One JP Morgan executive's untold story of the Great Recession – and how courage and prudent risk assessment can protect a company.
Throughout the Great Recession, you no doubt heard all too many stories about mortgage-backed securities, subprime mortgages and rampant greed. You read about, and perhaps were a victim of, very short-term, short-sighted and high-risk moves by financial firms around the world. This is a different story – a high-wire story of a high-profile executive who resisted the intense pressure of the moment and made a critical against-the-grain decision based on experience, guts and rigorous market analysis.
Edward Giera held the lofty position of a managing director at investment bank J.P. Morgan, where he was responsible for capital markets in the EMEA region (Europe, Middle East, and Asia). As a nearly 20-year Morgan veteran, he had seen the company through ups and downs and a number of investment and economic cycles.
In 2005 into early 2006, economies were booming. Giera’s end of Morgan was responsible for approximately $500 million in revenues, and Morgan was at the time among the top three capital markets houses.
“We were constantly looking at the markets to generate fee income with acceptable risk,” he recalls. “That sounds like such a simple statement, but decisions around it came with immense pressure. Morgan had an internal corporate strategy unit whose recommendations went all the way to the executive office at headquarters in New York. It conducted deep dives into the market and market opportunities, examining the revenue and cost structures for the entire firm, not just the investment bank.”
Giera was an executive in a line of business that worked regularly with Morgan’s strategy group.
But Morgan also hired external consultants to identify revenue gaps against competitors, looking at where competing firms were making more money than Morgan and how the firm might get involved to remain competitive.
Staying competitive meant generating profits that would allow for more bonuses, which then added to overhead at the firm. Yet, according to Giera, Morgan needed to generate more fees, more revenue at year end to deliver attractive returns. In bull markets everyone benefits, including a company’s shareholders as well as the bonus pool. “Competition for talent was fierce,” he says.
It was a vicious cycle that led many firms to ignore the bad risk they began to assume. Giera appreciated all this. He had seen Wall Street’s greed bite his firm and others in years past.
During 2005-2006, the external consultants dangled a very big opportunity in front of the investment bank’s management that involved the mortgage-backed securities business. Giera described how the risk/opportunity conversation began:
“In Europe we were engaged by a UK bank and banks would typically use the securitization for funding and capital and liquidity management. Just as they could hire the firm to issue long-term bonds, they could also use us for mortgage-backed securities. We called that ‘agency business.’ It does not involve a great deal of risk, in terms of the value of the asset changing because we only dealt with the value at the moment of change. The fee is relatively low but the volume is high and therefore is an attractive business. It was an important part of what we did.”
In short, the consultants identified what they considered a significant revenue gap and recommended that Morgan move aggressively to try to fill it. Why, the consultants asked Morgan executives, remain just be an agent securitizing a mortgage when you can originate the mortgage and earn higher fees?
Morgan’s rivals, not satisfied to act as go-betweens or agents, had begun to originate loans. The consultants saw the greater upside, the higher profit opportunity and recommended that Morgan management pursue this more aggressive, higher profit path – despite the additional risk.
Giera’s U.S. counterparts began to embrace this mortgage origination business. Pressure increased on all those running regional businesses to do the same.
“I was banged over the head about this revenue gap,” he says.
Morgan and other competitors did not just move into mortgage origination, they also began focusing on less credit-worthy customers, moving into subprime mortgages.
The entire industry appeared to have shifted into high gear, with accelerating activity in the non-conforming market sector outside the US, much like the subprime market in the U.S.
At a point in 2007, Giera took a stand.
“We weren’t geniuses,” he says. But he and his Europe-based team believed that the risk was not worth the potential upside profits. “We felt that at the time the defaults would be much higher than projected. It was too great a risk for the company.”
“I had close to 20 years working in the UK and understood that our market was more volatile than it was the U.S.,” he says. “If the U.S. experienced a shock with high levels of defaults, a similar shock would affect the U.K. far more than the U.S.”
He told management that in the UK Morgan would remain an agent and not enter mortgage origination. The decision saved the firm significant losses, losses that were incurred by Morgan’s competitors.
Epilogue: Morgan’s executive office respected Giera’s decision. Six months later they reassigned him to a new role, as head of global head of Pension Advisory, a new position at Morgan.
Remaining ever feisty, Ed Giera has advice for decision makers who have to make big bets that go counter to the company’s direction:
- Believe in your analysis. Especially if your conclusion is based on years of hard-won experience in all types of markets under all sorts of conditions.
- Always debate risk and the exposure risk presents to the firm today, based on current conditions. You need to debate this risk on a case-by-case basis, not on yesterday’s decisions.
- Always remember the pressure of the carrot and how it can overshadow reasonable discussion. Giera faced the demands of Wall Street compensation and shareholder pressures, which compelled many of the firms to take the more aggressive, higher risk position in the mortgage market.
Maybe, Giera muses, you need to draw the line at some point and ask when the firm’s best interests must trump that of a talented producer. “This may mean your firm is leaving profits on the table, and that means everyone is earning less,” he says. “Just be prepared to take that position.”
Ed Giera is currently principal of E.J. Giera, LLC, as well as a non-executive director for a number of companies, including Pension Corporation Group, Renshaw Bay Real Estate Finance Fund, Renshaw Bay Structured Finance Opportunity Fund, and NovaTech LLC.