Seeking Alpha
Long/short equity, deep value, value, special situations
Profile| Send Message|
( followers)  

Our report on Jamie Dimon's Testimony before the Senate Committee generated much feedback from readers. In our opinion, while Jamie Dimon is certainly far from infallible, we find him to be a more talented leader and manager than Ken Lewis, Stan O'Neal, Jon Corzine, Kerry Killinger, Charlie Prince and James Cayne combined. That explains why J.P. Morgan Chase and Company (JPM) acquired Bear Stearns and WAMU and why the rest of those callow, incompetent rapscallions have been put out to grass.

JPM has been in the news because its Chief Investment Office had engaged in trades that intended to reduce risk-weighted assets in anticipation of the new BASEL requirements. It chose to do this through a complex strategy that entailed adding positions that it believed would offset the existing ones. The strategy created a larger portfolio versus where it began, and instead of reducing risks, resulted in more complex and hard-to-manage risks. This strategy blew up when JPM announced a multi-billion loss from this strategy and resulted in the termination of those responsible, including the previously respected Ina Drew.

We admire Dimon's handling of this matter. When this matter came to his attention, he held the people who caused this loss responsible for their actions and replaced them with new leadership. The new leadership in the CIO revamped risk governance, instituted more detailed limitations across that unit and to ensure that appropriate risk measures are in place. Dimon was also able to honestly and candidly analyze and articulate what exactly when wrong. Dimon has even come to Washington and testified about it to the Senate Banking Committee and the House Financial Services Committee. We compare this level of responsibility and accountability that Dimon has shown with the behavior of Fannie Mae and Freddie Mac's executives. It appears that Fannie and Freddie's leadership has pulled a runner with regards to testifying about $154B in taxpayer losses to bail out those putrid edifices of crony capitalism.


Source: 10-Q Reports from JPM, Fannie and Freddie

On June 13th, Dimon was able to articulate clearly what happened and to deal with politically motivated questions from members of the Senate Banking Committee. On June 19th, he came back to testify in front of the House Banking Committee. We didn't see much difference between his prepared remarks before the Senate and the House.

Dimon pointed out to Representative Barney Frank that the majority of the trades in question were cleared and fully collateralized, which would have met the proposed requirements of the Volcker rule. He then pointed out to Representative Waters that clients will leave JPMorgan if the new rules put it at a disadvantage with foreign financial institutions.

Dimon pointed out that the Volcker rule allowed for portfolio hedging and that is what JP Morgan was trying to accomplish. He also pointed out that contrary to public opinion, JP Morgan does not gamble, sometimes it makes mistakes in the course of its operations. Considering that JPM was profitable even during the crisis and only took the TARP because it was strong-armed into doing so, we can see that JPM gets it right much more than it gets it wrong. We also agree with Dimon that by and large, the majority of people in the financial profession are upright, honest and highly intelligent. We go further in saying that we are appalled and disgusted by the ones who aren't, because those people end up making this bad for the rest of us.

We were glad that Dimon pointed out that a hedge is meant to protect an investor if something goes wrong. You can lose money on options by buying a put to protect your portfolio from downside in the market and the market goes up. You lost money on the options trade but gained on your portfolio. That doesn't mean that the option didn't do what it was supposed to do, which was ensure a small loss against a greater one. People do this all the time with life insurance, car insurance, homeowners' insurance etc.

We agree with Dimon wholeheartedly when he repeated that a bank's biggest risk is in its loan portfolio! In fact, that is precisely the reason why we own UMB Financial (UMBF), a top-tier Kansas City-based super-regional banking and diversified financial services institution. There are many reasons why we prefer to invest in UMB instead of JPM, here are four reasons:

  • UMB is a smaller bank and has more room to grow
  • JPM is led by a superstar CEO (Dimon), UMB is led by the low-key Kemper Family
  • UMB's adjusted fee revenue proportion of 59% exceeds JPM's fee proportion of 56%
  • UMB's net interest margin of 2.75% is higher than JPM's 2.61%, despite much less risk


Source: Morningstar Direct

We disagree with the Bloomberg/IMF claim that JP Morgan gets a $14B subsidy from the taxpayers because investors believe that the bank will be bailed out out by the government if it goes belly-up. We think that Bloomberg and the IMF got its numbers from the sports pages. Last time we checked, the Treasury Secretary called on JP Morgan to bailout out other large financial institutions like Bear Stearns and WAMU when those institutions started losing money on the NINJA (No Income, No Job or Assets) loans and the mortgage backed securities that held the NINJA loans. We will concede that in many cases, the banks were pushed to make those loans to utterly unqualified borrowers at the behest of gangsters in suits like ACORN due to the Community Reinvestment Act of 1977. We would like to propose a trade to Bloomberg, the IMF and the two economists who did that study. We eliminate Too-Big-To-Fail and in return, we eliminate Dodd-Frank and the CRA.

In conclusion, we believe that despite the $2B in losses associated with the trades, we believe that JP Morgan is a top-tier diversified financial institution and it has taken the necessary steps to ensure that the bank still has its fortress balance sheet. Even though we prefer UMB Financial, we have a great respect for Jamie Dimon and his leadership of the company. We are glad that Jamie Dimon is leading JP Morgan Chase. Had Bill Harrison been in charge of JP Morgan at the time of the crisis, the House of Morgan would have been in as bad shape as Merrill Lynch, Lehman, WAMU, Countrywide, Bear Stearns and Wachovia. We believe that if Jamie Dimon and his acolytes were running the big banks, the U.S. and Europe would not have suffered a 5 year financial crisis. Of course, we would still prefer big banking families like the Frost Family at Cullen/Frost (CFR) and the Kemper Family at UMB Financial running those banks because those banks do very well already and don't need a Dimon acolyte to manage things over there.


Source: Senate Banking Committee hearings, JPM's Q1 2012 10-Q and Saibus Research estimates

Source: Jamie Dimon Goes Two-For-Two With His Testimony

Additional disclosure: Saibus Research has not received compensation directly or indirectly for expressing the recommendation in this report. Under no circumstances must this report be considered an offer to buy, sell, subscribe for or trade securities or other instruments.