The latest imbroglio in the financial sector is JP Morgan Chase’s disclosure of a multi-billion dollar trading loss. Since the announcement, JPM’s stock is off more than 8 percent, has been downgraded by Fitch (one ratings agency) and is now exhibit A in the Obama administration’s drive for tougher bank regulations. Oh, how I miss working in banking!
When things get crazy, people want someone to blame — Heads on Pikes, as one National City colleague put it. The narrative is that greedy bankers caused the recession with their complicated hedges, derivatives toxic mortgages, et.al. Aside from that being a gross oversimplification (got to spread the blame much more broadly), it’s not illegal for a business to lose money. JPM is a financial company that has different types of businesses.
It’s a bank – Chase — in the consumer and commercial banking businesses. It takes deposits and makes loans. It makes money on the difference between what it pays for money (near zero for deposits, but a little more in other sources) and what it takes in (interest and fees). When people think of banks, this is what they think of. By law, the only path of investments for excess funds is U.S. Treasury bills, bonds and notes, and making loans. There are a lot of different types of loans out there, such as commercial paper, repurchase agreements, interbank lending, etc., but for our purposes, that does it.
The JPMorgan unit offers services for corporations not covered (very much) by Chase. Most notably, it’s various varieties of selling and buying stock and helping companies and other entities manage their cash. This is the part that gets people all twiddle-pated. The work is similar to taking deposits and making loans, but not really the same.
In the course of doing this work for companies, investment banks like JPM can make income by trading on their own – no client required. At its best, it raises cash that can help the company’s balance sheet and income statement. At its worst, it costs them money. The fear is that too many losses on the “equity” business side will destabilize the traditional bank side.
But back when these businesses were required by law to be separate, in relative terms borrowing was more expensive and rarer, and many businesses lacked the capital to grow. It’s like we are now in a nostalgia mode for the days of the 1970’s. Speaking as one who remembers soaring unemployment, skyrocketing interest rates and surging inflation all at once, that nostalgia is pretty darn silly. Oh, and banks were open 10-3, there were few or no ATMs and no online anything.
Now we take all of that for granted. It’s not cheap to provide all of that, and then you get told you can’t charge what you want for it. An opinion piece in the New York Times carped that JPM had lost $2 billion of “our” money. Not so. It didn’t lose depositor money, or even client money. It didn’t even lose investor money, unless the investor sold in the couple of days following the disclosure. It also didn’t lose government money — it repaid its TARP loan (that it was forced by the government to take) in 2009.
For JPM, they insist they have plenty of cash and profits despite the $2 billion trading loss. CEO Jamie Dimon has been plugging away on the talk show circuit, chanting mea culpas in the “by the book” crisis mode, and has even “accepted the resignations of” three execs with accountability for the loss, but it hasn’t stopped the criticism.
Where the administration, the FDIC and others are correct, however, is in saying that banks that are “too big to fail” are a systemic risk to the economy. Scale is wonderful until it gets so wide that no one knows what everyone else is doing. Even Jamie Dimon would agree that stepping in so huge a cow pie emboldens those who want the biggest banks to be smaller and more tightly regulated. That’s why the broader financial sector got hammered in the market in the few days following the disclosure.
What could Dimon due differently? Nothing. There are times when business is a poop sandwich and everyone has to take a bite. JPM is still with little argument the best financial in the business. Dick Bove, an analyst, said as much this morning when he rated it a buy.
In the meanwhile, the FBI says it’s investigating JPM, the FDIC has sued it for $15 billion, and the media fans the flames of hatred. In short, the mob gathers again, demanding blood.
What a business.