news to share. This part quarter, for example, its trading team had a perfect record of no losses on any day bringing in a performance that beat both Morgan Stanley and Goldman Sachs. Its M&A team also topped the league tables for the prior year, again beating Goldman Sachs. The bank's borrowing costs are rock bottom, and its CEO was offered up as Secretary of the Treasury by none other than Warren Buffet.

None of that, however, is factoring in to the chatter. The press and airwaves are dominated by expressions of outrage by proxy advisory groups that CEO Jamie Dimon, the earstwhile Treasury secretary nominee, has the audacity of being his own boss by holding also the title of Chairman. Their distress, to be shared in Tampa, Fla., on May 21, is more broadly directed at the board as a whole comprising individuals who failed to monitor the bank’s risk management, a failure highlighted by last year’s $6 billion trading loss in the company’s chief investment office. The directors stand charged with "letting down outside shareholders."

Writing for the Financial Times, Gary Silverman offers a refreshing counterpoint. In an essay aptly named "Daydreams of supervising Dimon," Silverman concludes "that just about the only person who would be truly capable of supervising Mr Dimon at JPMorgan these days is Mr Dimon himself, and that means this column leaves him as it found him – in a lonely place."

Huygens, being a numbers man, seeks comfort in the wisdom of crowds. Yet as Jacques Anatole François Thibault, winner of the 1921 Nobel Prize in Literature observed, "If fifty million people say a foolish thing, it is still a foolish thing." Huygens, being a numbers man and being from Pittsburgh and and being an admirer of Andrew Carnegie, is less interested in what people say, and more interested in what they do (or are expected to do).

Stakeholders are generally rational. Activist investors have a point, and when a company is in trouble, things need to be shaken up. Witness the value created at JCPenny by activists investors who upon the departure of then CEO Myron Ullman and brought in Apple Inc. retail giant Ron Johnson to restore integrity to the sinking retail ship. Seeking Alpha's assessment: JCP's stakeholders must be furious that the company spent $170M of their money to hire Ron Johnson and his team...only to rack up dreadful five quarters of 15%+ year-over-year declines in comparable sales. So who's in charge now? Myron Ullman.

From a reputational value perspective, JPMorgan Chases remarkable journey over the past two years has been document here previously. At the risk of having a Karl Rove moment, Huygens opined recently on a LinkedIn blog, Boards and Advisors, that the Steel City Re Reputation Value Metrics indicated no major changes at JPMorgan Chase. Huygens shared the same with friends on the LinkedIn blog of the Intangible Asset Finance Society. Updated metrics from this past week, now only less than two weeks from the annual meeting, affirm Huygen's impression. JPMorgan Chase's reputation is in generally good standing, and the current volatility of its RVM, a non-financial measure of reputational value, is at a peer-group low of less than 1% (Chart, top, row, Vital Signs and Current RVM Volatility). The data, representing the wisdom of crowds including, but not limited to pundits and shareholder advisers, indicate that as a group, no one is expecting any surprises. Or in the words of Consensiv, an advisory group, the Consensus Trend for JPMorgan Chase reflects a remarkable coherence of expectations.

Which leads Huygens to predictions in the alternative. First, it is unlikely that there will be major changes at JPMorgan Chase's Board of Directors; second, if in the unlikely scenario there are, the stock price will become quite volatile.

A meat-product snack called Slim Jim took pride in its two classes of followers: haters and lovers. The haters could be dismissed as long as there were enough lovers finding value in the product.

JPMorgan Chase (JPM) may be the banking equivalent. There is no shortage of governance executives and proxy advisors who have strong concerns about the fact that Jamie Dimon holds titles as both CEO and his own boss, Chairman of the Board. They're pushing for a split. Others see a Karmic injustice in the ability of Mr. Dimon to weather the consequences of the London Whale event and its multi-billion dollar loss without nary a scratch.

Other stakeholders have spoken through more economically compelling actions. Creditors are offering superior terms, equity value is high, and customers may have pushed the bank past Goldman Sachs on the M&A Value league table. Employees have love, too, and while the effects are transparent on the P&L, it's nice to know why.

Consider the bank's response to Super Storrm Sandy. CFO's Caroline McDonald writes, "Unlike many companies, faced with closed branch banks when people needed access, Chase chose not to passively wait for employees to get back to work whenever they could. The company provided transportation to pick up employees and take them to work, according to the employee I spoke to. The company also provided them with food, and those who had no home to go back to were put up in hotels, she said. This was all corroborated by a Chase spokesperson. The list went on and on, including taking care of children whose schools were closed through its backup childcare program, and helping employees find automobiles when theirs were destroyed."

What about the objective measures of reputational value from Steel City Re, and how is the growing horde calling for changes in Mr. Dimon's status affecting reputational value volatility? The short answer is not much. Relative to its 50 peers, JPM's ranking is in the 90th percentile. Its RVM volatility, a measure of uncertainty, is at the 15th percentile with an absolute measurement of around 1.5%. All indicators of reputational value stability are at top levels, suggesting that change is not expected. Which is not necessarily good if the proxy advisors get their way on principle - expect a major loss of equity value in the uncertainty that would follow.

They're at different ends of the ROE continuum, but both JPMorgan Chase and Deutsche Bank share one common attribute that is a hallmark of the financial services sector: remarkable resilience. Both keep taking a licking of one form or another and keep on ticking.

Earlier this month, the Board of Directors at JPMorgan Chase stepped into the fray, took up Barney Frank’s 2012 suggestion, and slashed Jamie Dimon’s bonus for the $6bn London Whale affair and for, as the press reports, “damaging the bank’s reputation.”

Yet objective measures of reputational value would argue otherwise. An institution in the throes of a reputational value crisis cannot buy $2.85 billion in credit at rock-bottom prices. In addition to paying only 77 basis points above US Treasuries for fixed-rate securities due October 2015, with an unprecedented low rate of 1.1 percent, the largest US bank paid only 66 basis points more than 3-month LIBORs for floating rate securities for the balance. Moreover, a CEO in the center of a reputational crisis is unlikely to be nominated by Warren Buffet to be Secretary of the US Treasury. And an institution in a reputational crisis is unlikely to report net income of $5.7bn for the fourth quarter, up sharply from $3.7bn a year earlier, as JPMorgan Chase shared last week.

Meanwhile an Italian judge recently convicted Deutsche Bank together with  JPMorgan Chase, Switzerland's UBS and a German-Irish bank, Depfa, for their role in overseeing fraud by their bankers in the sale of interest rate bets to the city of Milan. In parallel, Deutsche Bank is part of a worldwide investigation for altering the British benchmark interest rate (Libor) and its euro-counterpart (Euribor). The US Senate named the German bank alongside Goldman Sachs as the two institutions that played a “key role” in the financial crisis.

Once renowned for its solid and risk-averse business, Deutsche Bank became an aggressive investor under the leadership of Swiss top banker Josef Ackermann. His successor, Juergen Fitschen, who vowed to change the company's culture, recently came under fire in Germany for having phoned up the regional governor to complain about the police raids which are denting his bank's reputation.

The Steel City Re Reputational Value Metrics show JPMorgan Chase far ahead on most measures. As shown in the vital signs chart below, Deutsche Bank's RVM volatility, a measure of reputational value volatility, is been and still is more volatile that JPMorgan Chase's, its CRR, a measure of relative reputational ranking is lower, and its ROE is significantly lower. But in a nod to last week's Mission Intangible Monthly Briefing on organizational resilience, Deutsche Bank's reputational ranking, its CRR, is rapidly on the rise and therefore its reputational stability (reflecting change) is also lower than JPM's. These reputational value measures are forward-looking indicators of economic value. Therefore, notwithstanding all of the scandalous news, these reputational value metrics indicate that in the setting of a rapidly rising CRR, profitability at Deutsche Bank (read: ROE) is sure to follow.

Vikram Pandit stepped down last week as Citigroup Inc.’s chief executive officer. For followers of corporate reputational value, this turn of events was not surprising.

The lot was cast when Pandit asked long-suffering Citigroup investors to support an outsized pay package for mediocre performance. As discussed in the forthcoming book, Reputation, Stock Price and You, Pandit’s nominal salary was generous relative to the respect afforded to him by investors.

As reflected in a regression of Barron’s Most Respected Company scores from the book's Chapter 7, financial sector CEO salaries correlate with reputations. Three companies were outliers. Nominal salaries at Berkshire Hathaway and Visa, both companies with stellar reputations, were below the trend line. At the bottom end of the spectrum, Citigroup ranked just above AIG. While AIG’s CEO’s salary was $3.02 million,  Pandit’s nominal salary was significantly above the trend line at $7.02 million.



Citigroup’s performance, however, has been only mediocre. As shown below in the Steel City Re Reputational Value Metrics, among 250 peer companies, Citigroup ranked in the 56th percentile recently on Steel City Re’s CRR, a measure of relative reputational standing; in the 46th percentile on the RVM, a measure of reputational value volatility; and rewarded equity investors with trailing twelve month returns in the 49th percentile. The figures are vastly improved from just earlier this year.

But as is often the case, better may not be good enough. None of these levels are what would be expected for such a huge balance sheet. Goldman Sach’s recent CRR was in the 88th percentile and its RVM volatility was in the 40th percentile. JP Morgan Chase’s CRR was the 77th percentile and riding on a post-whale upwards wave with a greater RVM volatility ranking in the 65th percentile.

AIG’s CEO’s salary was $3.02 million, and his compensation package was approved by 99.19% of the votes cast at the last annual shareholder meeting. In contrast, Pandit’s compensation package was approved by only 45% of the votes cast. The board had to act. Ann Murray, partner at McKenna Long & Aldridge LLP, a law firm, warns that boards need to act defensively and anticipate shareholder reaction. “Failed” say-on-pay votes triggered derivative litigation against directors in about 20% of the cases in 2011.

The last data entries on the charts below show the market's response to Pandit's resignation. Stock price jumped relative to peers, RVM volatility decreased and forward-looking reputational ranking (CRR) indicators reported expected upswings.

"JP Morgan Chase & Co., the bank that plunged as much as 24 percent in the month after disclosing a multibillion-dollar trading loss, has erased that decline," reported Bloomberg (Kopecki, 13 September). The wrong-way bets on credit derivatives cost the bank $5.8 billiion so far and are the focus of an escalating investigation by a U.S. Senate panel and at least 11 agencies, including the Justice Department and Securities and Exchange Commission.

While the bets first disclosed 10 May 2012 also were potential sources of significant reputational damage, Huygens reported that the Steel City Re reputational metrics suggested otherwise. Those metrics now indicate that JP Morgan Chase's reputation, too, is almost back to where it was prior to the spring 2012 event. The metrics further indicate that JPM's reputation ranking is expected to continue to rise at a reasonable rate with both the current reputational volatility and projected stability ranking in the 60th percentile with a positive expected direction of change.

JP Morgan Chase has been a robust reputational risk story. One point emerging from the story is that reputational  metrics could have given both the market and JP Morgan Chase's board significant peace of mind. The events made for great media fodder, but it was never really  a reputational crisis, as the metrics showed then, and affirm now. Notwithstanding the personal abuse of the hearings etc., CEO Jamie Dimon has done well. So far he and his wife have reaped a 22.6% gain from their $17.1 million bet on JP Morgan Chase's reputational resilience for a cool $3.86 million in less than two months.

It was only 11 months ago, on 25 August 2011, that Berkshire Hathaway Inc., Warren Buffett's investment company, agreed to sink $5 billion into Bank of America Corp, the beleaguered financial giant. The deal helped allay fears that America's biggest bank needs a fresh infusion of capital to withstand mortgage losses and another downturn in the economy. The investment was both fresh capital and a market signal -- a reputation thing, if you will.

Last week, Jamie Dimon, CEO of JP Morgan Chase, pulled a Buffet Lite. Dimon, his wife, and a limited-liability company linked to him bought $17.1 million of the bank’s shares after the stock slid amid trading losses. “I expect this is meant as a sign of his confidence in the bank,” John Coffee, a securities-law professor at Columbia University Law School, said in an e-mail to Bloomberg. Like insurances and other financial guarantees, it may be the best PR money can buy.

Huygens noted this past Thursday that Morgan Stanley (MS), according to Bloomberg, was getting the Rodney Dangerfield treatment - no respect. Today, with the benefit of the weekly Steel City Re reputation metrics, we take a closer look.

The time series chart in the top right corner below shows just how miserable the year has been for Morgan Stanley. Over the trailing twelve months, relative to its peers comprising some 260 financial service firms, its reputation rank (in blue) never reached above the 50th percentile. While its current reputation value volatility over the past three months is less than over the past year, the vital signs chart shows that relative to its peers the volatility has crept up from the 66th to the 70th percentile. More worrisome for the firm's stakeholders are that the forward-looking trend indicators (direction of change) are all negative which may explain both the high level of volatility and the most recent steep dive in the company's return on equity relative to peers.



For context, compare Morgan Stanley to one its better known peers, JPMorgan Chase (JPM), that has been in the news recently. Currently also facing a reputational challenge of some significance, JPMorgan Chase's issues are new and follow a period of low volatility (for this sector) ranking in the 16th percentile relative to peers. As a result, although JPM's direction of stability of its reputation rank is more negative than MS, its current reputational volatility is about the same (72nd versus 70th percentile), its reputational rank is still much higher (48th vs 24th percentile), and therefore its return on equity is greater.

We'll be brief. A company experiences the failure of a key business process and is publicly humiliated. It's reputation is deemed to have been impaired. Experts in reputation metrics asses the situation. The firm's reputation value has dropped to a level that is no lower than the level at which it has resided for at least 32% of the time for the prior two years. Its relative reputation ranking compared its peers dropped as low as the median and is on the rebound only three weeks later. This is not a reputational crisis - not for JPMorgan Chase (JPM), at any rate. (Loss Gates mark the 1.0, 1.5, 2.0, 2.5, and 3 standard deviations of the 2-year historic Reputation Value Metric average.)

While we have often written of the link between reputation, liquidity and credit risk, examples help underscore the point. JPMorgan Chase (JPM) is in the throws of an alleged reputation crisis which by many measures, is not particularly noteworthy. On the other hand, notwithstanding the media blitz, there are potential costs to this event that are consistent with reputational damage, if not a full blown reputational crisis.

From the Financial Times (Cotterill, 11 May), we have reactions from Fitch and S&P the day after the 10 May disclosures:

Fitch Ratings has downgraded JPMorgan Chase & Co.’s (JPM) Long-term Issuer Default Rating (IDR) to ‘A+’ from ‘AA-’ and its Short-term IDR to ‘F1′ from ‘F1+’. Fitch has placed all parent and subsidiary long-term ratings on Rating Watch Negative. Fitch has also downgraded JPM’s viability rating (VR) to ‘a+’ from ‘aa-’ and placed it on Rating Watch Negative. Fitch views the size of loss as manageable. That said, the magnitude of the loss and ongoing nature of these positions implies a lack of liquidity. It also raises questions regarding JPM’s risk appetite, risk management framework, practices and oversight; all key credit factors. Fitch believes the potential reputational risk and risk governance issues raised at JPM are no longer consistent with an ‘AA-’ rating.

Standard & Poor’s Ratings Services revised its outlook on JPMorgan Chase & Co. (JPM) and its banking subsidiaries to negative from stable...We currently view JPM’s risk position as “adequate” and not “strong” (as our criteria define the terms), partially because of the risk on JPM’s balance sheet, which we believe contributes to the need for elaborate hedging strategies. Management’s admission that the hedging strategy was “flawed, complex, poorly reviewed, poorly executed, and poorly monitored” contributes to our negative outlook.

The Facebook Fiasco (FB) has tarnished many a reputation. But only one firm at ground zero experienced a failure of a business process that is core to its reputation. The NASDAQ OMX Group, Inc., (NDAQ) the holding company of The Nasdaq Stock Market, Inc., is the world’s largest exchange company. By its own description, it’s a technology company. “We are not just financial types that sell technology. We’re market-savvy technologists that know first-hand the business challenges technology is supposed to solve. “ That technology failed dramatically Friday, 18 May. The punters want to know: was this a reputational event; is this time to short NDAQ; and while we are at it, how does this rank relative to what JPMorgan Chase is experiencing?

On first pass, the relative drop in the reputation ranking of NDAQ from the 80th to the 71st percentile among its 80 peers seems unambiguously less severe than the drop in the ranking of JPMorgan Chase (JPM) among the same peers earlier this month from the 79th to the 52nd percentile (although it has already started recovering and is now at the 54th percentile (Steel City Re Corporate Reputation Ranking time series below).


However, looking at both the one and three year time series for the two companies, the historic reputation ranking (above) and reputation value metric volatility (below) shows a more nuanced comparison. All other things being equal, JPMorgan Chase is a firm with a much more volatile reputation. In the loss gate chart for NDAQ below, the gates 1-5 show the reputational value metrics for 1, 1.5, 2, 2.5, and 3 standard deviations of the two-year historic mean. The tight clustering of the five loss gates for NDAQ, with loss gate 3 (2 standard deviations) centered on 0.4 GU reflects a much less volatile reputational pattern than JPM where loss gate 3 is centered about 0.47 GU. Even so, the reputation value metrics for both firms is still wide of the mark for even one standard deviation drop from the 2-year historic mean.





There's more to consider. In the multi-variable time series charts below illustrating the 90-day exponentially weighted moving average of the reputational metric volatilty, and now looking at the data with custom peer groups, the volatility of NDAQ's metrics are less sensitive to the volatility of the CBOE VIX, or "fear index" than than are JPM's metrics. Which among other things suggests that at least some of JPM's reputational metric depression may be attributable to the background uncertainty associated with Greece and the Euro.


Returning last to basic reputational metrics, the vital signs column charts and time-series charts provide an interesting quantitative perspective for all of the current media chatter about these two firms.  Relative to the 80 firms in the Finance peer group, the historic volatility of NDAQ is in the 28th percentile and is climbing with the most recent value at the 46th percentile. Its current reputational rank is in the top quartile, return on equity in the third quartile, and projected reputational stability is just above median. JPM's historic reputational volatility, notwithstanding the great swings seen above, is still in the lowest quartile among the custom peer group of 258 financial service sector firms; and the current volatility only moves JPM's volatility to the high end of the third quartile.


These data indicate that neither reputational event affecting the two companies was particularly severe. The data further suggest that there is significant resilience in the reputation of NDAQ that should be able to absorb the impact of the high profile technological glitch; and that the most recent event to surprise JPM is already resolving from a reputational perspective.