Jason Goldberg
Good morning and thank you all for joining us for Day 3 of our Global Financial Services Conference. I couldn’t think of a better way to conclude this conference. I’ve been having JPMorgan Chase present. From the company, we have Chairman and CEO, Jamie Dimon. Jamie, thanks for joining us.
Jamie Dimon
Pleasure to be here. Thank you.
Jason Goldberg
I guess Jamie maybe sort of last time since you were at this conference about three years ago, a lot has certainly further evolved in terms redefining the new financial services architecture. As you kind of look forward, maybe the next three years, kind of what do you see as the biggest opportunities and challenges for JPMorgan ahead.
Jamie Dimon
So, welcome everybody. Certainly lot, it’s been a challenging three years. We’ve had lots of new rules and regulations and all the banks I know has been a tremendous amount of time writing code, getting people in place, pushing down capital liquidity, the products, clients, countries, adjusting their business models et cetera. If we are see a lot of banks do, some of them had like drastic adjustments and some of them had very little. So the thing that haven’t changed, we still take deposit, make loans, move money to ECN, DCN, market making. Any of our goal is to still do more of that in a better way for clients, so we were fortunate we haven’t had to make major strategic changes. While we seen the effect of all of these things on profitability et cetera, I think the next three years hopefully will be better meaning by the end of this year, we will have NSFS, TLAC, another year of CCAR, these things will be more and more embedded how we run the company and that the pace of change will be a little bit slower, so we can focus more on the business. I do think that banks have to make sure they are serving clients, not just doing regulators. So hopefully we’ll get a look better and we get more clarity.
Jason Goldberg
I guess you mentioned TLAC and NSFR, CCAR, are there any I guess any other aspects of this financial architecture that you’re kind of worried about or have your eye on it, have you kind of hasn’t yet come up or you think you’re later inning for that cycle.
Jamie Dimon
I hope we’re in the later innings because it’s been six years and the living stuff is really important to get right. So I think everyone wants to try to get their right. We don’t know exactly yet but a huge effort is got into it. We have some rules come out, had a blunt and it’s tough to get accommodate to but I don’t we’re going to comment to most of them overtime. We got changes in our business model that much. It will change your profitability and your cost but not necessarily how you serve a middle market client, a large corporate client or consumer client which I think I was looking the business from a standpoint of customer, not customer at a standpoint of just us.
Jason Goldberg
I guess maybe a kind of little forth on time horizon, obviously lot of events have gone on this summer whether that pushed out, China is evaluating emerging market or concerns, volatility in the marketplace and may get your thoughts on the current environment, what you’re doing tactically to react and how you see from shaping out?
Jamie Dimon
We don’t do anything to tactically react. So if you look at, we had like two or three weeks of trading that you all experienced which was abnormal, volatile, violent. The good news is there was no, if you look at the environment, there was no counterparty lost, there was no margin call it wasn’t met, there was no FX that went bankrupt or MF Global something like that. So there was a huge chunk of good news there. I personally take those volatilities good because sometimes they will filter back instead of real market. But the economy itself which is far more important is still tugging along and I don’t know I think anything changed it that much. For us, when we go through, it was very slow volume and volatility, so the results weren’t great in those three weeks in terms of trading, it was pretty good. I like the fact that, we can trade to those days and we didn’t lose money in any of those days renting like that and finding this good news.
In regard to China, I think we’ve been fairly consistent. I think we just saw is speed bump in China and not that bigger deal. China, our view of China is in 20 years it will be a large developed nation probably housing 20% to 25% of the global Fortune 2000 or something and that’s where we are keeping our eye on. We know that between here and then, they are going to have some serious bumps in the roads in a couple of ditches and maybe even a rough like we had in 2008 or 2009. And I think they are very bright, the reason for that though is, they have a lot of lot of issues they got to deal with and they are very open about these issues. The issues they have to burn out their democracy, they have 100 million people who vote inside the time and his party, there is no developed nation that doesn’t have a broader kind of democracy, they have to do real market performance. So it’s not just trading, but it’s allowing your different types of investors at deeper markets, pensions, corporations, they got to get the SOEs more transparent and I’d say more public with more governance which will reduce corruption and all of these things it’s just not going to be perfect for them anymore and they’re going to have this. I think the speed bump just remind the world that China is going to be maybe a little more volatile than you think.
Right now, they do a $4 trillion in reserve, huge wherewithal to continue to grow with 5% or 6% or 7% I don’t know, but even if it is 6% or 5% it’s not going to be a devastating thing for the world. 5% growth and I think their COGS is now like $12 trillion is a lot of growth for the world. It’s a lot more than it was 10 years ago, because 10 years ago their accounting was a lot smaller. So the fact is, unless they have a recession I don’t think it’s going to dwelling nice days. And all of the things we see them doing by the way are still in favor of market reform. They continue to do these things even just one devaluation was in towards the market. They weren’t manipulating against the market, they were just following where the market already was which is a form of market reform.
Jason Goldberg
Interesting. In your Chairman's letter you talked about reduced liquidity in some of the fixed income markets and I guess any thoughts in terms of that played into this summer and just kind of how do you think that plays into maybe the next financial speedbump?
Jamie Dimon
So there are a lot of things here and there is clearly less liquidity. I don't want to say there's complaints because this isn’t about about [JPMorgan] or something like that, it's not bad for us. You see less liquidity and you see it not necessary to bid out and matter of fact the Fed did report on this. Bid us are kind of where still kind of narrow, spreads are terrible but where you do see it is is the second the markets move bid ask gaps out, the depth of the market is much lower i.e. it can only move so much in corporate bonds and so much in government bonds.
Literally 20% of it you should be able to move without moving the price. And then you see this kind of volatility in the market. The system itself is far more stable, there is far more capital, there is far more liquidity. So it hasn’t been a terrible thing and as some of the regulators say if that's the cost of stability so be it. What I worry about a little bit is what happens when you have a really bad environment. We don’t have a bad environment in there. The banks will be much more restricted in their ability to stand against the tide. And I worry about little bit though a lot of that will be made up for was not banks, that maybe a good thing or bad thing and that all remains to be same.
I remind the people about the banking system. We all in the crisis and I’m talking about 2008, 2009, 2010, all of the banks continue to lend money, I’m talking about trillions of dollars of revolvers, middle market loans, small business loans, corporate loans basically at the prevailing spreads which is 150 over LIBOR, 200 over LIBOR and they weren’t rapacious. The market almost disappeared or if you could try to get some done, the market is 1200 over. So banks stood against the tide and lent into it which I think is their job. Some of the people would legitimately ask why would you lend to someone at 200 over when you can buy there at same credit exposure 800 over because banks have clients there for the long run and not there for the short run, they have other revenues. It’s going to be a little harder for banks to do that, because some of the rules that were built in place increase your capital and reduce your liquidity in a crisis.
And so it’s a little bit that kind of thing that worries me a little bit, again there may be non-bank lenders do it though my experience with a lot of “non-bank lenders” private equity and hedge funds they aren't going to do it but it will be like a market. They don’t owe – the market doesn't owe anyone anything. They don't have a client, they are in personnel, if they could buy it better over here they are going to buy it better over here, whereas a bank owes someone something, they have a client. And so I do think we view this different and we should be thoughtful about how we go down and prepare for that kind of crisis out there, which I hope is decade away by the way.
Jason Goldberg
Since your earnings call, the final G-SIB rules or the G-SIB rules were finalized. We've seen take some actions in terms of reducing notionals and securities, trading assets and the like. And I guess where are you in the balance sheet optimization process, any changes worth noting? And one of the questions I get a lot and I’m not sure of the answer to this in terms of how ultimately does the G-SIB buffer fit into CCAR in the future and how does that all play out?
Jamie Dimon
Right. When G-SIB, when the final rules came out, we were an outlier 4.5% and we don’t want to be an outlier. I think it’s a bad place to be so we want to overtime become a close to everybody else. We announced just one thing that we’re going to do like reduce our non-operating deposits by $100 billion and we’ve done that and we could probably do another $100 billion but obviously the first one is easier and it was no regrets to $100 billion, the second one is little harder.
Going out to our clients and saying, we don’t want your money is a very funny thing for a bank to do but we have done it and so we’re going to shut certain types of clients and we are downscale stuff and we’ve been doing compression of trades, reducing some clients to create too much G-SIFI. Over time every bank has different constraints. So this is more like a linear programming problem. When you meet constraint A, your next constraint is going to be constraint B and you actually want to maximize some of them, minimize some of them so you want to – if you say we’re going to for G-SIFI, you want to maximize your SLR, your CCAR and stuff like that so that you can get the best results. So it’s kind of a linear programming exercise and it will go on for years. Because for years we're probably going to try to reduce that G-SIFI charge if we could do it reasonably and where if we can’t get the proper returns we want in a certain business. And the thing that you said about G-SIB and CCAR I don't think there's any logic for that but we just don't know.
Jason Goldberg
I guess maybe shifting gears…
Jamie Dimon
And if you look at JPMorgan, our CCAR losses as a percent of our capital are actually much lower than other people. So other people seem to be CCAR constraint or G-SIFI constrained. We get G-SIFI down, we may be constrained by CCAR. So we’re kind of try to moderate through all of that stuff.
Jason Goldberg
The Fed yesterday at one point was widely expected to raise rates over the last few weeks. I think most of them expected to stand back which they did. Does it matter to you? Does it matter to your customers and how do you think about JPMorgan’s balance sheet in this dynamic rate environment?
Jamie Dimon
It's a lot of chatter about nothing. I don't want to add to that chatter. Let the Fed decide when they want to raise rates and wherever I go I ask businesses, consumers, small business, large business, will it affect you if rates go 25 basis points? I haven’t found anyone who says, Oh my god. By the way, if someone says oh my god, I’m in trouble, okay honestly you’re not paying attention, they’re going to go up and when it goes up September, October, November it isn't it's a psychological thing, folks. It’s not a economic thing, it’s not really in my opinion tightening. They could raise rates – tightening in the old days meant you're taking cash out of the system.
And by the way the system doesn't work the same anymore. In the old days if they said they want rate of x, they would buy treasuries that would create reserves, presumably banks would lend them out with some kind of money multiplier and they can do rates that way. The reserve banking doesn’t exist anymore because all those reserves bank have – I’m going to call them – they are not required under old reserve requirements, they required an LCR, so that – it won’t work that way, but they can set IOER, which the rate they pay us if rates go immediately there and it's not necessarily taking money out. I think normalization is a good thing, I prefer we just get on with it, but they obviously have to make their judgements about the global situation.
And obviously the yield curve, if you look at most banks you get a budget to the yield – the implied kind of yield curve is something like that, well, obviously, the more you push that out, the more NIM compression you will have. It’s not a big deal, I’m not panicked over it, I also think one day it will rise faster than people think, not slower. It just won’t happen right away.
Q - Jason Goldberg
Now we’ve got some of the macro stuff out of the way, early on you were talking about you kind of mentioned your customers and that’s kind of where the focus is. Maybe just talk to in terms of what are your customers are doing, health of the customers whether it's consumer, small business, middle market, large corporate, you have a pretty good sense in terms of kind of what’s going on in corporate America?
A - Jamie Dimon
I mean, America is growing at 2% to 2.5%, it’s been doing it for six years now. We’ve added 10 million jobs, the consumer balance sheet is almost back to where it was in 1985. If you look at that one number, how much of their income goes to service debt. So it’s not – there are still segments, they are suffering a little bit, but that number went up to 14.5%, now it’s back to something like 10%.
Credit itself, actual credit losses is almost as good as you will ever see, which is good. The markets are wide open, so small businesses, middle market, large companies can get all the – mostly all the credit they need, which is good and mortgage is still too tight and I think the mortgage will be tight until something clarifies about the laws for how people have to originate and service. But the American consumer is doing fine, I wish the economy is going faster, but I think it will take good policy have that happen.
Q - Jason Goldberg
You mentioned pristine credit quality which is a theme we’ve heard throughout. You were at this conference in 2006 and warned about subprime mortgage. Good call. As we kind of look ahead, I guess what are the areas on the horizon that you’re focused on, where you think the next issue is going to emerge from?
A - Jamie Dimon
I don’t think it’s going to be credit. I mean if you look at the credit, it’s being written out mortgage, it’s pristine. Small business, it’s good. I mean, obliviously, the cycle your small business laws are good. Middle market, I think it’s very good. And I think the standards it seems to us are better than what people have been doing years ago. And large corporate, you all know as well as I do is still pretty good, so it’s not there.
The oil thing, people mentioned what’s gotten into oil. And we stress test – we try to stress test these reserve base lending things down to $40 oil, $35 oil, $30 oil, even if it goes to $30 and stays there for an extended period of time, we will have to add $0.5 billion to reserves, but I don’t feel it’s that big a deal. And you want to lend those companies; you want to keep these companies alive and doing what they are supposed to be doing.
So I don’t see something out a horizon credit that’s terrible. But I do expect it will get worse. So don't misread this as being good for this long. Never seen it stay this good for 20 years. I will be this good and then it’s going to charges will go up and the economy will change obviously.
Q - Jason Goldberg
JPMorgan has kind of always prided itself on being kind of an efficient company yet earlier this year came out with a couple of expense initiatives on the consumer side and mortgage side, the nascent banking front. To the extent rates stay lower for longer and that continues to pressure NIMs, are there other expense opportunities kind of going forward and how do you think about?
A - Jamie Dimon
We don’t run the business that way and they are not expense initiatives. We run the business that you think the way you want to do, you invest what you got to invest, you built the systems you need, you open the branches you need. The two things that we disclosed, both the investment bank and the consumer bank, were reducing their expenses for whole bunch different reasons because they could. And the branch is getting a little bit small, the headcount come down, more and more people are using ATMs, so the actual transaction of the branch coming down. So you need effectively less tellers, but we still think they are great place for advise, for investments and so there are things you are growing, there are things you are screening, that’s normal business.
Our expenses will be coming down a little bit while we make these investments, and obviously it could become more efficient. Some of the things you put in place for compliance, AML and some of the regulations, we will become more efficient in doing that too. So we will meet our regulatory goals, but we can reduce some of those costs. Because when you try to rush to do those things you don't necessarily do it in the most efficient way. And NIM, I don’t think would change that much if NIM isn't what we expect next year.
I mean, when you look at a business, if you add a check-in, just one check-in account and in the old days the NPV of that was 25% or so, the IRR is 25% and you do it today and the IRR is 12% or 8%. Would you not open that account? Of course, we open the account because that will change over time and as spreads go up. So we’re looking at – we're keeping our eye on the long haul here and not the short one.
Q - Jason Goldberg
I guess one of the investment initiatives is obviously region banking is kind of in the theme throughout the conference last year at this conference. Marianne kind of announced Apple Pay for the first time. Can we talk to just how you see that playing out, the role that banks have and just the leadership position JPMorgan has taken?
A - Jamie Dimon
Our position has been if you have our card or a debit card, we want you to be able to use it in the way you want to use it, which is why – and we think Apple Pay did it the right way. You are not looking for your customer data, they are not going to get in front of us or something like that. So we are trying to build wallets and things like that that are useable. Now we have 20 million people online, so you can take out your phones, you can look at your accounts, you can transfer money, you can move between your own accounts.
Banks are going to make it easier to transfer, we call it the P2P. So we want you to use it the way you want and we want to get some of that real estate, so that you can use Chase Pay and put other things in Chase Pay and we’re going to be very aggressive in that kind of stuff. And so far we are winner now, we are not a loser in that. And of course, when it comes to this kind you've got to worry. Everyone, a lot of smart people looking at wallets and payment systems and stuff like that. And I should say that on the merchant side, we are going to very aggressive in merchant processing.
So when we announced ChaseNet, remember ChaseNet allows us to go to a merchant and negotiate a simple different deal than Visa did because we own Chase Paymentech, we can also go to the merchant and offer a very simple deal, combine them, not combine them and we want share. We are going to gain share in merchant acquiring. And hopefully we can gain share overtime to put more volume through ChaseNet and also make merchants, we want the merchants to be happy with us and the customers to be happy with us. And so we want to built things and we are willing to do it in a way that’s economic. So when Gordon Smith goes Money 2020, which I think is in October, I hope he's going to be announcing some pretty neat stuff in the space about I would call ChaseNet and Chase Paymentech.
Q - Jason Goldberg
Interesting. I guess earlier we were talking about some of the turmoil in kind of outside the U.S. internationally. Obviously you’ve been growing there. Are there I guess additional opportunities for you now that in those markets, historically you’ve talked about acquiring overseas, is that still feasible and how do you think about it in the kind of environment?
A - Jamie Dimon
We are not the acquisition business right now unless it was kind of a small fit in something. And obviously we can’t do a bank here and I don’t think we are going to try a bank overseas right now. There is no reason for JPMorgan in getting a fight with regulators around the world what we’re trying to do and distract us from our mission at hand. I believe we'll grow organically for a long time. And think about organically is follow your client, go to country-by-country how does the economy grow, how many Fortune 2000 companies are there, how many rich consumers are there like private banking type clients, how much assets on the management will be there, that’s our client. And if you look at the globe because that’s going to go for 20 years, faster in certain parts than in other parts and we want to keep our share or a gain or share. And so, yeah, we see opportunities even in markets where you may say they are not going to do particularly well. So we think we could gain share in capital markets in Europe for example. And trading, it remains to be seen but there will be less players out there so hopefully we will gain some share.
Jason Goldberg
Interesting. So I use the first half of this presentation…
Jamie Dimon
In the middle market by the way we are going there too. So when we bought WaMu one of the benefits we got, a huge negative is now because some of these mortgage costs, but one of the benefits that got us into Florida and California. Not only do we expand consumer in those places, we added more private banking, more small business and a lot more middle market. We’ve also added middle market and we totally grow intelligently in cities that we don’t have a footprint like Nashville. And so you are going to see us more aggressive and you’re going to see us enter new markets of consumer. We’ve ever done it before. Go to a new city and open 100 branches may take two years or three years something like that and so we’re going to be trying things to grow organically I think are pretty neat kind of funds.
Jason Goldberg
I’ve kind of used the first half to ask some broader topics. I want to open to the audience to see if you guys have any questions either new topics or delving deeper into some of the comments that Jamie made.
Question-and-Answer Session
Q - Unidentified Analyst
I do want to make one point because some of you, you all work at competitors, we are in custody and cash management. We love the business, we put some of our best people in those businesses to run it. Some people are going around saying, we have to change the leadership. No, we put a change in leadership to put our best people in it. We intend to win in custody and cash management. Watch that space, we’re not backing out and some of your - yourself that you are probably seeing or JP Morgan is getting out and you shouldn’t give them business. So, kind of irritates me a little bit and …
Unidentified Analyst
Jamie a lot of the capital rules that continue to evolve, but as you talk about maybe we are in a stabilizing environment you look across the cost structure and learn to adapt to the new compliance environment. Can you talk a little bit about sort of what return on equity this business deserves over time and whether that, how related to interest rates that return on equity should be or can we look at it sort of over the cycle or in a sort of a low rate environment.
Jamie Dimon
So, when we did Investor Day, we’re not backing off of this, we said even with much higher capital, if they don’t stop, if they continue to raise them, which they could do, all better off, we would have to change this, but that we think we can do 15% on average across businesses.
Now, looking at ROEs, now there are some businesses that do a 100%, okay and if you were to have a balance sheet, all you did was put assets in the balance sheet using the RWA that the models give you, you shouldn’t be earning 15%, but if you built the chase payment tech in the asset management business and efficient branch system, you are going to have a branch system that earns 12%, I give a branch system that earns 24%, why, I hire share in the markets I’m in.
So, to me if you look at ROE it is not like there is a magical ROE that everyone has got to go to the same place, but obviously there is a version to me in over a extended period of time, but not in the short run and we have some fabulous businesses that should earn better than average ROEs and few which might struggle next year, but 15% will still be what we think we could possibly do.
Unidentified Analyst
The new city branch strategy sounds very interesting, could you talk about some of your thinking in terms of build versus buy for entering in new retail market, what are the trade-offs in your view.
Jamie Dimon
Just about our strategy. Yeah the thing about this – this was any branch business. Market share in the area is really important. So, most of the time when you expand it is only better to open a branch where you are than not, you can build it up to - the brand is known, you travel from your - where you live to where you work and you might change because you got more convenience etcetera. Convenience is still really important.
So, mostly we’ve been opening branches for you, remember we’ve opened a thousand over time, which gets higher market shares where we already where and that’s important, we are not going to stop that. So, all we look at every market and we are always looking at where should be and how we should be etcetera. This is just going to new market. It is going to be harder.
So, you open 100 branches in new market it’s a fact that the returns will probably be less like opened 100 branches where I already am to get share. I want to see if we can do it, if he can do it effectively how it works, you know how we could accelerate gaining share in that market. So, we’re going to do that, you know it may cause a little bit of money, but I’m anxious to do it and it will be fun to do it. Yeah.
Unidentified Analyst
In terms of getting that critical massive scale that you want, why not supply some underperforming branches somewhere to get you to critical mass or is that part of the potential strategy?
Jamie Dimon
We can’t, we are legally not permitted to buy banks in the United States. We are at the 10% FDIC limit. So, if I could buy 50 branches I’d go do that, but we have to build them instead. So, it is a lower return way then – I mean you would buy the branches if you could, if it was even at reasonable premium you buy them, it would be more effective way to go to market. And then in some markets, I wanted to buy Chevy Chase at one point, and we had to do was take the name Chevy off, so we were to spend, even when we did one like, it cost like $100 million just as it changed the size. I mean these are expenses.
Unidentified Analyst
One of your former colleagues has been quite active in promoting the concept of block chain money transfer could you comment a bit on, a, what you are doing to look at this and whether we should look for 5, 10 years of change in the whole international money transfer system?
Jamie Dimon
So, this came up many times, I always said, I still believe this will not be a currency because government’s control currencies and they are not going to like it. And they wouldn’t allow it. They like to control where it goes and who has it and where it shows up, but the block chain, which is a technology behind the encryption and the certification and that is a technology, which might very well be very useful in a cheap way if you can go see we own something with that terms like when it takes 21 days on average something like to transfer a loan. And in that loan document, I think a lot of it is still done by paper and those loan comments on the details, covenants, who owns it, transferability and all of that could be put may be in a block chain type of thing.
So, I remember all that stuff is already been done. So if you go to DTCC, they already keep all the data. They transfer all these things, the question is can you use these things to do it more efficiently. And if it is more efficient we should do it. And I don’t know yet and it’s got to be secure. So, it was [indiscernible] bunch of these block chain companies and they think it might be usable for things like loans and repo and other things which are constantly moving around and really want public and not public is it safe as DTC is today, we are going to find out. And we have a study group in this whole thing working with people. And I think most of the banks to at this point.
Unidentified Analyst
Good morning I was wondering if you could talk about interest rate risk, we are in a very interesting time where interest rates are at their lowest levels. This has been going on for some time, so your loan book has now rolled down, securities are down so it just feels to me that duration of some assets are really going to extend, say on the mortgage book and then also just in general, there is just going to be a lot of built-in losses as rates start to rise.
Jamie Dimon
So, I think of today we are kind of at a steady state because it has been this way for a long time. Most of the things have rolled over world, so NIM I covered it was, but 2.09 or and - the thing that it is [indiscernible] and everything rolls over it will be 2.09 and the last little bit more depending on decisions you make. And then a bank, the starting point for bank should be match funded. Okay, so you could match fund everything that floats, doesn’t float, duration stuff like that, but most of the banks today are positioned where I’m going to say they are short funded. They have more floating rate liabilities than not [ph] and therefore the rate - as therefore rates go up they will benefit.
So we make a disclosure in our 10-K that if rates go up 100 basis points we will make little over $2 billion more. More of that’s in the short and long end, but obviously how they go up really matters and how fast they grow up really matters, but in general rates going up, all things being equal will do better. They will not be built-in losses other than if it is AFS, yes, and that’s built into some of these sea cards so that like that, you have the AFS portfolio, but we model that too.
And we know exactly that is and how much that cuts into the capital and stuff like that, you know mortgages held on the books are not mark to market and there is no OCI on that, but you have a better loss and match funded, so most banks have been pretty cautious about, I think I have to do and interest rate exposure. The real risk for a bank and interest rates is the [indiscernible]. Like what if something is dramatically different than when what you expect. The rates drop from here. I think the worst thing for banks stagnation. Higher rates no growth and inflation and so in some way we are well-positioned – they protect us from that exact tale. So, we may [indiscernible] a simulation that interest rates only will get 7 billion of more NIM, but that - if we have stagnation that will be used up on other bad stuff. Like lawsuits.
Unidentified Analyst
You talked a little bit about the extremely benign credit environment and that’s usually when tomorrow’s credit bombs start to get planted, not talking about the current energy issues, but where else do you see future credit problems, is it CNI, CRE?
Jamie Dimon
So, you know you’re right about future planning of future credit problems, but think of two things, one is the normal cycle. There is a normal cycle, if we have a recession losses are going to go up to the extent they fall in normal cycle you built it into your modeling stuff like that, that is life. That is like the weather, deal with it. So ones that get you are the ones that surprise you. Sub-prime mortgage that actually built into prime and you’re always right there are - always the biggest surprise are always in an industry.
So in 2000 people are shocked that it happened to media, telecom. I’m in telecom is, your grandmother will buy telecom stocks and Warren Buffett love media, but things change Internet came along competition comes along and I think in ’07 and ’08 it was sub-prime and then it was also utilities. [indiscernible] anyway, so the biggest protection is to be diversified, of course, industry. You are not always going to pick up where the deterioration was and – but I don’t see anyone out there today. Oil, you all know about and obviously that was filtered through system, but we just don’t and it will be bad for us, I hope that no bank goes bankrupted.
And we are very cautious on credit. Credit is still our biggest exposure. But again we have $200 billion of equity and $700 billion of loans. I mean we are in very good shape. We have $800 billion money at the Fed and securities, which are very average duration two or three years and AA+, I mean we have one of the most liquid balance sheets that you will ever see in banking.
Unidentified Analyst
So a follow-up, do you think that the next credit downturn originates out of the banking system or do you think it originates out of the non-banks, everyone else who is competing in the credit space these days?
Jamie Dimon
Okay. When you say the credit downturn, a recession, a normal recession, which doesn’t originate in banks and non-banks, will close the credit cycle. The last crisis obviously the heart of it, the nucleus, was mortgages in the banking system, outside the banking system, mortgages, and Fannie Mae and Freddie Mac; it was mortgages; that was the corruption that caused the whole crisis. I don’t see anything like that in banks, zero, nada, nothing, zilch.
Non-banks, they are not big enough to close a systemic issue. Now there might be a systemic issue five or seven years from now, so don’t quote me today if there’s been a change. There are lot of non-banks, there are lot of clearing houses, there are lot of things taking place out there. That will house risk. So clearing house does not eliminate risk, it concentrates it, but hopefully a collateral and system all these various things, it will be safer than the bilateral system we have before. I don’t know if that’s true. Okay.
So we will find out, we are very cautious, careful when it comes to clearing houses because they are so big, there have virtually no capital and it only takes one thing that can cause a problem there. So there are areas that we look at, but we don’t think it will be in the banking system. The banking system in the United States has capital, liquidity; our diversification was the source of our strength and our weakness.
I think people – if you look at the older – last crisis, the last economic downturns, I will go back to 1974, okay, in 1974, it was a recession, in 1980, 1982, it was recession, and both those markets and credit got killed. Okay? In 1990, it was commercial real estate and then in one of those it was also LDC debt, less developed country debt, and then markets and credit got killed.
In 1997, it was the Taiwan, LTCM, blah, blah, it didn’t last that long, but markets and credit got killed. In 2001, it was the internet bubble. In 2007, it was – in every single case, markets drop, credit gets worse, I think people are massively overdoing crisis at this point. I mean in cycles.
Unidentified Analyst
Many European banks are still figuring out...
Jamie Dimon
Yeah, the one thing I do worry about a little bit by the way is treasuries. I mean, there has been – interest rate has been so low for so long, there is an oracle, a paper that I kind of wrote it, but it was kind of funny that not only that the traders have they never seen interest rates go up, but their bosses have never seen interest rate go up. Anyone into this business since 2006 has never seen interest rates go up, they saw a little bit of a crisis here, but they never seen interest rates go up.
And the biggest buyers of treasuries were central banks, foreign exchange managers effectively and banks. And all three of those are going to reverse. So I wouldn’t be shocked to see 10-year treasuries, when rates are going up, people change their mind, they change direction, that they will be vitally volatile and go up much faster than people think. I’m not predicting that, I’m simply saying in the back of mind, I think that’s a possibility and we will be prepared for that.
Unidentified Analyst
Many European banks are restructuring, redoing their plans, still you are at the growth stage. They have negative rates and there are lot of strategists who are recommending overweight in European banks, which I don’t necessarily agree with, what do you see as the opportunity there?
Jamie Dimon
I think what they’ve been doing to Europe, I’m sympathetic, okay, to what the European banks are going through and they have more to go. Because one of you wrote a report recently about the RWAs, they are not quite equivalent with the United States, but they’ve had seven years of increasing capital requirements. And there is no question in my opinion that dramatically slowed down the growth of Europe, dramatically. And it’s one of the reasons why Europe is still going to grow very slowly, it’s because the bank can lend and it’s 70% of the – I call the capital markets there.
The opportunity for us is twofold. One is some of that business is going to move into the capital markets where we are very strong. But we are not nearly as strong a lender in Europe as we are selling bonds for companies and some of that’s very developed, some of that’s not developed, over time, we think it will shift much more to capital markets. And the second is some of those banks making drastic change in the strategy.
So if a European bank is out of something, credit trading or interest rate or whatever it is, CDS, obviously, the share goes to remaining players. So you see a little bit of that take place and remaining players will benefit from that. I want those banks to do well. I think we need them to do well so we have the world grow a little bit. If I have been a regulator in Europe, I would have stopped at one point, say the banks are stronger, let them do their job and when Europe really recover that’s the time to think to add more capital, more liquidity, but not constantly in the mist of what the ECB is trying to do and stuff like that because it’s really one hand is giving, the other hand is taking.
Unidentified Analyst
We have about couple of minutes remaining Jamie, so I would make...
Unidentified Analyst
Good morning. In the context of what you’ve been saying about the credit environment, I was curious about your outlook for – your thoughts about your leverage lending business, in terms of desire to committing capital to that business either increase or decrease and then beyond just your desire and comments you have about the regulatory environment, the restrictions they’ve placed on leverage lending business and how that’s affecting you and the competitive landscape?
Jamie Dimon
We are in the leverage lending business a big way. [indiscernible] that’s business, that’s good. I was sitting at a risk committee other day and someone is saying, the bridge book is getting up – is up a little high and there is more coming down the pike and there are acting like this. There is good, commerce is good, business is good and like – so I’m not afraid at all about the leverage lending business, zero.
If you go to the leverage lending – when we all did hurt a little bit, okay? The bridge book – I forgot the exact numbers, the total amount of unsyndicated stuff on bank balance sheets was over $400 billion and when the shares stopped that got stuck and banks lots quite a bit of money. And the total amount of visible bridge loan now is like $50 billion. If all of that was on JPMorgan’s balance sheet alone, we still would be okay and probably the underlying stuff is better and it’s not just the EBITDA ratio that people look at, it’s the types of business, the type of equity, some of the covenants, the flex pricing that banks have that protect the bank, but you could still see the deal and it was no flex pricing back then, so it is far better than today.
The regulators have come in and said, you can’t do loans over – there are two criteria. 6.5 or 6.0 EBITDA ratio and the second is you have to payout either 100% of the senior debt or 50% of all the debt in seven years and then obviously it’s raining. There is a little movement in that about how you’d forecast, where you look at and stuff like that, so some of the banks will feel more constrained have been losing business, so some of the non-regulated banks picking up that business.
If you go to middle market lending, all the leverage – and not all, but a big chuck of leverage lending in the middle market is now non-banks. Now one of the issues again with that is, we will lend to our clients in bad markets, markets will not lend their clients in bad markets and all hedge funds. So if you are a client, if you are the middle market client who bought hedge fund or private equity in making that loan they will not be there; in bad time, they can’t. So that’s the market to market right away and that will be a huge hit. You can’t make a loan and then have an immediate 20% loss.
Unidentified Analyst
We got one minute left Jamie, so if I don’t ask this question, I will get in trouble, but kind of a shorter term question and maybe a longer term question. [indiscernible] trading revenues and your retirement date?
Jamie Dimon
We are about the same as everybody else. September is still to go, so who knows, and I think people are massively over-focused on those numbers. And my retirement date, every time you ask me, I’m going to say 5 years.
Unidentified Analyst
Yeah, you had, very consistent.
Jamie Dimon
I don’t want to retire. So I don’t know, I mean as long as the board wants me and I could still do the job and I have my other stuff like that and I want to work hard. I think when I kindle my work, I should leave this stuff. So we have a fabulous management team. I had mentioned on one of the analyst calls that I may not do every quarterly call. And of course, you all understand that, I mean Marianne such a good job. It’s not completely necessary.
I will do three a year, maybe two a year, but not everyone because sometimes there is no way I should be there. If there is anything bad, anything strategic, anything important, we are as transparent a company you can find, I will be there. So I’m not trying to avoid anything, it isn’t completely necessary, I could do other stuff, while Marianne takes care of that. And I also think that management team is just exceptional, so there is plenty of people [indiscernible] who can run the company and I think that’s very important and there are plenty of people five years from now that who can run the company. So I feel the – the board and I both feel comfortable about that.
Jason Goldberg
Perfect. Please join me in thanking Jamie for his time.
Jamie Dimon
Either am I.
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