The Bankwatch

Tracking the consumer evolution of financial services

Dimon of JP Morgan makes a perverse argument for lower capital – no talk of innovation here

Jamie Dimon, who you will recall was seen here looking a little more contrite, bankersin Feb 2009 when they were being bailed out by TARP, is on a rampage to remove government control of banks. 

Lets face it, banks as they exist today, only exist because of close government co-operation.  This is carefully managed through the window of the central bank, the Federal Reserve, Bank of England, Bank of Canada, etc.

He is right in that all banks are not the same, but he is wrong in that all banks operate at debt to equity levels that would never survive in the ‘open market’ meaning without government provided deposit insurance and implicit government guarantee of the entire institution.

I refer to the 4th quarter results and this shows JP Morgan with debt to equity of 11.02 : 1 – in plain english shareholder equity represents 8.3% of total assets.  Consider GE at 5.0: 1, or Microsoft at 0.86 :1.  GE is on the traditional higher end of the scale when we are talking about ability to survive economically and weather good times and bad.  Microsoft is the traditional strong balance sheet. 

JP Morgan is in much stronger shape than most banks in the world. There are many European banks in the 20: 1 or worse range. 

Davos WEF 2011:  JP Morgan chief Jamie Dimon lashes out at bank critics | Telegraph

Today, he is quoted warning of a ‘nail in the coffin’ of banks and proposing a reduction in the capital that JP Morgan holds (they are at 9%)

Urging regulators to make a quick decision, he said the slow progress meant banks were already shrinking their balance sheets on the basis of “anger and the shrillness – and Switzerland says it’s got to be 19 per cent and people in the UK say it’s got to be 15 per cent.”

“If you think that’s helping growth, it’s not,” Mr Dimon said, adding that a 7 per cent capital ratio would be adequate.

Relevance to Bankwatch:

I am as sympathetic to banks as the next banker, but the arguments Dimon uses and the objectives he promotes are self serving.  Yes a company will be more economically efficient at a lower capital ratio, ergo return on equity will be higher with more assets employed to produce return.  But and this is the key …. but that lower capital ratio is only feasible with a government guarantee for your organisation. 

So, in effect Dimon is insisting on government support forever.  One is left to wonder who will benefit in the world he promotes and when he says higher capital ratio’s would hinder growth, is he actually referring to GDP or some other growth metric.  Lets not forget, JP Morgan paid out 7% of capital as bonuses in 2009.  It does not seem equitable for this to occur on the back of taxpayer support.  I cannot but but recall the words of Umair Haque about thin value, and how Dimon epitomises.

A final important note.  This shrillness against regulation is accompanied by a lack of anything about innovation or new business approaches that might actually be good for people and businesses.


Written by Colin Henderson

March 30, 2011 at 22:45

Posted in Uncategorized

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  1. […] of utility banking first came up during the crisis.  By the way, this is why Dimon is so excited right now. Technorati Tags: Independent Commission on banking,bank […]

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