December 10, 2009, 6:46 am
Simon Johnson, the former chief economist at the International Monetary Fund, is a senior fellow at the Peterson Institute for International Economics.
Haraz N. Ghanbari/Associated Press Jamie Dimon, chairman and chief executive of JPMorgan Chase.
In May, Jamie Dimon, the head of JPMorgan 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, Mr. 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 as if the full year 2009 may turn out even better than Mr. Dimon expected in May.
Speaking at the Goldman Sachs U.S. Financial Services Conference this Tuesday, Jamie Dimon presented JPMorgan 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 Webcast (you have to register, but it’s free).
Mr. Dimon’s remarks were informative at two levels: how JPMorgan Chase operates, moving forward; and how that reflects the likely outlook for the United States economy.
According to Mr. Dimon, JPMorgan Chase has six “standalone pieces”:
investment bank,
retail financial services,
card services,
commercial banking,
Treasury and security services, and
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 made 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 (O.T.C.) 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 (1) is performing very well, presumably mostly because of trading activities (the details are not clear, but JPMorgan Chase has a very high market share in O.T.C. derivatives).
The retail bank (2) has become the No. 1 provider of auto loans in the United States, while mortgages and credit cards(3) are doing “really poorly.” Credit losses over all 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 Mr. 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(3), commercial banking(4) and asset management(6). 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 and regulatory reforms are not in the slides, but from about the 21st 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 — that the consumer will pay the price, not JPMorgan Chase.
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.
Over all, 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 gross domestic product), 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 Chase are put to good use on Capitol Hill.
Huge financial collapses do not emerge unheralded from periods of economic stagnation. They are preceded by great booms, including rapid expansions of “successful” banks.