Master Banker, Master Schmoozer
How JPMorgan Chase's Jamie Dimon is trying to shape the outcome of regulatory reform.world Updated: Nov 12, 2009 14:33 IST
Among the highest bishops of banking, Jamie Dimon sounds like a heretic. He insists that no financial institution is too big to fail--not even his giant JPMorgan Chase, the largest bank in the country by market capitalization ($168 billion). "It is bad public policy," says the 53-year-old Dimon. "It will have terrible consequences."
Call his outspokenness self-interest or coyness, Dimon has largely escaped the popular backlash that would consign many high-profile bankers to the lowest rungs of hell. JPMorgan repaid its huge government loan early and got kudos; Goldman Sachs did so and aroused suspicions about its motives. All that angry talk about obscene pay packages at banks on the public dole has focused on the likes of Bank of America's Ken Lewis (total compensation for 2008: $12.5 million) and Citigroup's Vikram Pandit ($2.9 million), whose institutions aren't so healthy. Dimon, who earned $8.5 million last year, is on nobody's hate list. Perhaps it's because JPMorgan is the best-capitalized large bank in America ($31.5 billion of loan loss reserves and $162 billion of shareholder equity as of Sept. 30).
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Or because Dimon, a longtime Democrat, has connections inside the Beltway, where he gets high marks for his blunt, unvarnished counsel. Starting last year, as regulators scrambled to save a financial system near collapse, Dimon was anointed the government's go-to banker. He was pressed into service to rescue Bear Stearns and Washington Mutual, and nearly dragooned into swallowing Morgan Stanley. An early proponent of regulatory reform, Dimon has managed to emerge a rare hero of a vilified industry.
Yet, for all his savvy and networking, things haven't entirely gone his way. The political storm that followed the financial crash pushed Capitol Hill into legislative overdrive. In May Congress passed a pro-consumer credit card law to ban retroactive interest rate hikes on existing balances and compel better disclosure of terms. Now legislators are mulling regulations that would, variously, allow Uncle Sam to take over and dismantle virtually any financial institution, as well as move a majority of derivatives onto exchanges and set up a consumer finance agency to monitor lending and other activities. In the crosshairs of all the proposed changes are two of JPMorgan's biggest lines of business--derivatives and consumer finance.
"We learned a lesson here," Dimon confided to some of his peers before a dinner of the Financial Services Forum in May: Do a better job reaching out to members of Congress. Dimon is already well schooled in the task. The JPMorgan chief visits Washington almost once a month, seeking out politicians on both sides of the aisle, pressing his case particularly with New Democrats like Illinois Congresswoman Melissa Bean and Republicans like former Ohio Representative Rob Portman, who is running for the Senate (Dimon recently contributed $2,000 to each politician). "I'll talk to anyone who wants to talk to me," says Dimon, white-haired but otherwise boyish-looking.
He also enjoys a relationship with Barack Obama and, just as important, with the President's inner circle and advisors like Valerie Jarrett. The ties were forged during his years in Chicago. Dimon, a consummate networker, phoned Obama around the time he was running for the U.S. Senate and invited him to a lunch with other business leaders. While the two didn't share social circles, Dimon has known many players in the Administration for more than a decade, among them Chief of Staff Rahm Emanuel, whom he helped in his 2002 election to Congress, and economic advisor Larry Summers. A few years ago, before Hillary Clinton announced she was running for President, the Dimons had her over to their home in Chicago.
More antibank legislation is inevitable, and the question is how to thwart politicians' worst instincts. If Dimon can be the statesman in the Wall Street regulatory war he will top off a long, sometimes tortured journey to the heights of American finance--and, conceivably, become Treasury Secretary if Timothy Geithner wears out his usefulness.
Exiled to Chicago nine years ago, after Sanford Weill, his longtime mentor at Citigroup, fired him, Dimon rebuilt into a powerhouse one of the most precarious financial institutions, Bank One, founded by the McCoy family. He survived and prospered greatly after J.P. Morgan, which acquired Chase Manhattan in 2000, bought Bank One in 2004. Today Dimon has more than triumphed over Citigroup, if retaliation means anything to him. Recently he named an apparent successor in Jes Staley, head of the asset management group, and tapped him to be the new chief executive of JPMorgan's investment bank.
What sort of oversight does Dimon want? In his letter to shareholders published in March (near the stock market bottom), he noted that the "extent of the damage and the magnitude of the systemic problems make it clear that our rules and regulations must be completely overhauled." One by one he ticks off things in need of regulatory reform: the mortgage business, where brokers operated with next to no oversight; the Basel II capital requirements, which allowed investment banks to greatly boost their leverage; and the supervisory framework that inadequately monitored systemic risk.
Since then Dimon has become equally passionate about his concern that some changes now being contemplated are wrongheaded. "I think America is an incredibly entrepreneurial, innovative, strong, vibrant, go-getter country," he says. "But I fear in the spirit of doing good we could create a weed of bureaucracy that could wind around our ankles and necks." Dimon says he hoped the crisis would create an opportunity "to streamline, strengthen and simplify our spaghetti regulatory system." Instead, he says, "we are making it more complicated and more litigious, which, over time, I think will be more damaging to our country."
Dimon favors an overarching regulatory body, a "systemic counsel" with "some real teeth." It would "look around the corners" to take care of problems, say, with mortgage brokers or institutions like Freddie Mac and Fannie Mae. In order to deal with another potentially calamitous collapse, like that of Lehman Brothers, Dimon supports a "resolution mechanism" for investment banks, much as the Federal Deposit Insurance Corp. seizes a failed commercial bank, guarantees its counterparties and then dismantles it, finds a buyer or puts in new management.
His bête noire is the proposed Consumer Financial Protection Agency, which would snatch away the responsibility of protecting consumers from traditional bank agencies and allow states to introduce stricter regulations if they choose. Dimon says he agrees with a lot of the precepts of a protection agency but doesn't think banks need another regulatory body to contend with, and he is dead set against state me-tooism. "If I have a legal department and it doesn't do a good job, I don't create another legal department," he says. "I fix the one I've got."
Yet his bank has been able to move the regulatory needle only so far. JPMorgan has had some success on derivatives, the financial instruments whose values are tied to those of assets such as stocks, bonds, commodities and currencies. It has helped reshape the debate away from calls for an outright ban of the complex instruments, which necessitated the government bailout of insurer aig. Reformers favor transparency, meaning that derivatives would be standardized, traded on an exchange and marked to market. Wall Streeters favor flexibility, which means not only the ability to customize contracts to suit clients' needs but also the ability to make price comparisons harder.
JPMorgan has galvanized such clients as commodity firms to tell Congress that derivatives aren't simply a financial insiders' game; they play a pivotal role in managing economic risks. It has dispatched its executives, Associate General Counsel Mark Lenczowski among them, to testify before the Senate Agricultural Committee, which is considering a bill that would put a severe crimp in over-the-counter derivatives. Dimon has a lot riding on this one. On the recent earnings conference call he noted that if all derivatives are forced onto exchanges it could have a "material impact" on the bank's future earnings. Dimon and his colleague Steven Black, executive chairman of the investment banking unit, have told analysts that if JPMorgan doesn't retool its business to the coming changes in derivatives, the bank could lose $2 billion to $3 billion of annual revenue--2% to 3% of the company's total top line. (In November JPMorgan agreed to pay $75 million in fines to settle a complaint that it paid bribes seven years ago to win bond and derivatives business from a county in Alabama.)
New rules won't catch JPMorgan flatfooted. If most derivatives are moved onto exchanges, the bank will try to make up for lost revenue by a jump in the volume of clearing these trades. "Cleared derivatives trades will most likely have a lower profit margin than trading over-the-counter derivatives," says Betsy Graseck, who covers banks at Morgan Stanley. "But there will be lower capital requirements for cleared trades, so you could end up with a higher return on equity."
On populist causes like consumer finance Dimon is facing a tough battle. The bank wasn't in favor of many provisions in the credit card legislation, including the ban on retroactive interest rate hikes. It is too early to tell if Dimon will prevail in helping to kill the idea of a separate consumer finance body to monitor mortgages and other types of lending. That would create a legal and paperwork nightmare. Over the opposition of the industry and Republicans, the House Financial Services Committee in October approved legislation to create such a body, but the bill, likely to pass the House, faces a struggle in the Senate.
The bank, at any rate, is not going to brag about its ability to influence outcomes. "In all my years around politics, no one company, no matter how plugged in they think they are, no matter if their ceo knows Bush or Clinton--their ability to influence on an issue is pretty limited," says William Daley. Brother of the long-term mayor of Chicago, Daley served as commerce secretary in the Clinton Administration and now oversees corporate responsibility at JPMorgan.
Everyone, including JPMorgan, fears that Capitol Hill might screw it up. A bank "could end up being treated like the electric company," says Lily Claffee, a lawyer at Jones Day in Washington and former general counsel of the Commerce Department in the Bush Administration. "If the government can't afford to allow the lights to go out, then it better regulate every aspect of the electric company's business, its rates, its products, its operations, its size, its financial health." Investors in bank stocks would then have to accept utility-like returns. Indeed, a report by JPMorgan's own bank analysts predicts that widespread regulatory changes could reduce investment banks' return on equity to just shy of 11% in 2011, from 15% today.
Dimon is doing what he can to get ahead of the regulatory rumble. In late September, just days after Senate Banking Committee Chairman Christopher Dodd, the Connecticut Democrat, announced he was working on a bill to rein in abusive overdraft fees, JPMorgan and Bank of America unveiled a drastic revamping of their debit card programs. Dimon's bank offered to lower or eliminate fees, change the way it credits transactions and require customers to enroll for overdraft protection. The policy changes could cost JPMorgan $500 million a year after taxes. "I think we were a little late on the overdraft fees, personally," Dimon concedes. "There are certain complaints that resonate as reasonable--a complaint about a $39 fee for a cup of coffee is fair." Even though overdraft fees were the leading gripe from customers in recent years, Dimon says the bank was slow to react to how the explosive growth of debit cards has radically changed the use of checking accounts. "Back in the day we balanced our checkbook," says Dimon.
Don't worry too much about Dimon's bank. In the third quarter it netted $3.6 billion, compared with $527 million in the same period a year ago, despite losing $1 billion in its consumer lending unit. Its credit card business might even get a boost from new regulation, since the rules will create barriers for newcomers and reward the economies of scale at existing card providers.
Meantime, Dimon aims to be part of the regulatory discussion--at the White House and the Treasury building, at the Federal Reserve and on Capitol Hill. "JPMorgan will be around long after I am gone," he says. "I am far more concerned about my country in this regard than my company." Spoken like someone pondering his next move--say, for example, into Washington.