By: Gerry Mihalick, CFA
Jamie Dimon went to Capitol Hill to explain JP Morgan’s (JPM) announced trading loss of 2 billion dollars. The odds of political grandstanding and vilification of banks? High. Congress’s track record in asking substantive, thoughtful questions at hearings like this? Low.
Imagine if Mr. Dimon were able to turn the tables and ask Congress about its qualifications to be judge and jury of such complex and important banking issues.
Perhaps these are the questions Mr. Dimon (and all of us!) would like to ask them.
“Senator, in very broad terms can you tell me what a derivative actually is?”
“Can you tell me the difference between book value and tangible book value?”
“What does the Tier 1 Capital Ratio tell us and how does that ratio at my bank compare to other financial institutions world-wide? (by now he’s probably thinking “Do these people actually write laws that affect trillions of dollars and millions of jobs”)
“We incurred a 2 billion dollar loss. Can you tell me, rounding to the nearest, oh say 100 billion dollars, how much in total assets we have?” (Answer $2.2 trillion)
“Explain to me, again in broad terms, how do losses flow through to various providers of capital and liquidity? Ok I’ll demonstrate who absorbs losses before depositors or taxpayers do.”*
First Hit? Earnings – we are generating about $18-20 billion per year
Next Hit? Tangible common stock holders – we have $134 billion
Next Hit? Preferred shareholders – we have $8 billion
Next Hit? Subordinated bondholders – we have $22 billion
Next Hit? Senior unsecured bondholder-we have $148 billion
Next Hit? Commercial paper –we have $52 billion
So, that’s a total of $383 billion before depositors or taxpayers are on the hook for any losses. So tell me, how you can characterize our bank as ‘gambling with tax payer dollars’ when tax payer dollars were nowhere near this transaction?
“How much does the US government lose in a day?” (Apparently 2 billion dollars, as per Senator Jim DeMint jpwww.mcclatchydc.com/2012/06/
“Can I, along with the American tax payers, see YOUR TRADING RECORDS, particularly during 2008 when you were one of a handful of individuals on the planet who knew the true conditions at the banks while you were simultaneously drafting legislation that directly affected them?”
“So, you want my bank to make loans, but then you tell me not to take any risk, which is it?”
“How much in cash taxes did JP Morgan pay last year? You can round to the nearest half a billion.” ($8.1 billion and it will be much higher this year.)
“How many people does JP Morgan employ?” (239,00 most of them high paying positions, right here in the US)
“What was the cumulative amount in taxes OUR EMPLOYEES paid last year?”
“Many lament ‘we need more manufacturing jobs in the US.’ But Senator, don’t you think that high paying white collar jobs like the ones my company offers is something worthy of your children’s aspirations?”
“If you were going through what I’m going through right now, do you think you’d be more likely or less likely to hire more people?”
“Thanks for your time. Now I’ve got a bank to run, one that pays a lot in taxes. Last time I checked the US Treasury needed the money.”
Yes, the trading loss of $2 billion is perceived as black eye for JP Morgan’s and Jamie Dimon’s reputation. Even Mr. Dimon admitted risk controls over the trades in question were lacking.
Overall JP Morgan has been very successful on many fronts. It has successfully rebuilt capital ratios, integrated acquisitions, and is generating healthy earnings again.
But the demonizing of Wall Street is overdone. Yes, there were many mistakes made by banks during the financial meltdown. Yet we need to move past vilification of large banks and realize there is major culpability among all players of our very vast, complicated and diverse financial ecosystem all of whom benefited greatly from the credit boom. Profligate government spenders were drunk on the tax dollars thinking it growth would go on forever. Their constituents of course had no problem accepting these huge transfer payments. Aren’t these 2 groups culpable?
Of course, let’s not forget the individual home owners and condo flippers who bought more house than they could afford. Who funded these loans? The depositors! And who ultimately backs the depositors? The US tax payers. Why don’t we equally vilify and label those bad actors who got a free ride as ‘gamblers with tax payer money? Where is the outrage there?
Banks made mistakes. So did a lot of groups. That is why the arguments levied against them have been: egregiously one-sided, grossly oversimplified, often lacking a basis in financial reality, and mostly unproductive. The financial services industry is one of the great economic engines of this nation, one that generates hundreds of billions in taxes and creates millions of high paying jobs. To tear it down for political expediency is in no one’s best interest.
*Source, JP Morgan Financials,investor.
Disclosure: I am long JPM.
Additional disclosure: Long JPM, financial related companies.
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