In Sunday's New York Times magazine, Roger Lowenstein profiles Jamie Dimon, head of JP Morgan Chase. The piece, titled "Jamie Dimon: America's Least-Hated Banker," is generally sympathetic, but in every significant detail it confirms that Mr. Dimon is now -- without question -- our most dangerous banker.
Mr. Dimon is not dangerous because he is in any narrow sense incompetent. On the contrary, Mr. Dimon is very good at getting what he wants. And now he wants to run a bigger, more interconnected, and more global bank that -- if it were to fail -- would cause great chaos around the world. Lowenstein writes: "Dimon has always been unusually blunt, and he told me that not only are big banks like JP Morgan (it has $2 trillion in assets) not too big, but that they should be allowed to grow bigger."
The problem with very big banks is not that they are "too big to fail," in the sense that it is physically impossible for them to fail. It is that they are so large and therefore so connected with each other -- and with all aspects of how the modern economy operates -- that the failure of even one such bank would cause great damage throughout the world.
Lehman Brothers had a balance sheet of around $600 billion when it failed. Its collapse helped trigger the worst financial crisis and deepest recession since the 1930s. Imagine what would happen if JP Morgan Chase -- even at today's scale -- were allowed to go bankrupt.
Dimon is brilliantly disingenuous on this key point: "No one should be too big to fail," he tells me. And J. P. Morgan? "Right," he says. "Morgan should have to file for bankruptcy."
But Dimon himself argued, in a November 2009 op-ed in the Washington Post, that regular bankruptcy is not a feasible option for megabanks. Instead he eloquently advocated the creation of a special resolution mechanism for big banks -- an update and expansion of the powers that the FDIC has long used to handle the orderly failure of small and medium-sized banks with insured retail deposits:
Creating the structures to allow for the orderly failure of a large financial institution starts with giving regulators the authority to facilitate failures when they occur. Under such a system, a failed bank's shareholders should lose their value; unsecured creditors should be at risk and, if necessary, wiped out. A regulator should be able to terminate management and boards and liquidate assets. Those who benefited from mismanaging risks or taking on inappropriate risk should feel the pain. We can learn here from how the Federal Deposit Insurance Corp. closes banks. As with the FDIC process, as long as shareholders and creditors are losing their value, the industry should pay its fair share.
Unfortunately, the resolution authority that ended up being created by the 2010 Dodd-Frank financial reform legislation does not cover JP Morgan Chase because Dimon's bank operates so extensively outside the US (30 percent non-US in its current business, on its way to 50 percent, according to Lowenstein). There is nothing in the current resolution mechanism or the broader powers of the Financial Stability Oversight Council that enables the relevant authorities to implement the orderly winding down of a cross-border bank, like JP Morgan is today or Lehman was in 2008.
And there is no prospect of any kind of inter-governmental agreement to put in place a process for imposing orderly and foreseeable losses on the creditors to cross-border bank. In fact, the Basel Committee of bank regulators, which has jurisdiction in this matter -- and which Dimon praises in the New York Times interview -- has definitely decided not to take up the issue.
JP Morgan Chase is already Too Big To Fail. If it were to threaten failure, the government would face a terrible choice: provide some form of unsavory bailout, i.e., fully protecting creditors; or risk the outbreak of a Second Great Depression. While the executive branch pondered these alternatives, there would be global financial panic.
But that is not the worst of our worries. Jamie Dimon is apparently dead set on ensuring JP Morgan Chase becomes even larger, in part by expanding its operations in emerging markets in India, China, and elsewhere.
As Ireland and other European countries have recently discovered to their horror, Too Big To Fail banks that want to expand globally can grow so large that they become Too Big To Save. "Too Big To Save" means that the government wants to save the bank -- e.g., by providing a blanket guarantee, as the Irish did in October 2008 -- but that creates such a large liability for the state that it pushes the entire country into insolvency.
JP Morgan Chase is well on its way to becoming Too Big To Save. Through expanding overseas, it effectively bypasses the weak controls we still have in place on bank size (no bank is supposed to have more than 10 percent of total retail deposits). Experience in Europe is that this strategy can enable individual banks to build balance sheets that are larger than the GDP of the country in which they are based -- in the UK, for example, the Royal Bank of Scotland had a balance approaching 1.5 times the size of the British economy. And then it failed.
If JP Morgan Chase were to reach the equivalent size in the US, it would be a $20 trillion bank. Perhaps that would take awhile, but JP Morgan Chase soon at $4 trillion or $8 trillion is easy to imagine.
Dimon argues that banks becoming bigger is the natural outcome of market processes. He is completely wrong -- as Thomas Hoenig, president of the Kansas City Fed explained in a New York Times op-ed this week:
These firms [big banks] reached their present size through the subsidies they received because they were too big to fail. Therefore, diminishing their size and scope, thereby reducing or removing this subsidy and the competitive advantage it provides, would restore competitive balance to our economic system.
(See also this news coverage on Hoenig's views.)
Or listen to Gene Fama -- the father of the modern "efficient markets" view of finance. He told CNBC that Too Big To Fail banks are "perverting activities and incentives", giving big financial firms, "a license to increase risk; where the taxpayers will bear the downside and firms will bear the upside."
Or read the recent letter to the Financial Times by Anat Admati and other top names in academic finance. They could be speaking directly of Dimon and his views in the New York Times piece when they say:
Many bankers oppose increased equity requirements, possibly because of a vested interest in the current systems of subsidies and compensation. But the policy goal must be a healthier banking system, rather than high returns for banks' shareholders and managers, with taxpayers picking up losses and economies suffering the fall-out.
(See also Professor Admati's follow up letter to the FT this week, further blasting the views of top bankers and their acolytes.)
Jamie Dimon's job is to make money for his shareholders and even he has struggled -- the bank's stock price is only roughly where it was when Dimon took control in 2004. He really believes that the answer to his stock price doldrums is to make JP Morgan Chase bigger and more complex. In effect, he wants to load up on risk -- hoping that this will pay off for him, his employees, and (presumably) his shareholders, and really not caring much about who bears the downside risk.
Lowenstein mentions at various points that Dimon was a protégé of Sandy Weill, but he neglects to remind us that Weill in his heyday espoused many of the same ideas that Dimon stresses in the interview. Weill believed there were great synergies between commercial and investment banking (and insurance). Weill was convinced that bigger was undoubtedly better both for shareholders and for society. He was wrong on all counts, as explained by Katrina Brooker in the New York Times earlier this year:
"The dream, the mirage has always been the global supermarket, but the reality is that it was a shopping mall," says Chris Whalen, editor of The Institutional Risk Analyst, of Citi's evolution over the last decade. "You can talk about synergies all day long. It never happened."
Sandy Weill, of course, built the modern Citigroup, which effectively collapsed -- in spectacular fashion -- in 2008-09, and which had to be rescued by the government at least twice. What was Citigroup's balance sheet at the time? It was just over $2 trillion, roughly the size of JP Morgan Chase today. And Citigroup was (and is) extremely global -- doing business in more than 100 countries.
Jamie Dimon is intent on building a bank that will surpass all the size and complexity records set by Sandy Weill's Citigroup.
Whether or not JP Morgan Chase will fail on Jamie Dimon's watch remains to be seen. He is, without doubt, a relatively careful risk manager in an industry where hubris tends to run amok.
But sooner or later Jamie Dimon will hand over the reins to someone who is decidedly less careful, someone who goes with the groupthink, and perhaps even someone like Chuck Prince, head of Citigroup, who inherited Sandy Weill's mantle and said -- in July 2007, "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."
The music had already stopped when he said that.
If the Dimon's bigger, more global, and greatly interconnected JP Morgan Chase is still dancing next time the music stops, the choice will not be bailout vs. great recession. The real choice will be no choice at all: fiscal disaster through attempted bailout (Ireland), or fiscal disaster through economic collapse (Iceland).
This post originally appeared at The Baseline Scenario.
Jamie Dimon: Becoming Too Big To Save -- Creating Fiscal Disaster
JPMorgan's Dimon 'Impressed' by Africa Opportunity
Lunch Links: Data, Silver, Dimon and WikiLeaks
standard that will pin Wall Street and their alter egos ears to the mat. Banks then will have to serve their Masters, not the other way around as now. But first, the fiscal disaster impending.
I do not want your banks hand in my pocket------------------------
http://www.esonomacounty.com
http://www.esonomacounty.com
It's time to take these "too big to fail" banks down a notch. We can't afford to have them hold our world economies hostage if they screw up again and again.
Suddenly there would be nobody left to owe your credit card bills and home mortgages and corporate loans. It would be Jubilee, a time to start fresh with a clean slate.
We could even do away with with the need for politicians to represent us indirectly and to decide how to spend our money that they collect through coercive taxation, as we could now directly represent ourselves in a truly democratically controlled non-profit global banking system, in which each citizen has one transferable voting share. True democracy, not democracy by proxy controlled by puppet politicians who serve the corporate banking interests ahead of the interests of the citizens who put them into office.
Failure of the economy would simply be the excuse we need to create a new game in which 1% of the players don't control 95% of the wealth.
It would be a good thing. We could all get a fresh start.
http://define.com
We've got all the credit card processing infrastructure and ATM networks globally, so we could actually just continue business as usual, except without the debt. People could still work and get paid, payroll accounts would still be funded.
Since the Federal Reserve would immediately be invalidated, we might opt to go cashless.
I personally have been cashless for about 10 years and it hasn't been a problem. Gas stations take my credit cards. Grocery stores take my credit cards. Online shopping superstores all take my credit cards.
So we'd really need all the guys that work in the computer rooms of all these banks to keep their jobs. The tellers and retail operations could probably go away. Where I live the ATMs now can handle deposits of checks without evening needing envelopes.
Of course, in the Third World they still use currency, so we'd probably have to have some kind of greenbacks, at least until the cellular infrastructure was put in place to handle mobile banking.
But then we'd have all the money in the world to pay for cellular infrastructure.
http://www.viewzone.com/collateralx.html
why are we asking Mr. Dimon? is it not very clear what Mr. Dimon is selling!
But Logic, History, Facts and Common Sense are not on his side.
We know and have so for quite a while that in finance megastructures do not provide optimal value and will always be the harbinger of great systemic risks.
As we can see, doing away with them once that has become clear is much more difficult. But, lets not exaggerate, it would not be the end of the world as they have us believe.
Rather than focus on making the company larger, Dimon would be wise to focus on improving service levels first. Eventually more customers will realize they have a choice and will start to turn to Credit Unions and Community Banks that provide a better customer experience.