Jamie Dimon Makes Best Case for Not Breaking Up Big Banks

The Jamie Dimon piece in Friday’s Washington Post is a must-read. Dimon, head of behemoth JPMorgan Chase (JPM) makes the best case for not breaking up large too-big-to-fail financial institutions. His idea: set up a robust resolution process and let reckless lenders fail regardless of size.

Now, back in September, I attended a meeting at the Clinton Global Initiative where both Americans Sheila Bair and Jamie Dimon and British bank executive Peter Sands gave their ideas on the too big to fail idea. They all agreed that too big to fail must end. But, while Bair was arguing for shifting the balance of power toward smaller, community banks, Dimon was arguing, as he does in the Post, to keep large organizations intact.

Reviewing the exchanges, I wrote:

What I found interesting was the general agreement between Dimon, Sands and Bair that regulatory reform to date has been a bust… the conversation made clear that Bair, Dimon and Sands all felt that the first and most important bit of financial reform must be to set up a resolution process in order to deal with too-big-to-fail institutions. Let me characterize Dimon and Bair’s remarks below.

Jamie Dimon. It is clear that Dimon believes JPMorgan Chase was never in any real jeopardy during the financial crisis. He spoke on several occasions about the lack of a resolution crisis to deal with large firms without mentioning any names, but clearly intimating that other beleaguered institutions like Citi (C) and BofA (BAC) were saved by this. He said that the financial crisis should not be used as an excuse to break up large institutions (like his) because the crisis was the result of bad lending as in any other crisis. He said, smaller imprudent lenders are being liquidated systematically by the FDIC. The only reason larger companies did not face liquidation is because no resolution mechanism was or still is in place to deal with them…

He said the present reform proposals are not heading in the right direction and used an analogy saying, “If we had a problem with our legal department, I would tell the guys to fix the legal department. If the government had the same problem, it would create a second new legal department.” Over-regulation is not the answer. Smart regulation is.

Sheila Bair. Bair was in stunning agreement with Dimon on the core issues. She too said the first priority of any financial regulation must be to put a resolution mechanism in place to deal with too-big-to-fail institutions. She rejected the concept of the Federal Reserve as the main financial regulator, something even Ben Bernanke is now rejecting. But, she disagreed with Dimon. Instead she felt that the financial system had veered excessively into derivatives and other complicated financial products and that this was a major contributor to the financial collapse. She advocated regulating these and increasing the focus on traditional banking products typical in community banking. It was clear from these remarks that she favors community banks over too-big-to-fail institutions.

Both points of view make sense. Dimon is obviously advocating from the position of an interested party. Nevertheless, he does make good arguments. Note that he says management should be fired. Shareholders should be wiped out. Unsecured creditors should, if necessary, be wiped out too. This is a big deal.

Here are excerpts of what he had to say (bolding added). The link to the full article is at the bottom.

Our company, J.P. Morgan Chase, employs more than 220,000 people, serves well over 100 million customers, lends hundreds of millions of dollars each day and has operations in nearly 100 countries. And if some unforeseen circumstance should put this firm at risk of collapse, I believe we should be allowed to fail…

But ending the era of "too big to fail" does not mean that we must somehow cap the size of financial-services firms. Scale can create value for shareholders; for consumers, who are beneficiaries of better products, delivered more quickly and at less cost; for the businesses that are our customers; and for the economy as a whole. Artificially limiting the size of an institution, regardless of the business implications, does not make sense…

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… We can learn here from how the Federal Deposit Insurance Corp. closes banks…

Source

No more ‘too big to fail’ – Jamie Dimon, Washington Post

Disclosure: I have no financial interest in any financial services companies. Further, I have said previously that I do not favor re-imposing Glass-Steagall as a magic bullet solution given that most financial carnage over the past twenty-five years has originated in the regulated commercial bank sector. Like Dimon and Bair, I see a robust regulatory regime as critical. On the other hand, I am generally in favor of reducing bank size, unlike Dimon.

Comments

[Leftfield:]

Dimon actually advocates consequences to managements and unsecured investors in TBTF's. What's amazing is that that is radical a year after the epic bust. But, I've read convincing arguments that the large institutions do not provide better services or efficiencies. The talent picked for success of running a more local or regional size entity hardly scales effectively when size is excessive.
Those institutions are only succeeding because they are politically favored with overleveraging trading desks that put losses to the taxpayer and mark to magic accounting of their distressed assets. And, financial products have successfully imposed costs and created lavish compensation through opacity, complexity and deceit. All other types of businesses progress by creating efficiencies and lower costs.
Of course, the discussion by our misrepresentative "leaders" is so dishonest and ineffective that any thoughts of consequences at all by a major player is big news.

Nov 16 12:00 AM

[fizzicyst:]

Dimon's arguments are specious; I disagree on:

Resolution requires prompt and resolute (no pun intended) action by a federal agency. Having spent several years working for the feds, that would be the exception rather than the rule. Breaking them up now and then letting them fail is 100% sure; I'd give effective, timely federal agency resolution maybe a 10 - 15 % probability at best of working in a specific case ---- if the agency is headed up by someone other than Sheila Bair.

I've had the experience of dealing with more than 25 banks, both big and small, including Dimon's shop, as a customer in the last several years. (As CEO, I expect he gets better service there than I do.) The big ones are inefficient, bureaucratic, unfriendly, unresponsive, and usually offer lower interest rates on deposits. If Dimon had had my experience, he couldn't have made that statement about benefiting customers with a straight face!

Regarding his pitch about benefiting shareholders, I've also been a shareholder of about half a dozen banks in the last few years, and I've done fairly well with small and medium sized ones growing and so becoming big. But I haven't done very well AFTER they were big.

Nov 16 12:54 AM

[Michael Clark:]

The TBTFs not only threaten the global economy, as we've seen most recently, they also threaten our democracy: they have taken over our goverment, with well-laced campaign contributions, outright bribes, and with promises of jobs to congressional 'friends' after government service ends. If we value our democracy, we have to take the government back from the banks, the insurance companies, and the very rich special interests generally.

Get out the pruning shears. It's time level the playing field again.

Nov 16 02:24 AM

[redbaron:]

Well said, Michael Clark. I agree.

Nov 16 07:10 AM

[captainccs:]

How to say this in a language simple enough that even a bank executive can understand?

If a bank is too big to fail, it is too big and must be broken up.

Why is this so? Winding down failed banks is the same as dealing with huge storms, the storm sewer must be large enough to deal with the largest storm or even with a triple storm in the case of the perfect storm. Who or what is big enough to deal with the perfect storm? The government or rather. "We the People," or rather, "We the Taxpayers."

Insurance is based on the law of large numbers. A big insurance company can insure a large number of smaller companies but not a single huge company. When a huge company seeks insurance it will be served by several co-insurers backed by several re-insurers. You have to diversify the risk. If you cannot have a large enough private big bank insurer then the banks themselves need to become smaller to be safe, to have the risk diversified.

Dimon is just talking up his book, pay no attention to the self-serving banker. Too big to fail banks are semi-socialistic banks, profits are private while loses are public and that is NOT fair.

Nov 16 07:24 AM

[apppro:]

It's amazing how just the other day that same Jamie article had the diametrically apposed interpretation. In either case, I feel my comment made to those prior articles still applies:

<<Jamie should learn to keep his fat mouth shut, imo! JPM was just one step away from going the same way that Lehman's and even Bear did. Last March no bank was safe and if we hadn't put an end to the insanity by eliminating M2M, among other things - well the so-called suspect rally would never have occurred and we all would be lighting campfires next to our tents in Squatter City!

The shorts that took us all to the brink last year saw no qualms about driving even the mighty JPM down to $15.00 - it would have gone lower if things in macro hadn't changed.

Jamie would better serve his share holders (of which I am one) by getting our damn dividend back, keeping his mouth shut, buying back stock, and going after the shorts that still destroy this stock almost everyday at 10:40am.>>

Nov 16 07:24 AM