Jamie Dimon at the J.P. Morgan Cyclicals Conference

Includes: SPY, XLF
by: Jeffrey Bernstein


I was fortunate enough to attend Jamie Dimon's lunch presentation at the J.P. Morgan cyclicals conference the other day. I think it's worth re-capping here. I read Dimon's letter to shareholders in the J.P. Morgan annual report a few months back and was amazed by how well Dimon explained the financial crisis in plain English that even non-Wall Streeters could understand. You can find it here. I have always believed that the true measure of intelligence is the ability to explain complex concepts in simple terms. So I had great expectations of Dimon's lunch presentation at the conference and I wasn't disappointed. I will try to re-cap what I heard for you. My apologies to you and to Jamie if I miss anything or mischaracterize anything that was said.

Dimon began by taking the audience back in time to the Bear Stearns bankruptcy, when he got a phone call at a Greek restaurant asking if he could lend Bear Stearns $30 billion. He proceeded to walk through the incredible happening of the next nine months culminating with the Fannie/Freddie implosions, Wamu, Wachovia, Lehman, AIG et al. He noted that while he raised his hand to tell the powers that be that his bank did not need TARP, several other institutions said they would take the money before the Feds even finished making their offer. He averred that he agreed with the strategy of making all of the 19 large institutions take the TARP money, so as to avoid the risk of the strong refusing it because they didn't need it and the weak refusing it for fear of causing runs on their banks.

Was TARP the perfect plan? No! But in hindsight it seems to have worked. Dimon averred that he didn't like how the Feds bailed out the auto companies by giving the unions 50% of the the business, but he told his bond guys he believed that it was fair that as secured creditors, his guys received just 30 cents on the dollar of debt, because in a liquidation they would have received even less. Not perfect, but the point was for the government to do something, not nothing.

Dimon asked the audience, which included a large number of management teams from cyclical companies that were presenting at the conference (many of these companies were large and small conglomerates serving many diverse end markets): Is your business stabilized or getting better? Many hands went up. Then he asked how many people's business is getting worse? One hand went up. Then he asked: What stock are you? Eliciting a well deserved roar of laughter. Not only is the guy straight as an arrow in telling it like he sees it....he's got a sense of humor too.

Dimon then discussed the kind of freeze he believed took place as a result of the markets going tilt last year. He asked, How many people moved money from riskier to lower risk assets in response to the crisis? Many hands went up. Dimon said that some $1 trillion of corporate assets were believed to have been moved into low risk, short maturity paper and was poised to move out on the risk curve. I don't believe he offered a quantification of the amount of consumer money that had done the same. He discussed the consumer pullback and some research by J.P. Morgan economists suggesting that if the current decline in consumer consumption was sustained, the consumer balance sheet would be de-levered back to 2003 levels within three years. Dimon's opinion was that this would not happen, as he expected consumer spending to pick up and de-levering to take place over a longer period of time.

On the subject of bank losses, Dimon was less sanguine, saying, "Expect several bank failures each week," the reason for this being that local and regional banks are much more levered to commercial real estate. Dimon asserted that the commercial real estate shoe had already dropped and that the recognition of the consequences was merely a matter of accounting treatment. That said, he did not believe that these bank failures posed a systemic threat to the system. He noted that the 19 largest banks hold 50% of all loans. All 19 are now sound due to TARP, stress tests and required capital raises. He averred that these banks also had a margin of safety from their "well capitalized" status even if un-employment exceeds the "worst case" 10% level. Additionally, these banks have other levers to pull in terms of cost cutting and efficiency, as well as the ability to earn significant sums in short-order in the current environment.

In terms of the progress of the economy and capital markets, Dimon pointed out that the capital markets continue to open wider and wider, accommodating increasing lower rated credits' capital raising needs. He stated that stimulus money was only just beginning to flow and that the near-term economic outlook was increasingly positive. At this point Dimon threw the floor open to questions. His answers were concise and well reasoned, and addressed questions as diverse as what should bank regulations/capital requirements look like going forward? (Capital requirements will be higher.) Should there be a "Too big to fail" policy? (No, it would invcentivize everyone to consolidate into giant banks status.) Can J.P. Morgan make a 15% ROE in the future? (They can and are already at 10-12%.)

Dimon opined on the status of the dollar by saying that China held only 65% of its assets in U.S. currency and could easily diversify by buying either yen or euros; he wasn't sure that either of those was a great alternative. He also said that if they did divest dollars in a big way, the yuan would appreciate significantly, killing their economy. I asked perhaps the most debated question of the current time: Are you more worried about inflation or deflation?

Dimon, in my opinion, showed his intelligence by saying, for planning purposes we look at those issues and he is equally concerned about both. It is possible that we could fail to get the economy going fast enough to become self reinforcing (I am paraphrasing here) and could have a double dip. At the same time there will come a time when the Fed has to remove the huge amounts of liquidity they have pumped into the market.

Bravo Jamie! I should mention that throughout, Dimon maintained a very composed and respectful demeanor even when he joked about writing a $25 billion (I think that's the number) TARP repayment check at a New York City J.P. Morgan branch while sending a note to Geithner reminding him that while the Fed had lent J.P. Morgan $25 billion, J.P. Morgan was still holding loans to Uncle Sam of $200 billion. He used some colorful language now and again to underscore a point and prove that not only is he one of us, but he's a real New Yorker.