Why Jamie Dimon And Jon Corzine Couldn’t Find Their Money

Tom Groenfeldt

Jamie Dimon and the London Whale are playing a key role in Pamela Pec Cytron’s  marketing campaign for Pendo Systems, although probably not by choice.

The CEO of JPMorgan Chase and the London trader who lost $6.2 billion for the bank have become a leading example of inadequate controls in banking. CEO of Pendo Systems, which provides enterprise-wide  multi-currency accounting for financial institutions, Cytron has gotten into the habit of pointing to current headlines to make her point that even the most sophisticated international financial services firms don’t know their positions. Her presentation about Pendo Systems includes a copy of a clipping from The Wall Street Journal story from May 18, 2012:

‘“On April 30, associates who were gathered in a conference room handed Mr. Dimon summaries and analyses of the losses,” The Wall Street Journal reported. “But there were no details about the trades themselves. ‘I want to see the positions,” he barked, throwing down the papers, according to attendees. ‘Now I want to see everything.’”

“Jamie Dimon said all he wants are his positions, but he can’t get them because they are all over the bank,” explained Cytron, who says Pendo System’s BasisPoint could have delivered all the detail with a single query.

She also directs people to the YouTube clip of Jon Corzine, CEO at MF Global, telling a Congressional panel “I simply do not know where the money is or why the accounts have not been reconciled.”

Congress being made up of Congressmen and Congresswomen, no one thought to ask why the CEO of a financial industry leader handling billions a day didn’t know where the money was.

Cytron has an explanation for the lack of financial  information that Dimon and Corzine confronted — their companies have been using systems that were developed in the 1980s, or earlier.

That was a period of innovation, she notes. It brought the launch of Windows 1.0 and Apple’s Macintosh personal computer. It was also the time of Lady Gaga’s  birth. Windows, Apple and Lady Gaga have moved on since then, but the securities accounting systems remain pretty much the same.

The client/server systems were revolutionary at the time. Mainframe systems were displaced by PC-based and mid-range systems such as Portia, InvestOne, CAMRA, PAM, Axyis, HiPort, Eagle Global Plus and Dimension. Initially all focused on a geographic or business line silo for banking, insurance, wealth and investment management.

Relatively quickly many of the older industry standard firms that sold mainframe accounting systems disappeared, said Cytron, who is betting that the industry is ready for another major shift. Today’s incumbent systems, she said, were developed in another era, a time when processors were slower, storage was far more expensive than it is today and the investment world was less global.

“We built BasisPoint when technology was catching up with financial services requirements.” It is all Microsoft and built around Microsoft SQL Server.

“We made bets on SQL, cheaper storage and faster processing. At the time people said our approach would never work, but we made those bets in the design and they paid off.”

With Pendo, all of a firm’s data can run on a single database, so the next time Dimon, or the CEO of AIG, needs positions, the staff won’t have to go to multiple databases and then reconcile different accounting practices around the world.

“If I go back to 2010, 2011, 2012 I can find article after article on global accounting, the lack of innovative fund accounting systems. AIG had nine investment accounting systems — five versions of PAM and four of Portia and the valuation swing on the same asset could be double digit basis points because they were all running in separate instances.”

The Pendo system is also date agnostic.

“We don’t do processing at a system level, we do it at the lowest level, so nothing causes you to shut down the system. If you are based in the US and running in Asia, you wouldn’t have to shut the whole system down to update one geography. It can update tiers independently,” she explained.

“From an accounting perspective, you have to bring in indicative data such as market data, corporate actions and prices. In other systems it is a system-wide process; they shut down for an overnight run. We have 8 tiers of hierarchy so you can bring in prices at the lowest level — the fund — and close that level down without affecting anything else.”

Unlike current systems, Pendo can work in three currencies, so a fund buying Japanese equities on an American market can enter the price in Australian and American dollars and Japanese Yen. The critical advantage is that by is simultaneously storing, processing and displaying that data, it offers a single bird’s eye view of these levels by basis, by industry and by issuer while applying regional rules.

Unfortunately for her, she launched Pendo just as the financial services system came crashing down in 2008. The industry needs new accounting systems but it continues to muddle along with systems that have failed, often dramatically.

Look at the London Whale, she suggests. Why didn’t Mr. Dimon ask why it took so long to get the firm’s exposure?

As the Wall Street Journal reported Dimon initially played down an April 6 report in the paper calling the London’s trader’s position as a tempest in a teapot. The paper later reported that as the losses grew, Dimon on April 30 demanded to know the bank’s positions. It took weeks from the time the problem was identified to determining its size.

Bloomberg has reported that the bank may release its internal report on the loss and that Dimon could see his bonus slashed.

Yesterday the U.S. U.S. Office of the Comptroller of the Currency and the  Federal Reserve will require JPMorgan to improve its controls and risk management and the FSA in London may also be looking at some enforcement action, according to Bloomberg.

Cytron is frustrated that the repeated crises have not led to an examination of the root cause.

“Every major problem has some hint of accounting in them. What feeds all these systems is the underlying positions, but they continue to try to fix the problem from the top.

“Jamie Dimon has been the most respected person on Wall Street,” she added. “Because of the way lines of business are structured, you have these silos of information. Why hasn’t anything happened since 2008 when these problems nearly took down the world economy? We need systems that make positions transparent in a single database and then tag them to exposures in a mutual fund, bonds or a hedge fund so if you want to see the accounting position you can get it across different types of holdings. If the industry doesn’t fix their problem, someone is going to fix it for them with more regulation.”

Accounting data is held in the back office, which has none of the glamor or profitability of the trading operations. Regarded as a cost center, it typically receives little investment and less attention Even in the JPMorgan blowup, attention has focused on risk management and controls, not on the fact that the bank apparently could not determine its losses for several weeks.

With Pendo Systems, Cytron said, users can see the positions in real-time.

When firms ask her how long the nightly run is on BasisPoint she explains that the system operates in real-time. Unlike older systems that have to run overnight reports for users to get at the data, BasisPoint supports real-time queries. One mid-size insurance company which had 600 reports looked at the way BasisPoint works and concluded it could get by with just 30 reports, all of which were already in Pendo, since the rest of the information was always available by query rather than requiring IT to run a report. In fact, 40 percent of the firm’s reports hadn’t been touched in 10 years.

The incumbent systems work with a single cost basis. Although they do multi-cost basis through reports which can incorporate the various internationally recognized accounting standards –  Japanese GAAP , US GAAP, IFRS or Australian Tax — older systems don’t provide online real-time financial impact analysis by basis. Obtaining the data granularity required to feed risk, compliance or management reporting tools is cumbersome and requires a tremendous amount of manual intervention, Cytron said.

“They were build eons ago when memory and fast storage were expensive.

Pamela Pec Cytron, CEO of Pendo Systems

Cytron said that BasisPoint’s most exciting feature — excitement is all relative when you’re talking about accounting systems — is the application’s cancel and rebook feature.

“If you have an error in December and missed a paydown on your bond from February, you have to fix that. In every single system, you have to go in and manually unwind all the paydowns and corporate actions and then rebuild them. Since it is all done manually it takes a long time to fix it and it is prone to error. We show how with one transaction you cancel and rebook and you see all the lot level detail and fix it.”

Existing accounting systems were built from the individual accounts, not the individual positions. Moving to  system based on positions requires a huge mind shift, she said. But if you have granular data you can do mark to market and historical costs, International Financial Reporting Standards or U.S. GAAP, handle bonds or equities, domestic or Asian or European.

More than just a mind shift, the move requires courage, or demand by regulators. Legacy systems might be clumsy and expensive to operate, but they are familiar and reliable.

“Everything that surrounds accounting is massive. The integration is massive since an accounting system could be connected to thousands of feeds.

Moving a core system is expensive and time-consuming, not to mention scary — the reason very few top tier banks have replaced their core systems. (See my story on CBA and Nationwide.)

Pendo proposes a deliberate migration by moving new business to BasisPoint in a cloud utility and then slowly transferring existing data and finally shutting down the legacy system.