Going, going, wrong: JPMorgan’s auction

15th December, 2012

One of those clever manoeuvres so beloved of banks has started to unravel, writes Tim Harford

‘JPMorgan is nearing a settlement with the UK government in which the US bank and its employees could pay close to £500m in back taxes . . .  The Wall Street bank . . . has asked more than 2,000 current and former employees to contribute to the settlement. Individuals who choose not to participate voluntarily could face a more expensive tax bill . . .  Participants in the scheme said JPMorgan had given them until Friday to volunteer to pay tax at a rate of their choosing in a “blind auction” that would be used to establish an average contribution rate.’

Financial Times, December 8

Sorry – what?

It’s delicious, I know. In a nutshell: JPMorgan Chase has been using a tax shelter scheme which now turns out to be ineffective. The bank has reached a settlement with HM Revenue & Customs to pay some back taxes, but in principle it is the employees who are liable for much of the tax bill.

And now JPMorgan has turned round and asked the employees involved to cough up.

Exactly. For some reason they’re doing this with some sort of auction, rather than simply telling the employees involved how much to pay.


One can only guess, since JPMorgan did not care to elaborate either on the reasoning or the details of the auction. Perhaps the basic problem is that JPMorgan has been trying to solve a collective bargaining problem by negotiating on behalf of all the employees concerned – but it lacks the legal power to enforce that bargain. I don’t really know.

Maybe more companies should run auctions for their staff?

Maybe they should. Or vice versa. More than a decade ago, in a fit of futurological fervour, I imagined that the workforce of the future would wander around, proudly displaying on their lapels a little digital screen with a constantly changing hourly rate. The screen would indicate the best alternative bid for the employee’s time and if the alternative bid ever exceeded what they were actually being paid, they’d stroll off the job to accept the more lucrative offer.

Science fiction, basically.

If you like, although you can already hire labour for very small tasks through sites such as TaskRabbit and Amazon’s Mechanical Turk. A fellow by the name of Wingham Rowan has been arguing that ultra-flexible, by-the-hour labour markets could be a huge help to people who – perhaps because they have poor health or unpredictable family commitments – cannot keep regular hours. Mr Rowan argues that the government needs to support the idea, for instance by making it easy to establish that people have the appropriate qualifications or criminal record checks.

Won’t such auctions just drive wages down to the bare minimum?

It’s really hard to say what they would do. In principle it depends what is in shorter supply – decent workers or decent work. Wages could rise sharply or fall sharply, or probably both in different sectors of the economy. But the sheer loss of friction in the workplace – the fact that it would be easy for companies to quickly find workers and easy for workers to quickly find work – should be a very good thing.

This all sounds far too reasonable. I was enjoying the schadenfreude of a bunch of highly paid bankers being forced into some kind of corporate devilry.

Auctions can be a little devilish. There’s this fascinating idea of “the winner’s curse”. Imagine an auction for the right to drill for oil. This is worth much the same to any oil company – it depends on the oil price and how much oil turns out to be down there. Unless the bidders are particularly savvy, the auction will simply be won by whoever has the most optimistic geologists on that particular lease. Auctions select optimists, which is one reason why it seems to be so hard to find someone to run an auctioned railway franchise sustainably.

Is that what’s going on at JPMorgan?

I rather suspect that “blind auction” may be a misnomer. I really don’t know. Auctions are wonderful at revealing hidden and dispersed information. They are best used when a seller has little idea of an item’s value, but does have access to lots of interested bidders. Quite what information JPMorgan is hoping to elicit from its staff is unclear to me.

Also published at ft.com.

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