In May, Jamie Dimon, the head of JP Morgan Chase, told his shareholders that the bank just had probably “our finest year ever.” Despite being close to the epicenter of the worst financial crisis since the Great Depression, Dimon’s bank was able to make a great deal of money, obtain government support when needed, and reduce that support level quickly when the overall situation stabilized – thus freeing the bank of constraints on its pay packages (and other activities).
It looks like the full year 2009 may turn out even better than Mr. Dimon expected in May. Speaking at the Goldman Sachs US Financial Services Conference on Tuesday (December 8), Jamie Dimon presented JP Morgan Chase’s third quarter results (year-to-date). His slides are informative, but if you want to pick up the nuances in his message, listen to the audio webcast (you have to register, but it’s free; here are back-up/alternative links).
Mr. Dimon’s remarks were informative at two levels: how JP Morgan Chase operates, moving forward; and how that reflects the likely outlook for the US economy.
According to Mr. Dimon, JP Morgan Chase has 6 “standalone pieces”: Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury and Security Services, Asset Management (p.3 of his slides). These businesses help each other, although Mr. Dimon was studiously vague about exactly how.
In fact, there is nothing concrete about synergies or economies of scope in the slides. In his oral presentation, Mr. Dimon makes some high level remarks about “business flows and fees” but the exact meaning is unclear. For example, presumably clients of the Asset Management business get the best possible pricing if they buy or sell over-the-counter (OTC) derivatives through the Investment Bank. But then what exactly is the advantage to the client of having these two businesses owned by the same company? There’s always more transparency in arms-length transactions.
As Mr. Dimon talks through the various businesses and their prospects, he treats them very much as independent businesses – all dealing with distinct parts of our collective need for very different types of financial services.
Investment banking is performing very well, presumably mostly because of trading activities (the details are not clear, but JPMorgan has a very high market share in OTC derivatives).
The retail bank has become the number one provider of auto loans in the United States, while mortgages and credit cards are doing “really poorly”. Credit losses overall are higher than expected, given the unemployment rate – consumers are not in good shape and the rising losses on prime mortgages (p.14) imply further trouble ahead. Unemployment may fall in the second quarter of 2010, but – in Dimon’s view — it’s too early to say that the overall credit situation has done more than stabilize.
JPMorgan Chase continues to grow, including in credit card services, commercial banking, and asset management. Mr. Dimon doesn’t say this, but the weakness of his competitors creates great opportunity to build an even bigger bank, with more market share and heftier political clout.
His views on the pending legislative/regulation reforms are not in the slides, but from about the 21 minute mark in the webcast, he is quite candid. He doesn’t see major impact on his business from what is in the pipeline, e.g., any kind of progressive capital requirement that would force bigger banks to hold substantially more capital. To the extent there is tougher consumer protection in new legislation, he says – rather bluntly – the consumer will pay the price, not JPMorgan.
Mr. Dimon insists, at minute 23, that we should “get rid of the concept of Too Big To Fail”, and he suggests that a new Resolution Authority – giving government more power to shut down or take over big banks – would make this possible. Unfortunately, he glosses over the “international coordination” issues that make this impossible to achieve in the foreseeable future.
Overall, we are left with a big bank that is getting bigger. It has been (relatively) well run by Mr. Dimon, but there are no assurances for the future. Given that the “Resolution Authority” is at this point a mythical beast – with no potential effect on the problem of “Too Big To Fail” – we should worry a great deal.
We could set a hard size cap on banks like JPMorgan Chase (e.g., on assets relative to GDP), which could force them to find ways to spin-off businesses – and return to the much smaller and more manageable size of the early 1990s. There is no evidence this would be disruptive or cause any economic difficulties. But, for political reasons, this won’t happen any time soon – the size and power of banks like JPMorgan is put to good use on Capitol Hill.
Massive financial collapses do not emerge unheralded from periods of economic stagnation. They are preceded by great booms, including rapid expansions of “successful” banks.
By Simon Johnson
A slightly edited version of this post appeared this morning on the NYT’s Economix; it is used here with permission. If you would like to reproduce the entire post, please contact the New York Times.