Recently, JPMorgan Chase (JPM) CEO Jamie Dimon gave testimony to the Senate Banking Committee to address issues surrounding the bank's $2 billion plus loss in its London trading operations that was first disclosed on May 10. I heard a Jamie Dimon I had not heard before. The sense of arrogance that permeated every prior time I had heard him speak was gone. It was replaced with a sense of modesty and contrition. Instead of alternatively belittling and pandering to his questioners, he treated them with obvious respect, any at times, even deference. It was refreshing, though not without inconsistencies.
In his written statement that began his presentation, Dimon made much of JPMorgan's role in supplying credit to all parts of the American economy, including being the only major bank to lend to states like California and Illinois. Yet, JPMorgan is not a nonprofit. The reason it loans money, is to make money. It makes money specifically form those it has lent to, and any other conclusion about JPMorgan's role in this economy is putting the frosting ahead of the cake. But the fact is, at year end 2011, JPMorgan's loan to asset level of under 31% was, by quite a margin, the lowest of any major American or Canadian non trust-focused bank. For example, Bank of America's (BAC) year end 2011 ratio of loans to assets was 42%, PNC Financial's (PNC) was 57%, Citigroup's (C) was 34%, Wells Fargo's (WFC) was 57%, U.S. Bancorp's (USB) was 61%, and Royal Bank's (RY) was 40%. One big reason for JPMorgan and Citigroup's low percentage of loans to assets is their relatively large investment banking operations. But please, Mr. Dimon, stop talking about what a wonderful resource to Main Street JPMorgan is. Numbers do not lie.
The next questions came on pending systemic regulatory changes. Those being heightened capital requirement under Basal III, and the specific Volcker Rule against proprietary trading. No one has been a fiercer critic against all banking regulation that Mr. Dimon, And Dimon has consistently belittled the Volcker Rule as being an unfair burden on bank profits. Yet, many of the questioners from the Republicans in particular on the panel were extraordinarily deferential as well.
What is galling about Dimon's general anti-regulatory stance is how Dodd Frank and the Volcker Rule both morphed into absurdly long and complicated rules. The complications arose due to the influence of hundreds of largely bank - employed lobbyists. JPMorgan has more than its fair share of lobby influence in Congress. Dimon has maintained, until today at least, that the London hedge trades would not have been prevented had the Volcker Rule been in effect at the time. I cannot see how Dimon could make that statement, though today he did "hedge" on it. He stated that the Volcker Rule might have lessened the amount of the losses. Yet, a clear written flowchart and training about risk would have meant none of this would have happened. I cringed when Dimon stated he did not really know what the Volcker Rule meant.
One true point on contention is the level of government support JPMorgan received via the TARP and related government programs late last decade. JPMorgan benefited not just directly from a $25 billion TARP loan, but also benefited by that much or more from the rescue of American International Group (AIG) and other financial issues. At a point where a measured, "thank you American Taxpayers" might have engendered tremendous goodwill, Dimon got defensive, and claimed that the TARP money was forced upon JPMorgan. Well even if true, if AIG had been allowed to fail, it would have dragged banks such as JPMorgan right down with it. Shame on Dimon for not taking the opportunity to show a little more humility.
The other thing about the testimony that troubled me is Dimon's persistent message that the London office's goal was to hedge against more catastrophic potential losses in JPMorgan's business, and was never intended as a profit source onto itself. That is nonsense. All trades are intended to offset losses, but to do so, must themselves be profitable. Dimon has apologized enough, and I appreciate the contrition, but enough with the stupid excuses.
Wall Street generally liked Dimon's testimony. The stock rose by almost 2% in value at the conclusion of the hearing. Some commentators also liked the testimony. Trader Joe Najarian sees the confidence Dimon inspired being enough to send shares up to $38 per share before reaching much resistance. Others, such as Mad Money host James Cramer, believe Mr. Dimon was and is a "loser." What I know is that Dimon, lauded in recent years as the world's most admired banker, and has been taken down a few pegs.
I do not expect to have a good fix on JPMorgan's future until mid-July when it releases its second quarter earnings report. If reported earnings are less than $3 billion, watch out. I am expecting earnings of $3.3 to $3.6 billion in the quarter. I am fiercely disappointed all the guidance Dimon and the bank in general have offered on earnings is that JPMorgan will be "solidly profitable."
If we look at that $38 per share price as a temporary ceiling that is about 13% above the June 13 closing price, there are many banks with more certain futures that have 12 month potential for a higher return. Look at Wells Fargo, Bank of Montreal (BMO), and Fifth Third Bank (FITB). If you have a very long time horizon, today is a good time to invest in what undeniably is one of America's strongest banks. I like the potential and relative certainty of smaller banks without the investment bank volatility that JPMorgan shareholders must tolerate.