Why JPMorgan Is JPMorgan

By James Kwak

Which is to say, a basket case. Along with Citigroup, and Bank of America.

We all know that JPMorgan Chase is too big to fail. We all know that this means that it enjoys the benefit of a likely bailout from the federal government and the Federal Reserve should it ever collapse in a financial crisis. So why does that make it a poorly run company? It’s possible for a behemoth to be well run; think of Intel in the 1990s, for example.

One reason, of course, is that it’s too big to manage. Even if bribing Chinese officials by hiring their children wasn’t part of the master strategy, not being able to stop it from happening is a sign that things aren’t really under control. (And for “bribing Chinese officials,” you can insert any number of other things, like “betting on the relative values of various CDS indexes,” or “manipulating LIBOR.”)

Mark Roe (blog post; paper) points out another reason. For decades, the supposed cure for bad management has been the so-called market for corporate control. In other words, do a bad job, and someone will take over your company and you’ll be out of a job. That someone might be a corporate raider like T. Boone Pickens, or it might be a private equity firm, but in either case bad management is a sign of opportunity.

Not so with too-big-to-fail banks. For one thing, TBTF banks  are impossible to acquire in one piece: no other bank could absorb JPMorgan, even if there weren’t the rule against a banking conglomerate having more than 10 percent of all U.S. deposits. The other option is to engineer a breakup, which is what all manner of shareholder advocates have been arguing for. But, Roe argues, if being too big to fail is your competitive advantage, that would kill the golden goose. Therefore, the market for control doesn’t work properly, and these behemoths continue bumbling along their way—not just threatening the financial, but doing a lousy job at their job of providing credit to the economy.

18 thoughts on “Why JPMorgan Is JPMorgan

  1. Right, the bank Tim Geithner turned to in the Spring of 2008 to help him with Bear-Stearns is a ‘basket case’. The same bank that the FDIC needed to absorb WaMu.

    J..P Morgan is only in trouble because it’s being held up for extortion by the Federal Govt. Largely because of the idiocy promoted by the likes of Kwak and Johnson.

  2. The same can be said of the federal gvt. Who would purchase the debt, and what would they use for payment. Now if they were to say, be extorted by a larger economy such as china’s, we would not know where the idiocy would lie because it would be ubiquitous on both sides of the fence. First a trade war would erupt, then there would be a deafening silence as each side waited for the other to jump so they could be victorious in their self proclaimed deeds. It’s a mess of epic proportions which will not end well.

  3. @JanetYellen (Fed nominee) Goldman Sachs trying to corner investor market now, with bitcoins, corn rows of GPUs working 24/7. Although, GS-TBTF is behind the curve, as Quark surpasses Litecoin and Bitcoin in the opinion of virtual developers/investors (see below). “The Goldman conspiracy theory: After writing about the markets for more than twenty-five years, I’ve come up with an informal rule: where there’s trouble, there you will find Goldman. This isn’t a criticism or an indictment; it’s merely an empirical observation. The bank is so big and so aggressive that it gets involved in virtually everything, so when the C.S.I. squads turn up to examine the body, they usually find some Goldman D.N.A.”

    It was reported earlier today that “Bitcoin surpassed $1,000 on the Mt. Gox online exchange, fueled by speculators snapping up the virtual currency as it gains wider acceptance.”

    Would the creator of the bitcoin actually reveal him/her/themselves since one of the underlying concepts of its creation, is its property of “anonymity.” The speculation and efforts to out the person(s) is ongoing. However, “Satoshi Nakamoto” is currently speculated to be “Shinichi Mochizuki” A recent and supposed posting from his pseudonym: the linked panel discussion includes names of Wells Fargo, Mr. Bernanke, ECB, Target (retail outlet), and Bitcoin as a complementary currency: http://www.youtube.com/watch?v=KXxqh8FX0iI

  4. You do realize that Intel in the 90s lazily squandered its technological lead to AMD and took years to pull its act together and resume actual competition, right?

  5. Saying that the market for corporate governance is a possible solution for smaller companies, assumes that companies with high returns are always well managed. That is not true if the playing field is rigged. For one, successful cheaters make good money. And then some well managed but smaller companies can be bullied around by companies that have powerful networks and swallowed.

  6. Recent journalistic exposes of the Pentagon’s permanent inability to be audited and the out-of-control US intelligence system both show that needed basic controls cannot be applied to vast systems. The large banks are just another example. There is little doubt that human government and business entities at the largest levels are incapable of being managed. This creates an opportunity for computers. Once computers demonstrate the ability to take over and solve this problem, humans will lose all meaningful control over their largest organizations.

  7. It sounds like Mr Kwak isn’t familiar with the Livingston doctrine. He should read Gary Gorton’s Misunderstanding Financial Crisis: Why We Don’t See Them Coming from Oxford University Press.

  8. “”but in either case bad management is a sign of opportunity.””
    Of course.
    Bad management of the monetary system.
    By the people in charge of the monetary system.
    And we all know who that is, of course.
    The private bankers who issue all of the nations money as a debt.
    It’s either the management, or the system itself.
    But we end up unable to have access to the money that we need to move our society forward from here.
    Why? Because we can’t have any money without having more debt.
    Issuing the nation’s money by virtue of creating monetary assets for private interests has run its course.
    And it’s time to take it back.
    It is time for public management of the nation’s money.

  9. The best way to achieve that last sentence is to put the power of the precious metal into the hands of the middle class visa vis, silver and gold back in coin, with the intention of eliminating paper money and non silver coins eventually,entirely. That is after a possible default on some debt, and of course we have to wait for today losers to not come back from that cruise they are scheduled to be on. It is imaginable for a few of us to accomplish.

  10. Congress could break JPMorgan up, just as they broke up AT&T. They don’t want to, and no one outside of a largely disorganized Occupy Movement has come close to forcing the issue.

    If Elizabeth Warren decides to run in 2016 (or rather starts fund raising 18 months before if she’s sharp) this is the ONLY thing I see on the horizon to change this particular TBTF situation. If Elizabeth Warren calls out Hillary on FALSELY claiming to be shot at, http://voices.washingtonpost.com/fact-checker/2008/03/hillarys_balkan_adventures_par.html and hiding under Susan Rice’s skirt during the Benghazi mess (even taking aside the Benghazi issue, Hillary proved she was a political coward hiding behind Susan Rice as Susan Rice hit the sacrifice bunt for Hillary on Sunday talk shows). However if Elizabeth Warren plays “patty-cake” with a vicious and perennially dishonest Clinton political machine Miss Warren will be bashed to smithereens before you can say “Do the catfight cha cha”.

  11. I wish I had your optimism concerning Ms. Warren, Moses. There are too many forces fighting her and more would join as soon as she gained any momentum.
    As for Benghazi, it’s the most misunderstood tragedy of our modern day problems. We knew there was going to be an eventual attack. So the military brass wanted instant back up to clean up the situation when ever it would occur, but that was about to cause an unnecessary unwinnable war, so it was called off at the last minute. Chiefs and Indians were killed, like at the bay of pigs there was no further action taken. But the real message never rang through to the ranks of the politicians and pundits, so we really just had another juggling affair with ourselves the media. And these things cost good money too, to be washed down the drain with the newest tensions arising everyday along with raising the cost of living in it wake.

  12. The main issue is that once the big mistakes are done in underwriting, the corporate raiders are not interested anymore in acquiring a toxic pile of securities. Remember there were some people looking at the books of Lehman, at least 3 parties, before its collapse. So the market for raiders and undervalued assets is still there, with securities banks possess the market for corporate raiding fails. Maybe this topic is in need in a “Market for Lemons” type of paper.

  13. Javier, What do you mean that there is a market for “toxic” securities- it is a matter of pricing and appetite for risk- As long as all risks are properly priced in, such a market is socially desirable. Papers on lemon markets deal with the social costs of asymmetric information and how to correct it. Is you argument that the regulation to correct the problem is there?

  14. It really makes you wonder about the accounting of these gigantic banks. If there are hundreds of divisions, scores of overseas locations, and literally tens of millions of total accounts, how do they keep track of the assets and liabilities for the entire firm? How do they value the derivative products they have long and short on all types of instruments and commodities? What is the real value of their debt holdings? Not only are they too big too fail, they’re too big to even look in the mirror.

  15. Reblogged this on JPCooper & Fellows and commented:
    James Kwan wrote this very insightful piece analyzing the management problems and inherent market competition conflict of interests of JPMorgan and TBTF banks. Reblogging. Let me know what you think.

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