The Rake

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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 several JP Morgan senior executives listed on Form 4 who are centimillionaires from their stock holdings. More than a dozen are decamillionaires, most several times over.

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.





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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  1. How about no tax deduction for interest on an amount of the company’s debt equal to the aggregate of the previous 5 or 10 years stock buybacks. And yes, I’m looking at you IBM.

  2. Again, tax managent stock options as immediate income at current value of options when granted and again when exorcised. Get rid of capital gains treatment for stock options.

  3. Avatar for jlmh jlmh says:

    How about no stock buybacks?
    Managment can have options, preferably with long dated vesting. Does align with shareholders, interest in a well performing stock. But no possibility of gaming the system ( that way) by giving company money to people who do not want to be shareholders.

  4. Personally, I want every member of the board of directors to own some of the stock. Not sure how to accomplish this w/out equity compensation. I also think that in the case of company founders, there may need to be an exception to the CEO/Chairman rule. Without an exception would there be too much of a disincentive for going public in the first place?

    What if buybacks were not allowed unless the company paid out a certain % as dividends in that calendar year? Say 50%? Also, all shareholder communication about buybacks should include full disclosure, gross amount, mgmt stock based compensation, other tax true up games, net amount.

  5. Ben - suggestions 1 through 3 take care of the board, but what of the ‘managers’? If stock-based compensation is truly compensation for hitting agreed-upon goals, then payment should follow into the next fiscal year.

    First, limit by law stock-based compensation to 10% of total cash compensation, and second, issue the stock each pay period. [ Add the current stock value issued into the period earnings, tax it based on the individual’s tax schedule, then remove the value of the stock - like taxing a company car. The company adds the value of the car to cash compensation for that payroll period, they then tax it, then remove the vehicle value. I hated it when I had a company car, but I also understood the taxing principle.]

    No more hulking huge stock awards, all at once, and the actual award is spread out over the year after it is earned. The employee can take possession of the shares each pay period, or let them accrue. And the only way this is going to happen is by law, because there will be serious push-back. But someone, somewhere, is going to have to draw a line in the sand to stop these abuses.

  6. I own a lot of stocks and don’t have a clue how much the executives are making. I’m sure I would be displeased if I did. If ROE is ok, most of us figure everything else is ok. Perhaps if the information were a clear line item and stockholders were allowed to express their view with some authority, it would help the situation.

  7. The proxy statement will tell you how managers are compensated. This excerpt from the 2019 Norfolk Southern proxy statement provides a clue.

    From the 2019 proxy statement: “Norfolk Southern’s goal is to achieve an operating ratio less than 65 percent by 2020 and double-digit compound annual earnings per share growth over the plan period (page 30)." Nothing in there about revenue or volume growth. Mgt is incented to get the OR down and EPS up.

  8. Jamie isn’t taking people’s money at the point of a gun. Investors are literally giving it to him. Then complaining, “there ought to be a law”.

  9. Ben, If I have a clear understanding of the stock buy-back extravaganza, it has been facilitated by the Federal Reserve’s loose monetary policy which allowed credit worthy (?) borrowers to replace equity with debt. Trying to nullify the actions of one government agency with more government regulation seems contrary to the ethos of the pack. I am not sure how to do this but the very first step is to clip the wings of the Fed. It is time to recognize that there is a business cycle that must run its courses. Safe spaces only exist in the halls of academia where these millionaire professors belong not trying to manage the lives of working class Americans. There is plenty of talent here at Epsilon Theory so a good start is for all of us trying to flee the flock to start thinking outside the box. To quote Buckmeister Fuller, “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.” You have helped us all take the first step in pushing back against the Nudgers, we need to come up with solutions that don’t involve making the bureaucracy more powerful.

  10. Avatar for glarri glarri says:

    Great comment.
    P.S. I think his name is spelt “Buckminster Fuller”.

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