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?