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JPMorgan Chase & Co. (NYSE:JPM)

Morgan Stanley Financials Conference Call

July 11, 2013 1:00 pm ET

Executives

James Dimon – Chairman & Chief Executive Officer

Unidentified Analyst

Okay, thanks very much everybody for attending our first keynote address from Jamie Dimon. I think everybody is familiar with Jamie, Chairman and CEO of JPMorgan Chase, since 2006 and successfully enjoyed a very strong vote of shareholder confidence in the most recent.

James Dimon

Thank you.

Unidentified Analyst

Shareholder meeting with majority two-thirds of the investors in favor of keeping the role together and that might be in part function of the fact that over the past three years of that you have had record results year after year over the past three years and not a loss at all during your tenure so. I think shareholders appreciate that.

By hearing Jamie, your thoughts on where we are on the economy, the environment, if you could speak a little bit to the U.S., are we at any point here likely to reach escape velocity so to speak maybe you could talk a little bit about your thoughts on Europe and are we modulating higher or lower and emerging markets?

James Dimon

Okay, so, welcome everybody and so Europe I’ll do first; Europe is going to be a little bit roller coaster, because they’ve so many things to do. They need to finish the banking union and banking regulations. They need to finish the agreement between the nations. They need to actually finish the conditionality around this OMT. And I think Mario Draghi had done an exceptional job, but more remains to be. So, and I kind of think where we kind of expect is that, there will be times it feels pretty good.

But bad has happened before they turn the corner, and there could be Cyprus’s or some like a Cyprus or an election that makes it feel bad. They’ve ways to go, it’s going to be couple of years, I hope they get through it and I think the politicians, they voted to keep Euro together, but I think I just said, it means you’re going to get a little bit of roller coaster, and hopefully they eke out a little bit of growth.

The United States is broad-based kind of strong, but no real weak spots. So when we’re growing 2% plus, but the corporate world is in fabulous shape in terms of liquidity, profitability, lowest leverage in the 40 or 50 years, that’s true by the way for SMEs, the middle market companies, small businesses kind of back to where it was, before we have the crisis. The consumer is in much better shape, asset prices were up, I mean stock prices were up, housing prices were up, I put the housing the second, 5 million more working and that one really important ratio was people pointed out, they know the consumer was spending almost 15% of the income on debt service is back to where it was in 1985, which is like turning the half percent or something like that, and we thought how bad it was, we know certainly how good it is, that gives the consumer almost 4% more income that’s from refis, paydowns, charge drop et cetera. I would say less of a burden.

Housing has turned the corner in every shape of perform and it’s still, it’s highly affordable, not all-time affordability anymore, but close to all-time affordability.

Supply and demand are in balance, if not in short supply in a lot of cities. We add and if you forget, we destroy 10,000 homes a year. We’re only building like 3,000 or 4,000 a year now; it’s like 800 to 600 or 700. Household formation on a normal run rate which is $1.3 million. It’s been less than half of that. There’s probably pent-up demand in household formation, which is, I think your kids moving their home again, and we add 3 million Americans a year. So this is, I think the market is in pretty good shape. I think the political environment, regulatory, political, debt ceiling, sequester, that whole thing is kind of the wet link and why it’s not more, okay.

Now you can make a very coherent argument that the political environment will get better not worse. Now they’re going to do a Simpson-Bowles or a big bargain just that we only have, I think we have one more crack at debt ceiling crisis, which I’m hoping we don’t have a crisis, and they work that through. The regulatory environment will probably get better. That’s what really need a analysis the data showed going to second term of President, new regulations come way down. And then I’m hoping market starts to grow again.

I think you can get escape velocity and without any dramatic else taking place. That’s my own opinion. I don’t know that, but then when that happens then we’d have interest rates. That’s why America is really important, when you travel around the world, I just got two weeks in Asia, you got to remember America still has the best economic system by far in the world, okay. It’s got the best military, the best universities, the best hospitals. It’s got the best businesses large, medium and small. The rest of the world has a lot of very good stuff, still the best here. It’s got the most innovation, the most R&D innovation from the factory floor to a Steve Jobs. It still got a very strong work ethic here. It’s got the lowest corruption and the widest, deepest most transparent dimension markets the world has ever seen.

Okay, and you ought to remember that it’s pretty good. This is one great hand we were dealt, that’s the hand, I think Warren Buffet speaks about, this is why America doesn’t let him down. This has overcome many bad things and we should remember how good that hand is.

Unidentified Analyst

So an improving economy comes with a little bit better, little bit higher interest rate environment, do you feel your borrowers are ready for that?

James Dimon

Why, I think they also be ready because rates are going to go up and so they all look at it, there is no other thing really think about it is, what’s the best case, worst case. The best case to me is that America starts to grow maybe we have a small deal of tax reform et cetera. We got 300,000 jobs in month for five or six months, unemployment is coming down. We want and you will want to see a normalization rates. We will hold the plot in normalization rates under a good scenario like that.

And so I would say the best case normalization is Fed funds at 3, 3.5, 10-year at five possibly give and take a little bit. And if that happens and we’re booming and the economies are up and people having jobs and profitability is high, which is what happens and the economy starts to grow rapidly, no one is going to care, and it’s not going to be that big a deal to taper and starts selling some securities, there is huge liquidity in the system.

The worst case is that inflation rates go much higher than 3% and 5% under all the wrong circumstances. Now I can see inflation, looking to employing the capacity utilization commodity prices. But you got to be prepared to something like that. So the other thing, which I think you have to think about is that normalization itself is going to create a lot of issues and some volatility in the marketplace.

Again that’s okay, and just going to read about all the time, there is going to be more bond volatility, something we get very nervous about it. That we hedge portfolios. But if it’s all normalization under the good environment or even close a good environment we’ll be fine.

I will prefer to normalization sooner in a good environment. In circumstances the time we’re going to be maybe much more important than when they start tapering off of how they’re going to do it.

Unidentified Analyst

So with that as backdrop what are that areas that you’re the most excited about in terms of investment opportunities for JPMorgan Chase?

James Dimon

Right. So looking past some of the immediate regulatory issues and things like that, when I look at JPMorgan Chase the first thing I look at is, what is going to happen to our clients over time and lot of growth. So if you said global multinational big companies, it’s going to double in the next 10 years and ECM is not going to, Equity Capital Markets, Debt Capital Markets need to drove those, interest swaps, FX and advice around the world is going to continue to grow.

Consumer wealth is going to continue to grow. High net, you all are going to have twice as much money invested in 10 years than you have today and if you’re in emerging markets three times as much money, okay. So that’s why you need ourselves in trading functions, in research functions et cetera. So I look at actually this should be good underlying growth exactly in our sweet spot. Corporations and high net worth individuals are serving investors like yourselves both in custody, cash, market making et cetera and those numbers are going to grow like this. Markets don’t grow like that. But you go country by country, see how many multinationals will there be in China 10 years from now versus what they have today, three times as many, four times.

And you go country by country in the United States maybe grow slower than Asia, it’s still going to grow. Population is growing 1% a year, the economy is going to grow a couple of percent a year and also good may be we’ll gain some market share in some places.

Unidentified Analyst

And is that something that you feel that you can do organically because pre-crisis everyone talks about how JPMorgan Chase was thinking about or should be doing an non-U.S. acquisition.

James Dimon

Yeah, there will be no major acquisitions in our foreseeable future. And I am completely comfortable we can do a great job for shareholders organically, just any branches to bankers, plus private, small business, large corporate, global corporate, Indonesia or Indiana, I’m convinced we can do that and we’ve been doing it. You actually look at small business, middle market, global corporate banking, market making, we’ve been just up and growing the actual base user clients, number of branches et cetera. So that maybe it will add on bolt on just other little areas we might want to add stock we’ve done a few small ones. We can’t do them in the United States, a big bank.

We’re already at the cap pretty much. We can do something for pretty much of the cap and overseas I would rather grow organically and there’s plenty room organically. If you said to me go into retail SME, the only way to actually do that is an acquisition. Will that happen one day in the future JPMorgan, maybe, but it’s unlikely to be in the next couple of years. And I don’t think it will be allowed for political regulatory purposes in any event.

Unidentified Analyst

Okay. So switching gears to management, you talked about some of the recent management changes that you’ve made. You have a new Head of North American CIO division and obviously you left Consumer group under Gordon and you’ve said in the past that this is one of the best management teams that you have ever had. Could you kind of give some color, explain why, what makes those groups so special?

James Dimon

Yeah. There was a little more than normal turnover. The way I take my direct reports to people left simply because it’s real, and some we’re just normal organizational stuff. So, Gordon, we told all, the Gordon topic and putting these together maybe co-CEOs and probably have a little bit sooner, but this is absolutely working, not because of any other reason. Gordon is with us by the way. He’s an outstanding individual. We’ve done a lot of great stuff with Gordon. For me the CIB was also the same thing and somewhat succession.

Some people were not going to be my successor and you would say to me is the opposite of what the press reported a little bit. You would say it’s incumbent upon you to make changes to make sure you are training people to be your successor. You can’t have any blocking, okay. And they’re going to say about the turnover, which is really important. If I were you, if you’re at a company and the people who got promoted or got the new jobs, the people you knew and respected and they were well tested, well trained and they’ve been doing a big chunk of the job already and the company knew that that’s very different than like just changing people, having a whole new bunch of new people in there.

So Marianne Lake was already, have been in the control of IB through the crisis. She has been the CFO of the Consumer Bank. She got bumped upstairs. And then, you’ll eventually evaluate the quality of the management team. Mike Cavanagh has already been ranked TSS. He’s going to bump upstairs to be collided with CIB as we put it together. Daniel Pinto has been running with Matt Zames Global Fixed Income and he got bumped upstairs. Matt Zames, as some of you know, is an extraordinary talent. These are all extraordinarily talented people in terms of character and capability and it’s a great team and eventually the analysts will say this is a great team. And these are same people who have been delivering all these years by the way. These are not unknown quantities. These are known quantities and…

Unidentified Analyst

It is a little bit different when you are in that very visible seat that they now all have. The Board obviously is always thinking about succession planning. Do you feel like if the [like for you robust] happened, is there somebody in this group that could start up?

James Dimon

Yeah. That’s the Board’s job, but yes. And the Board talks about succession and mostly about succession. They meet all these people. They know them all. And while they are more visible people, they knew Marianne, Dan Pinto, Mike Cavanagh, Matt Zames, Gordon Smith were all in major critical jobs, the biggest financial crisis of all time. They have no problem dealing with their jobs today like zero.

Unidentified Analyst

All right. Going to turn to some regulatory discussion and then we’ll flag the audience to kind of questions on your mind. So start thinking about them. On the regulation, there’s been obviously a lot of different chatter coming from different folks like FERC and CFPB et cetera on a variety of different topics. And some of the things that investors kind of ask me and type, it doesn’t feel like the JPM that we know and the underlying question is, are you pushing too hard to get the growth that you’ve been delivering?

James Dimon

No. I think we’ve build short some of these things. So when you get t consent orders and you get complaints from regulators and separate some of the litigation that I’ll go back to in a second, okay, we looked. It was true. Management is supposed to recognize when they fell sort of something. We’re still at this great wonderful company. If you travel around the world with me we’re on the ground at 60 places. I was recently in Saudi Arabia, Paris, all through Asia. This is a great company. We do a great job for clients, communities, citizens, veterans, government, developing funds and we have some of these problems and that’s life. I always had problems in some place or other. I wish were in regulatory and we’re going to fix them.

So we’ve taken some of our best people and we’ve given them command and control authority. We step them up and we’re going to fix every single, one of them both to our standards and the regulatory standards and we’ll get done as rapidly as we can. We’re already knocking a lot of it down. Actually not just having plans, but changing policies, procedures, moving technology stuff like that. So I’m completely confident we’ll get that stuff done and we’ll still continue to serve our clients, okay. But one doesn’t necessarily have that much to the other.

And some these other things, which people have this Chairman, CEO fight, people just come forward and ask me, I can’t believe each one of them. We just risk some of them. Every now and then believe or not the government wants to come after company and they are wrong, you know that right? Okay, and some will fight, some will settle, some the allegation sometimes sound terrible, we go to the fact and say, well that’s single but blowing out proportion to me, so we’ll deal with those in due course.

We had some like the real by the way, because one paper are going to point out, well it’s true, but it’s not, if all the people look at the same issue, and they are supposed to, that’s their job. When they think there might be something that goes wrong that’s what they are supposed to do. I had to confess those five or eight of them, in the old days it would be like one or two, but that’s the environment we’re living now.

Unidentified Analyst

Can you just – one other question that we get a lot from investor is, how to think through the different kind of information that’s coming out on the well, obviously the Board put out their report, management putout its report and then we have the 11 report as well and so just want to get your understanding as to how you think through what the different reports are saying.

James Dimon

I am not kind of specifically go through each one of these things, but we announced earnings on April 13 okay, no one at JPMorgan Chase, no one not one single solitary person from CIO to risk to finance to myself and a lot of people looked at it what we had a big problem. We knew we had a small problem, so some of the differences they knew, yes, there is an e-mail from a trader saying we have a problem, yeah but they thought it was (inaudible) our problem, okay not a $6 billion problem, and so that’s not (inaudible), that’s just what do you mean by problem, so we wouldn’t have said on that day that we didn’t think it was a problem, but we had a problem because a mere month later, we said bad strategy, badly debt lost $2 billion, we now lost $2 billion on the earning date, and on May 10 we told people what we knew.

I mean what more, I can say, bad strategy, badly added, badly monitored, badly controlled embarrassing, terrible, sorry. I mean I can give you the ugly details behind all that, but badly report means reporting wasn’t right, badly controlled mean that control which have more limits in there, barely on the and I said that risk to medium function property, whole bunch of difference that, and we came full [communo], we know that’s we did. Then there were issues about well, what we told the regulatory, did we try to follow, but we didn’t know ourselves some times.

The model there is succession in the model yes, the model got changed and it got changed back and we disclosed that and we change back, as it turned out the or even today the fact that we are moving out a little bit, which one is more accurate, but I’m comfortable that we did everything right, I think and I really said, if you in the meetings okay, I sat in those meetings myself and said make believe that Pope is over here and the Chairman of Securities, James is over here what is the right thing to do and that’s what we are going to do.

And you got millions of people second guess we haven’t had the fact but we did everything we feel it’s the right thing to do, there was no hiding, there was no lying, there was no bull shitting. Okay, and but we wrong about stuff and people thought X and maybe it was Y, and said Z and I think that’s what happens, people are human beings, but nothing was done there was deliberate anyway shape or form, I’m completely totally comfortable with that.

Unidentified Analyst

Okay, great. So I think we answered that question. It’s on people’s mind.

James Dimon

I mean people just you know I asked at the time why don’t we just go ask the SEC for guidance like what do we do, should we do this, should we even we did the restatements and July there was other one the July 13. There was still people saying well, it’s immaterial you shouldn’t be doing that actually moving earnings back you’re going to make the second quarter better especially the first quarter.

I was like whatever it’s the right thing to do, I’ll do. To me doing the right is far more important, I didn’t mind restating, was it good it was. It was okay, we are going to survive. Like, we are going to do the right things, so it helps people, what are in the old days you used to get good guidance you probably all too young to remember that. You really go to people and say, we had this issue, use the facts that we know them, what should we do, but you can’t do it anymore, much more fun the second guess and so.

Unidentified Analyst

All right.

James Dimon

And anyone who sues, are going to find that one to the end to by the way, so keep that in mind.

Unidentified Analyst

The other part of regulation, people are talking that obviously is SECAR and you went through the SECAR this past year, with the quantitative approval, but a conditional path right, but there is some things you needed to do that have the resubmission, that will be helpful if you could give us some understanding, because we’ve heard that you need better processes, but if you give some color around what that?

James Dimon

We find that your feedback, if you’re not guiding before last time, but they want much more granular loan limits, they want more idiosyncratic problems and we had forecasted they want more, they want things like NII to be done centrally, with much more detailed macroeconomics on the line, they have a feedback we got, we’re going to get and do a much more detailed intense job, we didn’t have a SECAR department before.

We were asking our CFO to have templates and do thing, we now have a 70% SECAR department. We’re going to be fully staffed, be best-in-class of SECAR and at the level and the detail the regulators want and some of it is going to embedded in our whole company. So that some was to help us, you build the systems, someone help you sit in the ties and stuff like that overtime. And I hope we get it all done right in time, we have to apply again I think we already said in September hopefully we will hear in October, November, hopefully we’ll meet their standards.

Unidentified Analyst

Okay.

James Dimon

It would be for lack of chance.

Unidentified Analyst

And then the other element of our regulatory there is questions on your global footprint and the degree to which you’re dealing with so many different regulators around the globe impact on your profitability from having to trap more capital and more liquidity?

James Dimon

Yeah, I wouldn’t react to that one yet, it is true that there is big discussions around the world about branches, of subsidiaries, trapping capital liquidity. I think those are all of downward discussions between regulators who is responsible the host country, home country each thing be property capitalized, and if you move capital from one country to another that this against to once.

So, my pretty assumption that will all be work through, probably changing legal structures, simplifying legal structures to resolution already things like that, but that will all work through. You could come up with the disaster scenario with everyone ring fences, everyone subsidizes, that you can change the global banking system that’s possible I don’t think that’s in anyone’s best interest.

Unidentified Analyst

Okay.

James Dimon

Most of the things I hear around the world around this are valid issues, who is responsible for X, what supports the deposits that are out here, what supports my clients, how do I know the people my country will get hurt, those are do the regular those are completely valid concerns.

Unidentified Analyst

And earlier, we were talking a little bit about litigation and some of the litigation that’s still outstanding. I mean you’re running with around $60 million a quarter or so and obviously $500 million plus minus in extra litigation cost quarterly. Is that here for the foreseeable future or is there in end inside?

James Dimon

I would say for those been lumpy so it hasn’t been like 500 and a quarter it has been, when we try to look at things, we try to reasonably estimate probable like being all that accounting stuff that we have to do. It’s going to be lumpy for a while. And because issues pop up and we want to analyze them and we try to reserve things early and not late, which I think is the right way to do it. Some may very well be behind us. Some are in front of us, but I would put that lumpy.

Unidentified Analyst

Okay. And then just on the outlook, Gordon met with investors a couple of weeks ago and updated on a couple of areas including some reserve lease coming from the housing component. Is there anything else that investors should know about how quarter is going et cetera relative to trying to looking forward?

James Dimon

No. I think Gordon said that the charge offs in the home equity are coming way down. I mean, mortgages, which is a good news. And literally it’s less than half of it was a year ago. So it would be 300 plus a quarter and that was 400, 600 go back a year ago it goes like 800 a quarter. That’s a good news. It is making us take down reserves. So when you’re writing reports and say the banks are popping up bonds, we look at that. We have to do it. I’d love to leave them up. We can’t. So I think he said reserves will be down another $1 billion, probably mortgages give and take.

Credit card equally is adjusting very good and last quarter charge of 3.55%. So I think he said $1 billion for the year. We did $500 million in the first quarter. So there’s more in credit card and I don’t know exactly how they’ll come up like quarter. But those are good things, you have charge-offs, but at least coming to be low and mortgage and the good underlying growth in deposits, credit card spend, account openings still this is exactly in compression, we’ve told you that before in (inaudible).

Unidentified Analyst

And then on the trading side Mike had indicated trading was pretty well.

James Dimon

Mike said 10% to 15% over second quarter of last year and it’s running a little bit better than that.

Unidentified Analyst

Right now?

James Dimon

Yeah. But that’s the last guide we’ll give you because obviously I’m going to change by there.

Unidentified Analyst

Right, absolutely. Right at this point, I look to the audience since the – if there is any questions from the audience. I can yeah over here. Up in front please and I can continue to go on and on and ask questions, but it’s a little bit more fun, if we all interact. So think all your questions, okay, here.

Question-and-Answer Session

Unidentified Analyst

(inaudible) Morgan Stanley. Jamie, you’ve previously expressed frustration that your European capacitors, had a slightly easier rise from the regulators? Do you think the too low proposals and some of the banks now started to shrink, I mean is that I think there is some opportunity?

James Dimon

No, let me correct what I said, I called apart digital back a year ago, a part of it was anti-American. The part that was being done by American regulators that was what would I’m worried, I’m worried still little worried about American law in derivatives in Volcker applying to JPMorgan in London and Singapore. That would be a huge advantage to us.

We need to compete in London and Singapore, the way everybody else competes in London and Singapore. What happens here is, always depend on United States for fine. And there are other things I mentioned which go one way, but I think they go the other way too. So if you’re a European bank, you can probably go whole longer stuff that stable to American banks. I leave that to you, I were just be more popular, when I was talking about a bunch of specific things.

We’ve looked at RWA comparisons. I think it’s clear that some European banks have much more model approval to use than we do. Our RWA is $1.7 billion, our GAAP assets at $2.2 trillion, okay. We have $400 billion plus of highly qualified liquid assets, $200 billion of additional investment securities, $200 billion of repo book, and still $1 billion several RWA. It looks like our trading book are going to be twice for almost to cut like-to-like, but ours, I think they’re be given a tough time, but a regulators too.

And the European banks, if you look at them, they were – they ran for years in more leverage and more wholesale in secured funding. But that was sanctioned by governments and regulators. They’re having to change a lot of stuff, how they run their business under a short time frame. It makes it hard and all the markets aren’t developed there to do all that yet. So I think a lot of pressure is put them too. I’m not…

Unidentified Analyst

Okay

James Dimon

I think it makes it hard for Europe. Banks are 70% of financing to companies in Europe and they’re 30% here. Capital markets are 70% here. The capital markets are 30%. They will now change over time, but doesn’t change overnight. With educating investors you got to get legal authorities, you got to change a whole bunch of different stuff.

Unidentified Analyst

And just competitively, clearly a year ago or so, European bank little bit more on their back foot and you took a lot of share, I’d say a couple of percentage points in the IB at least. How is it going now?

James Dimon

Well, I guess my operating assumption is always that you’re going to have tough competition. I think it’s a huge mistake to be sitting in our business and just because someone, somewhere is suffering that you’re going to win because they are suffering as opposed you doing well. We have to continue to build the systems, the people, the training, the brainpower, the knowledge, the research, all the things that make us a winner.

So I always assume there will be some tough competition and some of the competition is very tough. There obviously are some people struggling a little bit. Some of those will come back, some of those are going to change their strategies. Their changes may benefit us a little bit. It’s not completely clear to me yet. In some of the areas we’ll probably get more flow business because people backing out of certain products. But certain things may go to shadow bank that the banks just won’t want to deal with.

Unidentified Analyst

And then I’d say in the U.S. we have some regulations a little bit tougher than ever maybe. We’re just a couple of years ahead with regard to things like clearing, rules on, swap clearing, [bulkers] coming. Maybe you can talk a little bit about.

James Dimon

So we already put in place pre-trade and post-trade and new Dodd-Frank rules for trading derivatives. Yesterday we put in place where the bulk of professional investors now are clearing interest rate swaps and credit derivatives and it’s kind of going fine. I don’t have a report today, but there maybe some operational stuff trade, volume is down 30%. That’s kind of what happened in March too. So let me just come back as people get used to it. They have to post margins in different places. They have to do a whole bunch of different things. So that’s all going fine. And Volcker, we don’t know the final rules yet. We don’t have a prop trading desk. I think company is new to be allowed to portfolio hedge. My attitude on portfolio hedge would be if you look at what we did in the Whale, we made a mistake. We did a terrible thing. It was portfolio hedging damping down.

Well, that does not mean it should be lapse. I just take these to be a good strategy, partly embedded, partly controlled and partly reported. I suppose we can’t do that, but in the real stance the market making rules. I mean like I said the United States has the best, widest, deepest capital markets in the world. It is part of the great economic engine of America. I’m not so much as Wall Street by the way, but public markets, private markets, individuals, corporation, venture, hedge, private equity, the whole thing. And the cost by the way of trading has come down. It’s a general attempt that was 20 years ago. I say good thing to the issuer or the investor.

You should remember that. So swaps will come down a tenth. Equities will come down a tenth, equities will come down a tenth, corporate bond spreads of a tenth, mini spreads were a tenth, the benefits of the issuer and the investor and proper capital allocation over time. But we had a crisis. We should fix the things that caused that, but let’s not throw the baby out with the bathwater. So I am cautiously optimistic all said and done we will build the big markets. It make change a little bit final rules in our spreads and how many people will bid on something, but hopefully we’ll still have really great capital markets.

Unidentified Analyst

And you’ve invested quite a bit in the electronification of your fixed platform, your equities platform. You’re soon close to being done with that. When do we start to see the benefit in the P&L with regard to either lower expenses because you can turn off old systems or get more…

James Dimon

Yeah, I’m cautious to do that because as we turn off the old systems, we’re also building new systems and so I’m not going to see this drop-off in expenses and say that as the benefit. We have some revenue gaps that if we do good a job on electronic we can increase revenues $200 million here and $100 million there, which obviously we want to do. I think you’re going to see constant invest in technology. I don’t think it’s going to change or disappear overnight. We’ve got hundreds of new rules coming, requirements, global issues, subsidiaries, OLA, CCAR, DFAST. That’s going to take a lot of systems work. So to me it’s not going to stop. Hopefully you’re not going to see a big drop-off of revenues from something, but I think you’ll see continued investing.

Unidentified Analyst

You have questions in front.

James Dimon

One of the investors has mentioned to me like expense controls. Is JPMorgan partly in expense controls? On Investor Day, we went through and showed people that in each business we’re in, forget the aggregate for a second, we’re among in upper quartile of margin of efficiency and after investing new bankers and brokers and stuff like that. And so we are fully efficient. We’re always trying to get whatever I call waste. We’re always investing in the future and the future is banker, technology, research, the things that you need to grow, you pick on line you look at the Morgan markets, if you look at our bill pay systems, payment tech, they are all fabulous and so we’re not going to stop investing, but we’re always going to drive efficiency. And so, which is why we’re so good in terms of capital still. We have a lot returns in capitals.

Unidentified Analyst

Chairman Bernanke was asked recently in his testimony about SIFIs and as part of his answer he talked about resolution mechanisms. Looking at a year above you say there’s been a lot of debate now for quite a while in the U.K. and more recently in Europe with the Liikanen report and so on. What are your thoughts in terms of the structure that the U.S. is going to take, that Fed is going to take in terms of [reps threat]. Do you believe that the equity piece is done and it’s going to be more about loss absorbing capitals that sits above it and in general terms what’s your thoughts on this resolution aspect of…

James Dimon

So I think we all have a vested interest in getting rid of the concept of too big to fail, everyone. I don’t know anyone who says it is too big to fail. So therefore we’re going to need make regulators, particularly regulators, but then the regulators have to make the public say this is going to work. I think the Title I, Title II or the liquidation will work. In fact it worked for years with FDIC and most of them paid attention to it. Some of it was definitional. It should work, mean that a regulator should be able to take over a big bank, manage it and it doesn’t sync the economy, it doesn’t cost the tax payer, okay, and I think between equity and we have, $150 billion or $160 billion now of tangible equity and $240 billion of unsecured debt. So the total capital is like $400 billion, $500 billion and that’s a lot.

So to me, yes, that will be part of the mix and the important thing for all these things Basel III, Tier I common, Tier II, Basel 2.5, leverage ratios, it’s all the attachment point. They should be rational and thought through and be proper and reasonable for the system it’s going to run and I don’t know if they’ve done in equity. Some people make noises that there should be more. I think we should do an in-depth analysis where it is today. It’s a lot JPMorgan, our $2.2 trillion of assets, $400 billion plus of the high quality liquid assets, some like $200 billion other investment securities, $200 billion of repo book. that’s $800 billion of very short-term, very secured, very high quality stuff.

We have $700 billion of loans. We have $1.2 trillion of deposits and we have equity of $150 billion and then unsecured debt of $215 billion, and we have other preferreds and stuff like that. Our RWA is $1.7 billion. It’s equal to our assets minus the highly qualified liquid stuff. So on one is playing games if it is on the balance sheet over here and we’re earning 15%, 17% of capital. To me it’s where you want to attach these things and eventually that will sort out. I mean studies will be done. People have different points of view, but eventually that will sort out.

Unidentified Analyst

And when do you think we’ll hear on that?

James Dimon

Look, I think by the end of this year we’ll probably pretty much know most of stuff. Some maybe preliminary, but more detailed. Look, we have $300 billion today sitting at central banks mostly at the Fed. And if you put some leverage ratio, you want us to hold capital against that too. I mean at one point we would be very thoughtful of what we want, why we want it, to what effect and then which could be other parts of the market, shadow banking and all that, but I’m not a firm believer in good capital, good liquidity, get rid of too big fail. A lot of the arguments around too big to fail are false. There is no $80 billion subsidy of Bloomberg keeps imprinting over and over and over and now other studies are coming down now.

They’re showing why that study was those things are just fraud. I mean we raise money every single day in the public markets and we raise money at the quest. I mean it’s coming down quite a bit recently, but of an A industrial company. That is not someone saying JPMorgan is too big to fail, not professional investors, not people who bet with their money and their pocket book. They are saying there’s quite a chance of failure otherwise we’d trading 10 or 15 basis points over treasuries like Fannie Mae and Freddie Mac did for a while.

Unidentified Analyst

And so this question is like follow-up.

James Dimon

And they fell too by the way.

Unidentified Analyst

On the core topic because you are sitting is here at the end of the year you planned to have 9.5% common Tier 1 ratio, right which is what you are expected to have?

James Dimon

We are going to have, yes.

Unidentified Analyst

Yes, so then…

James Dimon

And we are only at approximate 100% LMCR as we sit, we’re going to, we changed our mind. We’ve kind of going slow with stuff that change, we are going to 9.5% this year and we went 100% LCR, and if the regulators want 120% LCR we’re going to do that too, whatever it is, I am going right there, no debate no arguments go right there.

Unidentified Analyst

But 100% LCR is by the end of this year?

James Dimon

We are already there.

Unidentified Analyst

You are there today?

James Dimon

We’re there today it bounced around because you are looking at LCR together kind of always ins and outs, but subtracting 100 today, I have now way yesterday, it was 100 less when I looked at it.

Unidentified Analyst

Okay, so then as you go into next year SECAR, how do you handle the ask, coming out of the conditional approval knowing that your earnings accretion is going to drive you above what your minimum is?

James Dimon

So at one point we need to come to the end game and the regulators haven’t given us guidance, and with the conservation buffer, how does that going to work, what targets, we’ve said 9.5, we got the 2.5 GCP charge, if they are going to change that, but at one point we need to know the rules, and then we’ll decide what we request, but we’ve shown investors we took and showed you a chart that we took your estimates for ’13 and ’14 earnings our estimates for RWA because we have some stuff running off and mitigation all of that, no buy back that by the end of 2014 we have $23 billion of excess capital, if we spend $6 billion this year, which is what we require for this year that means we have 17 over 9.5% at the end of the year, of course the numbers move around and OCR goes up and all those of things, but that’s a lot.

And I am not sure regulators and I just spent $17 billion of stock buyback, but that we are going to be generating a lot of capital. So are other banks by the way, so you’re going to see at one point when people probably say, that’s the capital number the banks capital cups are going to run us over, they are not going to really use it.

So I know this is going to happen in 2014 or 2015, but you are going to see a lot of people either request huge buybacks, special dividends they’re are going to raise dividends to 50% to 60% because they will not be able to use it.

Unidentified Analyst

So if you are forced to run with a 11…

James Dimon

Versus what other people doing.

Unidentified Analyst

Everybody yeah, G-SIFI, (inaudible) at 11, do you change how you’re pricing business already just absorbed the lower return.

James Dimon

I guess, let at 9.5% we think we are fine. We don’t thing it’s going to sort out that somehow would dragging 10% more cap and everybody send more cap than everybody else. But even we did if I am running 17%, non-running 16% or 15%, I’m fine, I’m not going to change our business model because of that, because we are going to serve customers and we’ll grow over time, we’ll expand over time and do a great job to shareholders.

Okay if there was a weight, but we will get very good at allocating that capital, which we already are. But we are allocating capital LCR even G-SIFI, whatever is slowing us, we are going to allocate it down to the client, the business, the country so we can really manage it. So if it’s 11% and the right (inaudible) is 7% that’s a wide extra capital driven loan, and we’d find some ways to manage that number down somehow. But you can’t just change your pricing the rest of the world doesn’t.

I also think it’s the knack of sort out exactly the way people think if were 11 and the rest of the world and some product areas it’s 7, we will probably also win a lot of non-balance sheet business, because we’ll be more silent to secure another people becomes a completive advantage for certain products.

So fixed deposits, are you going to deposit JPMorgan 11 with somebody else with seven at the same price, probably leave with us. So, our operating businesses, we make guardian say, we’ll give you the capital need, but you have to pay us more fee business maybe we’ll get, so if not complete (inaudible) because it’s more capital you’re going to loose.

And then, I don’t want to pre-determine how we react to that kind of thing we will actually when we get there. The most important thing is build the great franchises, run very good businesses, we’ll adjust where the reality is. I don’t want to guess the reality is start addressing today.

Unidentified Analyst

Looking to the audience see, if there is any other questions. Just on timing of the Basel III, what your sense on when we get that?

James Dimon

I think, we have most things by the end of the year, some in June, some in September, I think most by the end of the year, something a little bit delayed.

Unidentified Analyst

Okay, so then, the other topic I just want to touch on is rates, raising rates, rate volatility obviously, we’ve moved into a little bit more uncertain territory and being the year running large balance sheet. I just want to get an understanding of how you and the team are managing through that rate risk, is it different today, than it was a couple of years back when we were just starting easy money policy?

James Dimon

Yes, so let me just give you just couple of quick numbers, and we disclosed these numbers that if interest rates go up, one or two basis points, the whole curve we’ll make $2 billion more all things being equal. They may not all equal, but assume they are all equal and we don’t change our positioning, you can change the duration of our equity and how we invest in our portfolio, and we’d benefit from short end and you’re tenure going up, both, slightly different numbers, but big in both. And so obviously if you look at 200 basis points, we have even more and the 200 basis points is probably north of $5 million. That protects us from a rapidly raised interest environment, but I don’t know the circumstance in which it happens.

Now as a risk manager, I must – I want to protect against the factiods we have bad case, not the good case. So on the good case, it will be $5 billion more income plus a lot more volume and other stuffs and – but in the bad case my guess is, it will be $5 billion more NII. But you’re going to have a much worse environment. And so that’s why we protect yourselves from that. And then you can change your position. So you can – rates go up way up. We can invest a lot longer, but we’ll not be take (inaudible) exposure because we’re short duration and manage it.

So we’re going to manage through, but again looking at the bad factoids what we try to protect against. But these business manages own business, its own client (inaudible) the underlying volumes are growing. Some of this will be made up of volumes. So we’re not leaving the business. We’re not going to panic. We’re going to continue and service our clients, and like we did right to the crisis.

Unidentified Analyst

And what’s your sense on the back up in the tenure and the impact on the cost of a residential mortgage loan has that impacted your business?

James Dimon

Yeah, so again I’m more of the mindset that normalization is a good thing and particularly if we go there under good circumstances and I hate to tell you that 2.25% on the tenure is not high. And so that you got a – all we’re going to wrap it around 4% or 5% and maybe more, but it’s called 4% or 5% for now. And that backup in rates has directly translated the backup in mortgage. I think the primary mortgage rate now is close to 4%, again as low as 3%, 4% or something like that.

So I really – look recently with some other volumes. I’m sure it’s reduced refi volumes, it probably have not changed purchase volumes. And so it will affect the mortgage business, but again I think a normalization is a good thing. It’s just going to be a little bit of rocky drive, as it normalizes and we should all be prepared for that.

Unidentified Analyst

And how are you thinking about the mortgage business. In couple of years ago you were happy to be not in the leader of the pack. But today you are solid number two, and in some areas nipping at the hill to number one. So want to make sure I understand.

James Dimon

Yeah. We are going to be in the mortgage business. We want to be a winner, it’s too important a product not to do it. Okay there are three parts to mortgage business, but there are two important parts. Okay, part number one is production, production half of the mortgage is not coming of our branches, leave us as poor to bill silver clients that way. We think production schedule is normalized, you could debate what that is. They were extremely high, they come down low, they are 1%, they may not go back to work, but the cost of production will be higher, because there it’s just going to be more.

And we will need to build systems and stuff like that. Production is in operating business. And if we sales marketing business it’s important for clientele. And servicing where we are in the servicing business is in business. And there are two parts of servicing, one part which is kind of we can call it core and then default. So the cost of the servicing we show you on the chart is really high. So servicing itself we are paying – if you said what are the normal query expense fee and I think we have shared this number, it should be like three and a quarter, $1 million a quarter.

Okay it was running at seven, and so the easiest way to think about it is that as the link, obviously the foreclosures come down those numbers are going to come down. It’s seven, and this year it’s six. Well in the U.S. that is five and the EF that is four, some baffling, it’s not a production, but it’s kind of how we see it coming and it’s a good thing, delinquencies and foreclosure coming way down. So servicing will be a good business, it’s a business we’ll be good at, which is processing normally getting good information out of it. So doing great job, taking care of our clients and the folks.

The actual portfolio is a portfolio decision. How much we’re changing the balance sheet. It’s almost a portfolio decision. You’re in a Fannie Mae, you’re in Freddie Mac. We prefer to make consumer and business loans that own securities. But we have so much money that we own a lot of securities.

Unidentified Analyst

You’ve also been a leader and beginning or restarting the private level.

James Dimon

Yeah obviously two deals in private label. And I think you can see that comeback, so the – previously to raise the guarantee fee.

Unidentified Analyst

Right, right.

James Dimon

And also remember this is – the private label it’s a real it’s a good negotiation. I read some from the articles that JPMorgan done this private level securitization. Again forcing the investors, this is a joint, the investors are studying these terms with us, because I’ve got the number 175 different fields, which is going to go in, what can be done, how it’s going to be processed. But this comes close to be in a standard, it will be good for markets.

If we ever finish qualified mortgage, and qualified residential mortgage business given the gain. Some of these rules reps and warranties, you’re going to open up a private market which will be really healthy in the United States. So if you said what’s the extra cost in mortgages, that’s actually something as a clause people with certain FICO scores can get them and securitization rolling back. Jumbos are still costing, quite a dream over confirming. And so all those things are sort out and I specifically have seen the better for that, that will help our or housing markets even more, and consumers even more.

Unidentified Analyst

So I did want to touch on consumer backing in general and branching. But before I do that just want to pull the audience again and say.

James Dimon

Let me go back, if I remember quite the securitization, the APs which is we have seen a lot of subordination pieces. And you can gain like labor plus 140, 150 for that. You got actually some other questions. But the prison dilying that extra spread happening to take some risk, so that’s just a good negotiation between investors and JPMorgan, we’re trying to sort out, who is being paid for what, and who is going to take risk on rep and warranties, if someone goes default two years later and always kind of things, it’s actually a good exercise go through this and maybe what the securitization market will look like.

Unidentified Analyst

And the initial one, they ask for more support the investors.

James Dimon

Yeah, but also that eventually and hopefully there would be a couple, there will be one type of there would be several different types and maybe with different standards, you are not going to see subprime comeback.

Unidentified Analyst

Okay, any other questions from the room. Yeah, there is on one right here.

Unidentified Analyst

Jamie, could you talk about standards that you’re seeing in commercial lending right now, particularly with you guys are such a large syndicated lender, things getting a little bit over heated and ordering any prudence are we still doing things pretty…

James Dimon

Large corporate.

Unidentified Analyst

Your large corporate, and middle market as well.

James Dimon

So look I think let me do middle market plus, of course it’s getting more competitive, but not in prudent, and to me it’s the difference between pricing and underwriting, obviously I would rather cut the price, but have good underwriting, so you kind of small spread but so, it’s different in different markets, if you went to California or Illinois you hear different stories about middle market.

It’s gotten a little bit looser, but in some way that’s a good thing for America, we shouldn’t be always act like everything is terrible, that’s what competition is, portions pricing and to compete, I don’t know you got a point where there is any disaster going in commercial lending, and that fueled by charge-offs, they are like unbelievably low, they have been there for long-time until the middle market.

So we go to large corporate, yes it’s gotten more competitive and there is got to competitive on covenants, caps more the whole thing. But there is still more equity in the deals and one of the risk we had less time was in with one company did, if I remember correctly at the peak in ’07, the total amount of commitments in the marketplace and that is more like $350 billion, and today, it’s probably 10% or 20% of that.

So, that’s where, some of this was right, not just the underwriting so, the market is still wide open, and the high yield backed up 100 basis points, but it’s still trading and leverage loans and backed up but they are still trailing.

Unidentified Analyst

What about the course of real estate size?

James Dimon

We are the one real big in this commercial term lending, which is multi-family lending, and maybe got a little bit loose, that’s like 55% LTV, it’s actually very good business, and we got that out of WaMu, doing these acquisitions you always get somethings you didn’t like, you got something, you didn’t like it because there is the business making $700 million of your profit and we gave it more value than we bought it, and it’s a really good business, and the people run were exceptional and so I think it’s okay, and the other real estate, I am not up-to-date on it.

Unidentified Analyst

Great, okay. Consumer banking, just you are one of the biggest branch opening, banks out there, maybe you could just give people a little bit of sense as to why you’re doing that given the fact that some of your lead competitors are actually in shrinkage mood?

James Dimon

So first of all, love the business and consumers need services, they need credit cards, checking accounts, saving accounts, debit cards, auto loans, mortgages, advice, investment, stuff like that, we put the private client, I forgot how many branches we opened this year and the year 2000, it’s really working, okay. Small businesses have other branches too, about 30% of average branches small businesses, we love small business.

Even in this environment where spreads are really compressed. We are earning fairly good returns in capital and branches served clients. There is going to be more self-served, we already told you all that the average headcount, and the average branch probably come down by one overtime, that’s because of self-served. And the self-served the clients are electing to do, because they like it, not going to we force and they we’ll go do it, but product sets are growing, on line bank is growing.

Like I said half from mortgages, half are our Chase branded and the credit cards done on the branches, the new branch were probably smaller. You should always, if you want a retail system, you should always be refreshing your system, always.

Okay there are new markets, so you go to any market Dallas and they’ve got, there is always going to be new places, with the bursting their communities, where we need to be. So and to me you should be opening branches, you should be improving some of the old ones we’re doing that to, probably the net 100. Remember we also because of the acquisition of (inaudible), we have big package, we created big position in Florida and California, but there’s still a packets where we need to be that we want. So we’re just filling those things out. And I think it’s going to go on for a long time.

And if the average branch is smaller, the head count is down by one people still will need services and overtime, more things will be online, but we still need sales offices and small business bankers, and investment advisors, and retirement advisors and how they’re loosing the people that deposit checks and both in business that deposit care. So it’s not going away, I think it will more for retirement, the more electronic, more high touch, more services, less people and probably small. And requesting the whole bunch of new types of branches, right now a bunch of the banks are to. So – and one day we’ll pass the other things also.

Unidentified Analyst

So just a big picture to wrap up. You’ve been generating the teams tangible returns, low double-digits on total equity. Could you just give us your sense as to where you think you can take that in the trade environment?

James Dimon

We’re not really trying to take it anywhere, we’re just trying to grow our businesses and some of these things are like the weather. We have to manage through it. We’re not going to guess the bad weather time. (Inaudible), JPMorgan, I’m so damn proud of my company, okay. I wonder you all know that. And particularly you are building more as you hear about it. What our people do in 100 countries around the world that we do for communities, for entity, veterans, consumers, businesses, small businesses, middle market, software funds and governments is exceptional.

And we’re going to continue to do that. The huge underlying growth in those trends overtime, that’s not going to change. And we’ve got a lot of headwinds you know them, this is the mortgage litigation, it’s other litigation, it’s regulation all of these things, but we still earn 50% to 70% of capital. We’ve had three record years in a row, you only have to recognize next to you, it’s good returns and capital. If you look at client satisfaction, it’s like astronomical amount. I’ve never seen credit our folks in the consumer side, it’s more business side online banking, but our middle market customers, our smart business customers, our consumer and our investors a lot of you call your people do trading us, they think we do a really good job for them.

We break our backs for people. So – and the future is going to fine. Yeah, it’s going to be fine, the world is going to grow, and other noise will eventually go away. The rate agencies, I’ve talked to them before, they made a mistake downgrading banks precisely at the wrong time. That’s going to have more capital, more liquidity, regulations are going to create bigger amounts and make them more stable at the end of the day, while as regulation of good things not just bad things. We tend to focus on the bad. So we’re just going to keep on building our things, serving clients, deposits were up 10%, check in accounts were 78%, investment volumes are up 25% it’s a huge number. So that’s what we’re going to do, the areas themselves will bounce around, the company will continue to grow and kind of great management team.

Unidentified Analyst

Thanks very much, Jamie.

Jamie Dimon

Thank you, thank you all.

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