Jamie Dimon is the Chairman and CEO of JPMorgan Chase Inc. I’ve sometimes described JPMorgan Chase (hereafter “JPMorgan”) as the world’s least bad bank – in line with my view that most banks are not very good at what they do. I have worked for JPMorgan twice and remain a (small) shareholder. I met Dimon when I worked at Salomon Brothers and it was taken over by Travellers, the insurance company that had expanded into securities (through Smith Barney) under the leadership of Sandie Weill, for whom Dimon was his key lieutenant. Dimon came to meet (and reassure) some of the senior analysts in London and he did a great job. He was obviously smart, thoughtful and direct, as well as being charismatic. Analysts generally have the personality type that is not impressed by labels, qualifications or job titles – they demand to be impressed by somebody’s actual competence or intelligence (they are “authority independent”, a type that is very common in the academic world too, so no surprise that I’m here). Dimon passed the test.
Having been fired from Citigroup (created by the merger of Citibank with Travellers), Dimon enhanced his reputation by successfully running the Chicago-based Bank One, where he was particularly successful in integrating acquisitions, especially in the notoriously difficult area of merging two banks’ IT systems. When JPMorgan bought Bank One, he became first President and then Chairman and CEO. He has a glittering reputation for having steered JPMorgan through the crisis without major financial damage and having raised its market share in both commercial and investment banking through the acquisitions of Bear Stearns (subsidised by the Fed) and Washington Mutual.
But. Greek tragedy speaks of hubris, where a person becomes over-confident, arrogant and loses touch with reality, especially after earlier successes. When a trader has a really successful winning streak, it’s a good time to fire him or her, since the trader may be tempted to take excessive risk in future when they start losing money again (as they inevitably will). Jamie Dimon, after having a good crisis, might now be a threat to the US and international financial system.
Evidence for this comes from Dimon’s increasingly angry speeches about the threat of greater capital requirements for all banks and for the very large, too big/interconnected to fail banks in particular. If any organisation is now too big to fail, it’s JPMorgan, which dominates the derivatives market and is one of the largest in pretty much all areas of wholesale finance except insurance. I have no reason to think that the bank has any deficiency in its risk management systems but that is not the point. Stuff happens and it is simply impossible to prepare for all eventualities. I would be personally very sad if JPMorgan were to go bust, but I would be appalled if it had to be bailed out at gigantic cost by the taxpayer. Dimon clearly believe this is inconceivable but with all due respect, his views are irrelevant.
As the brilliant Simon Johnson of MIT has repeatedly argued (in his co-authored book “Thirteen Bankers” and in his blog “The Baseline Scenario“), large and complex banks, especially those which are very international, cannot credible be left to fail. Markets know this so such banks enjoy a funding advantage against other banks, a subsidy from the tax payer. One solution it to make their failure credible through a more effective resolution process, as contained in Dodd-Frank, but nobody really believes this. So the other options are to limit the risk the banks can take (eg separate investment from commercial banking) and to require them to hold greater capital. All banks must holder greater equity capital than before under the new Basel III rules. But there is a debate currently raging about forcing some banks to hold even more, including JPMorgan.
Johnson expertly explains why that is a good thing in a recent Bloomberg article. Dimon, through his reputation, success, charisma and possibly his links to President Obama (the Chicago club), is the most forceful opponent of higher capital requirements. JPMorgan, which has a much better than average record of risk management than the other major US banks, most of which are pretty rubbish. JPMorgan was the only big US international bank to be able to withstand the Latin American debt crisis in the 1980s (though it still lost a lot of money). It weathered the Asia crisis and tech bubble pretty well and had very little exposure to CDOs in 2007-08 (though it was heavily exposed to consumer debt more generally). It invented Riskmetrics and then gave it away free to the rest of the industry, which at the time was a way of setting a higher standard though it has helped to institutionalise the damage from assuming that financial returns can be treated as Gaussian normal.
But even if JPMorgan is a paragon of risk-management virtue, other big banks will screw up. They always have and they always will. And if the Greek tragedists were right, the biggest risk of all is the over-confidence of the bank that navigated so well through the crisis – JPMorgan.
Bruno Iksil
Good foresight – really interesting piece given the recent multi-billion dollar trading losses. Enjoy reading your blog.
From NYC!