In the face of inaction by the Congress and the courts, one shareholder decides to take on "too big to fail."
By Francesca Rheannon
Six years after the 2008 financial meltdown, the banks are still too big to fail. That has experts worried about a repeat performance. It also worries at least one individual shareholder who has decided to force the issue at the JPMorgan Chase annual shareholders’ meeting this Spring.
Michael C. Davidson doesn’t seem like a radical. A Portland, Oregon, tax accountant, he has held more than 200 shares of JPMorgan Chase stock since 2002. But he’s afraid the bank is putting his investments—and the rest of the economy—at risk by continuing the practices that tanked the financial system and forced the government to bail out banks.
Shareholder Resolution Asks for Divestment of Investment Banking Services
Davidson has submitted a resolution to the SEC that would, if approved for a vote at the shareholders’ meeting, ask JPMorgan Chase to develop a plan to divest “all non-core banking business segments.” According to the resolution, businesses involved in global markets, global wealth and investment management and all operations other than consumer and business banking, consumer real estate services and global banking would be divested.
In effect, Davidson is asking JPMorgan Chase to allow its shareholders to vote on bringing back the separation between commercial and investment banking that was installed by the Glass-Steagall Act under FDR and torn down by President Bill Clinton on the advice of then-Treasury Secretary Robert Rubin (who later went on to head Citibank) and Larry Summers.
Like many activist shareholder resolutions, Davidson’s links social and investor risks. The resolution states:
"We believe that such a separation will reduce the risk of another financial meltdown that harms depositors, shareholders and taxpayers alike; in addition, given the differing levels of risk in JPMorgan Chase’s primary business segments, divestiture will give investors more choice and control about investment risks."
The resolution urges JPMorgan Chase’s Board of Directors to appoint a “Stockholder Value Committee composed exclusively of independent directors” to develop the divestment plan and report on it to stockholders within six months of the 2014 Annual Meeting.
The Birth of a Shareholder Activist
Davidson’s decision to take the plunge into shareholder activism came just a few months ago—just in time, he hopes, for his resolution to be approved for a vote at the April Annual Meeting. CSRwire spoke with him to find out how he made the leap from passive investor to activist.
Why did you decide to take this issue of "too big to fail" on?
Because the whole notion of "too big to fail" is absurd. Things shouldn't be so big that they can supersede the government. I think these big banks are becoming so large that whoever is in charge of them has no idea how to run them. There are thousands of business units there. How can one man run them all?
These guys led us into the greatest financial crisis since the Depression. And they’ve walked scot-free. Something's wrong.
You've never undertaken anything like this before. What were your thoughts going into this?
I've seen the ballots of other companies I've owned where shareholders propose a measure such as voting on officer compensation or having the right to review certain aspects of the corporation for environmental concerns. I thought, “why doesn't a shareholder put up that maybe the bank should split itself up so that you have the traditional banking side and then the investment banking side.”
I think if the bank were to split up, you’d unlock a lot of intrinsic shareholder value. I believe the institution is worth more in parts than it is as a whole.
So you think it would increase shareholder value if it got broken up?
That's what I'm saying. They just got hit with a $13 billion fine. It cost the shareholder $2.87 per share. I'd rather see that in a dividend!
JPMorgan Chase is trying to convince the SEC not to allow your resolution to go forward, claiming that the resolution is merely "common and ordinary business" and doesn't merit being put on the ballot. What's your response to that?
Maybe the good folks at the SEC will actually let it go through based on the fact that it's an area of discussion that is way beyond ordinary business. It's up there with great policy. It's obviously that: they’re talking about it in Congress. The business community is talking about it.
Yet, yours is the first motion that I know of to, in effect, bring back the Glass-Steagall Act.
The notion was that the Dodd-Frank Act would do that, right? But obviously it hasn't worked. And so, yes, I think we should go back to something like the Glass-Steagall Act. Most of the folks who supported the repeal of that act have now come back and said we made a mistake, including [President] Clinton.
Often resolutions of this kind fail. People judge success by percentage of votes even if they do fail. What are your thoughts about going forward if this fails at the shareholders' meeting?
I'll go back and try again.
What's your perspective on the power of one person to make a change?
What I’m interested in is seeing the debate start. I think shareholders and investors have the right to have a debate about the governance of the corporation. We've got to start somewhere.
For some reason, JPMorgan does not want to have that debate amongst its shareholders. It's trying to keep this off the ballot. I think if it goes on the ballot, I don't think it will do very well because I’m not a big institutional block but at least it will get the debate going and people will be thinking about it.
Have you thought about making overtures to some of the big institutional investors, big pension funds, to broaden the base for this kind of fight?
I think that’s to come. I'm not sure that's the place you start. You start “where I am.” Then you get stepped on. Then you go out and say, “Is this right?” I just think it makes common sense someone has to stand up and say something.
What has been the most surprising thing to you about this process so far?
A lot of the little people, me, my friends, are very pleased about it. They'd like to see it continue on. And if that’s happening here, I think it's much more broad-based.
The issue at the heart of “too big to fail” is “Moral Hazard” – the fact that taxpayer bailouts allow the big banks to engage in risky business because they don’t face the consequences of those risks.
JPMorgan Chase CEO Jamie Dimon acknowledges the risk of too big to fail but claims Dodd Frank addresses it. Yet, his lobbyists are fighting tooth and nail to prevent implementation of Dodd Frank on the one hand and weaken its provisions on the other.
With “regulatory capture” by the megafauna of Wall Street threatening to overwhelm any reform, ordinary shareholders like Michael C. Davidson may be the key to building the groundswell for bringing the banks down to manageable size.