Jamie Dimon Complains About Demonization of MegaBanks

One has to wonder whether anyone in a position of influence really believes what he is selling. At best, Jamie Dimon’s defense of too big to fail banks like his own JP Morgan is a vivid illustration of Upton Sinclair’s saying, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”

But Dimon’s patently self-serving argument is more likely part of a broader industry push to try to win over the public it just looted.

The Financial Times took note of his salvo, which comes in his letter to shareholders:

In the current political environment, size in the business community has been demonized, but the fact is that some businesses require size in order to make necessary investments, take extraordinary risks and provide vital support globally. America’s largest companies operate around the world and employ millions of people. This includes companies that can make huge investments – as much as $10 billion to $20 billion a year – and compete in as many as 50 to 100 countries to assure America’s long-term success. Combined, big and small businesses spend $1.5 trillion per year on capital expenditures and $300 billion on research and development. It is estimated that more than 70% of the capital expenditures are made by large companies.

The productivity of our workers and the huge economies of scale of our corporations (generated from years of investing and innovating) are what ultimately drive our economy and income growth. Employees at large companies share in that productivity: Compensation and benefits for employees at large companies are substantially higher than at small firms.

It is estimated that large enterprises and large foreign multinationals active in the United States have accounted for the majority of U.S. productivity growth since 1995. Companies such as Ford, Boeing, Pfizer, Caterpillar, Apple, Microsoft and Google are exemplars of initiative and innovation worldwide. Cutting-edge companies like Hewlett-Packard underpin vibrant networks of small and midsize suppliers and vendors. Academic research shows that these investments abroad actually create more jobs in the United States.

Large companies such as the ones mentioned above need banking partners with large enough balance sheets to finance transactions around the world. And it’s not just multinational corporations that rely on such scale: States and municipalities also depend on the capital that a firm like JPMorgan Chase can provide.

Yves here. It goes on in this vein for a few more paragraphs, but you get the drift of the gist. The idea is 1. Big companies are key to productivity growth, ergo growth and 2. Those big companies need banks with really big balance sheets.

Let’s debunk them in order.

The choice of productivity growth is peculiar, since the US statistics have been found to be wanting (as in they used a now-disputed measure, namely, checks cashed, for financial services industry productivity growth, which appears to have greatly overstated productivity increases in the service sector). And a big chunk of the rest of the growth in productivity did come from a large company….Wal-Mart. Wal-Mart’s success in this vein cannot be extended to large companies generally (and a lot of readers no doubt will take issue with Wal-Mart serving as an example of the sort of corporate conduct that big businesses should emulate).

We then get into the next layer: is what is good for the very biggest companies necessarily good for America? That is another tacit assumption in this argument. Given that large corporations have been shedding jobs, and in the last upturn, were net savers (as in were not borrowing to invest in their business, but were rather paying down debt rather than invest in growth) that argument seems like quite a stretch. While some large companies individually are exceptions, as a group, big companies were not creating jobs, nor were they investing in growth. And numerous studies have found that large companies are not innovative (yes, there are always exceptions, but smaller enterprises have consistently been found to be the hotbed of new ideas and processes; why do you think BigCos have to resort to devices like snunkworks to elicit similar behavior?)

So…do these really big companies actually need megabanks? I find this a stretch too. In all the years I have worked in the banking industry, I never heard anyone at McKinsey in the 1980s or 1990s recommend greater size as a way to win more business with major corps (and I’ve done a fair amount of interviewing of corporate treasurers and CFOs over the years myself).

Now there is one exception here. There is a service big corps value highly. It’s a global payment system….offered by Citigroup:

As an example of what the unit allows multinationals to do, an Asian subsidiary of a European company can deposit funds with Citigroup locally and the money will instantly show up on the ledger of the parent a continent away. The system makes it easier for corporate treasurers to manage their finances, and many corporate and government clients outsource a wide range of other finance work to GTS….

Executives told officials with the Treasury Department and the Fed that GTS’s technology and presence in more than 100 countries made it too dangerous for the U.S. to let Citigroup collapse.

Yves here. But Dimon wasn’t arguing about payment systems, he was arguing about financing. It’s already worth noting that some of the companies on his Admirable Big Companies list, like Microsoft and Google, generate lots of cash flow and have comparatively modest investment needs, and hence are not capital markets junkies.

Moreover, in the stone ages of finance (the 1980s) we had companies that straddled the globe too. And guess what? They did just fine having their capital markets needs largely satisfied by investment banks, which were mainly private partnerships, getting loans and payment services from US commercial banks, and using foreign banks if they needed to issue Eurobonds or procure other local market funding services. Even now, large multinationals are not dependent on a single bank. They often seem subject to fads as to how to work with banks (I’ve seen over my career vogues for more banking relationships, as in more horses for courses, replaced by a change in conventional wisdom of favoring fewer banks, and then a reversion. I suspect these changes in fashion keep CFOs busy and therefore looking like they are earning their keep).

So why do big banks need such big balance sheets? Bank industry expert Chris Whalen has described JP Morgan as as $1.3 trillion bank appended to a $76 trillion derivatives clearing operation. And he also begs to differ with Dimon’s “fortress balance sheet” claim, contending that JPM would have gone down even faster in the crisis than some of the other major banks by virtue of its derivatives exposures. You need a really big balance sheet if you are active in the OTC derivatives markets, particularly credit default swaps.

Oh, and as witness what happened in the crisis, big banks (who are given backdoor subsidies, like Maiden Lane I) are a much easier way for the authorities to dispose of dodgy players. By contrast, a bad bank vehicle like the Resolution Trust Corporation has to get funding from Congress and is therefore under considerable scrutiny. No reason to let the public see what is going on if that can be avoided, right?

Update 4/1, 6:00 PM: I neglected to mention a wee factoid that casts considerable doubt on Dimon’s “fortress balance sheet” claim. Year end 2009 total equity was $165 billion. Per Mike Konczal’s conservative analysis, JPM’s losses on second mortgages are between $58 and $87 billion, if not higher.

Originally published at Naked Capitalism and reproduced here with the author’s permission. 

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One Response to "Jamie Dimon Complains About Demonization of MegaBanks"

  1. Guest   April 12, 2010 at 3:59 pm

    (I’m not putting this very well, but hopefully the point comes across).On the subject of leverage, it seems to me all these occurrences of “negativebases” or “negative spreads” (if I’ve got my terminology right) have to do withinconsistent leverage rules being applied – more leverage/ less collateral issimply being allowed for some instruments but not others that are functionallyequivalent e.g. CDSs vs the corresponding bonds, which require cash upfront;interest rate swaps with counterparties with credit risk vs government bonds.Ditto all those corporate treasurers who protest against moving hedgingactivities to exchanges and properly collateralizing them.These are all ways of sweeping credit risk under the carpet.Why can’t regulators see that? Or is it because they don’t want to, because ofthe practical difficulties of actually correcting the illogic, similar toallowing interest payments to be made from pre-tax, rather than after-taxincome?