JPMorgan Chase: A Swirl Of Regulatory Woes

| About: JPMorgan Chase (JPM)

JPMorgan Chase (NYSE:JPM) can't seem to stay out of the news these days. Front page, New York Times: "JPMorgan Is Caught in a Swirl of Regulatory Woes." The bank is "raking in record profits." Yet, "at least eight federal agencies are investigating the bank."

In terms of regulation and Congressional scrutiny, it seems like everything has fallen apart for the largest bank in the United States since the discovery of the "London whale." The London whale incident, if you remember, was about a $6.2 billion trading loss created by an aggressive trader in London. It was the first real blemish on this high-performing financial institution that came through the Great Recession as well as anyone. Bad press … and especially a lot of bad press … is not a good thing for any organization.

However, Jamie Dimon does not sit on his hands. Jamie Dimon is moving and he appears to be moving rapidly.

High-level executives are leaving one after the other. This led me to ask the question, "What's Going on at JPMorgan Chase?"

To me, the answer is that Jamie Dimon is creating a whirlwind. Jamie Dimon, to me, is not like most commercial bankers. Most commercial bankers, to me, try to avoid making hard decisions. Most commercial bankers, to me, try to postpone dealing with issues hoping for a better day.

I have run or been a top executive at three publicly traded financial institutions. I have served in the Federal Reserve System. I have worked at starting banks and credit unions. I taught the "Financial Management of Commercial Banks" in the Finance Department of the Wharton School at the University of Pennsylvania and wrote a textbook under the same name that was used at several Ivy League universities, several Big Ten universities, the University of Chicago, Stanford and other major west universities. I think I know the banking industry.

To me, a major part of the problem with commercial bankers is that they tend to postpone dealing with a problem until it usually is too late. For example, if a loan starts to go bad, lending officers tend to postpone dealing with it hoping that the market will get better or the economy will improve or something fortuitous will occur. Lending officers postpone putting troubled loans on their problem loan list. They avoid charging off anything against a loan. And, they hate to charge anything off.

I know this is a broad generalization but in my experience this is the kind of environment commercial bankers grow up in. In being connected with the commercial banking industry for most of my life, let alone most of my professional career, I feel qualified to make such a judgment.

This attitude also applies to the fact that commercial bankers are frightened to death about "mark-to-market" accounting. "Mark-to-market" accounting makes bankers recognize when an asset whether it be a loan or a marketable security has gone "underwater". "Mark-to-market" accounting forces commercial bankers to "own-up" to the fact that something might be troubling about an asset on their banks' balance sheet.

This is exactly what commercial bankers don't want to face. This is why commercial bankers fight at hard as they do against the use of "mark-to-market" accounting. Forcing financial institutions to mark their assets to market and truly adhere to this principle, to me, would do more for the banking industry that efforts to reign in banks that are "too big to fail." But, that is just my opinion.

"Mark-to-market" accounting would force bankers, early on, to face the potential problems developing on their balance sheets and it would force them to make decisions sooner, rather than later.

Jamie Dimon, to me, has been an exception in the banking industry in that, historically, he has tended to face situations and deal with them in real time. I believe that this is one of the reasons why he and Sandy Weill finally had to part at Citigroup. Dimon makes decisions, he does not postpone the decision making to deal with problems -- he does not let problems fester.

A lot is going on at JPMorgan Chase these days. I believe that a lot of what is going on at JPMorgan is connected with the evolution of the financial system and breaking out of new banking business models.

There will continue to be a lot of pain at JPMorgan during this transition period.

Still, I believe that JPMorgan is a place to focus on if one wants to be on top of what is happening to our financial institutions. In a similar vein, I think Citigroup (NYSE:C) is now a place to watch with its new leader Michael Corbat. Corbat, one should be reminded, is not a "commercial banker"! The other two banks in the top four, I don't find interesting. Wells Fargo is doing well but, to me, it is not evolving into the new financial future. Bank of America, in my opinion, is not going anywhere, and will not under the leadership of Brian Moynihan. Moynihan, to me, is a commercial banker.

So, stick around the JPMorgan space. I think it will be an interesting journey. It is making record profits. In my mind, it will continue to make record profits. Dimon with produce a new, world-class group of leaders. And, JPMorgan will get through these regulatory battles and will fight another day.

Furthermore, following Jamie Dimon and JPMorgan, I believe, will give some insight into the world of finance as it moves on into the future.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.