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Two weeks ago, Bloomberg’s Dawn Kopecki reported that Ina Drew would be allowed to keep all of the money she was paid over the past two years ? more than $20 million in all. Today, Kopecki’s headline is very different: “JPMorgan’s Drew Forfeits 2 Years’ Pay as Managers Ousted”. What happened in the interim? There are three possibilities, as I see it, all of which can overlap: The first is the official story: that Drew unilaterally approached Dimon, offering to return two years’ pay. “She has acted with integrity and tried to do what was right for the company at all times, even though she was part of this mistake,” Chief Executive Officer Jamie Dimon said today during a meeting with analysts. “In that spirit, Ina came forward and offered to give up a very significant amount of her past compensation.” This is actually entirely consistent with everything I’ve read about Drew’s conscientiousness and professionalism, and although returning $20 million surely hurts, Drew isn’t exactly impoverishing herself by doing so: Kopecki estimates that she retired with about $57.5 million in stock, pension and other pay. The second possibility is that Drew was always going to give back her pay, and that Kopecki’s initial story was simply wrong. There was no JP Morgan source for that story, which was based on the idea that if Drew was subject to any kind of clawback, that would have been reflected in an SEC filing; Kopecki had no JP Morgan source for her article, and JP Morgan had no particular reason to scoop itself with a formal denial, if it had long planned to announce the clawback today. Finally, there’s the other bit of new news today: the way that JP Morgan has started pointing fingers at its now-departed traders: Traders in CIO were expected to mark their positions where they would expect to be able to execute in the market. In this instance, while the positions were within thresholds established by an independent valuation control group within CIO, the firm has recently discovered information that raises questions about the integrity of the trader marks and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses in the portfolio during the first quarter. As a result, we are no longer confident that the trader marks reflected good faith estimates of fair value at quarter end. This is a very tricky tightrope that JP Morgan is trying to walk here: it’s basically saying that its traders were acting fraudulently, but not so fraudulently that they were doing anything actually illegal. Essentially, it’s saying that the bank itself can’t be blamed for reporting marks outside the market’s bid-offer spread, but that the traders can and should be severely disciplined for choosing marks towards one extreme of that spread, even as they knew they couldn’t realistically get those prices if they needed to unwind their position. As a result, Drew was overseeing a group that wasn’t just losing money, which is something that all traders do from time to time, but was also behaving unethically. That’s something no traders should ever do, and is good reason to claw back bonuses from the traders and their bosses, all the way up to Drew and possibly even Dimon himself. You can mix and match these different narratives however you like. For instance: Drew retired a respected executive of long standing, but then ? possibly within the past two weeks ? discovered that her employees had been behaving unethically. In response to that discovery, she offered up a payment equivalent to a two-year clawback. If that’s the case, then Kopecki’s initial story was correct, when it was published, and then the facts changed later on. But there’s still something smelly here. The restatement to first-quarter earnings came to $459 million ? that’s basically the amount by which the trading loss in that quarter was increased, as a result of re-marking positions. And notwithstanding the fact that the London Whale had extremely large positions, it’s still the case that $459 million is a huge amount of money. Which raises the question: is it credible that a difference of $459 million could be within JP Morgan’s internal thresholds? And if so, what does that tell us about JP Morgan’s internal thresholds? What’s more, if you’re the CIO trading desk and your single biggest and most public position starts sliding away from you in a nasty manner, would you really try to massage those marks? I can see why traders can get a bit overoptimistic when they’re angling for a big bonus, or trying to make it look like they made money rather than lost money. But if you’re already ‘fessing up to a $2 billion loss, at that point you have precious little incentive to make it look like it’s “only” $2 billion rather than $2.5 billion. You’re almost certainly going to lose your job either way; the last thing you want to do is exacerbate matters by being less than fully honest about where you’re at. So try this other narrative on for size: after the losses were first disclosed, the markets continued to move away from JP Morgan, and the bank’s losses grew, as Dimon always warned that they might. At this point, however, with the losses up to $5.8 billion in total, it became increasingly difficult to justify the idea that there wouldn’t be any clawbacks. At the same time, JP Morgan, for whatever reason, didn’t want to set an internal precedent saying that taking on risk and then losing money was sufficient reason to claw back funds. So instead it went back to the original marks and unilaterally determined that they were unethically self-serving. And at that point it could claw back bonuses not on the grounds that the traders lost money, but rather on the grounds that they were behaving unethically. And similarly, because Drew was now someone who had been in charge of unethical traders, it could ask her to return a lot of money as well. This solution would allow Dimon and JP Morgan to be seen to be taking the ethical high road, sending a clear signal to the bank’s trading desks: we understand you’re in the risk business, and that sometimes people in the risk business lose money. That’s OK, especially when executives up to and including the CEO signed off on your trades. But what’s not OK is if you lie about your marks, or you try to hide how much money you’re losing. The truth is in here somewhere, although we’ll probably never know where exactly. If I had to guess, I’d say that Dimon was in the first instance inclined not to claw back pay, especially since he had personally approved the trade in question ? but then, as JP Morgan’s share price got out of hand and there was outrage about the lack of clawbacks, he changed his mind. All he really needed to do was make a couple of phone calls. The first would go to the people trying to clean up the mess in London, asking whether the first-quarter loss was really as small as the bank originally said, and implicitly encouraging them to do what mess-cleaner-uppers always do, which is put as much blame as possible on the people who created the mess being cleaned up. And then the second call would go to Drew, who would probably need very little prompting to do the right thing and volunteer a clawback equivalent. The downside of this strategy is that JP Morgan was forced to restate its first-quarter earnings, and public companies hate doing that. Still, the bank’s share price is up more than 5% today, so the markets don’t seem to mind. The big write-off this quarter, along with the claw-backs, look as though they have drawn a line under the whole sorry story. Which means, I guess, that JP Morgan can now concentrate more of its attention on the ongoing Liebor scandal. 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