Jamie Dimon: There's no Such Thing as TBTF as Long as There is Failure
Jamie Dimon does the Washington Post and insists that TBTF is alright with him as long as shareholders get taken out in the unwinding process.
This coming from the man whose firm has absorbed the following in recent years: Chemical Banking Corporation, Chase Manhattan Bank, Bank One Corporation, Bear Stearns, and Collegiate Funding Services, Manufacturers Trust Company, Manufacturers Hanover, Hanover Bank, Bank of the Manhattan Company, Chase National Bank of the City of New York, Guaranty Trust Company of New York, City National Bank & Trust Company, Farmers Saving & Trust Company, Banc One Corp., First Chicago (First National Bank of Chicago, First Chicago Corp.,) First Chicago NBD, Washington Mutual, Providian, Great Western Bank, Bank United of Texas.
That's not all, how about those derivatives? (from my July 9th Goldman Sachs' Earnings, the $47 Trillion Reality):
Yes, kids, we've been here before. In case you didn't see the OCC report the first time around, it may be found here. Here's the Cliff Notes version:
- The notional value of derivatives held by U.S. commercial banks increased $1.6 trillion in the first quarter, or 1%, to $202.0 trillion, due to the continued migration of investment bank derivatives business into the commercial banking system.
- U.S. commercial banks generated record revenues of $9.8 billion trading cash and derivative instruments in the first quarter of 2009, compared to a $9.2 billion loss in the fourth quarter of 2008.
- Net current credit exposure decreased 13% to $695 billion.
- Derivative contracts remain concentrated in interest rate products, which comprise 84% of total derivative notional values. The notional value of credit derivative contracts decreased by 8% during the quarter to $14.6 trillion.
The worst derivatives offenders list looks familiar, now doesn't it? (ahem, can be found on page 23 of the OCC report)
1 JPMORGAN CHASE & CO. $81,108,352,000,000
2 BANK OF AMERICA CORPORATION $77,874,726,000,000
3 GOLDMAN SACHS GROUP, INC. $47,749,124,000,000
4 MORGAN STANLEY $39,125,255,000,000
5 CITIGROUP INC. $31,715,734,000,000
Yeah, so tell me about Too Big to Fail, Jamie? Please.
Our company, J.P. Morgan Chase, employs more than 220,000 people, serves well over 100 million customers, lends hundreds of millions of dollars each day and has operations in nearly 100 countries. And if some unforeseen circumstance should put this firm at risk of collapse, I believe we should be allowed to fail. As Treasury Secretary Timothy Geithner recently put it, "No financial system can operate efficiently if financial institutions and investors assume that government will protect them from the consequences of failure." The term "too big to fail" must be excised from our vocabulary.
But ending the era of "too big to fail" does not mean that we must somehow cap the size of financial-services firms. Scale can create value for shareholders; for consumers, who are beneficiaries of better products, delivered more quickly and at less cost; for the businesses that are our customers; and for the economy as a whole. Artificially limiting the size of an institution, regardless of the business implications, does not make sense. The goal should be a regulatory system that allows financial institutions to meet the needs of individual and institutional customers while ensuring that even the biggest bank can be allowed to fail in a way that does not put taxpayers or the broader economy at risk.
Creating the structures to allow for the orderly failure of a large financial institution starts with giving regulators the authority to facilitate failures when they occur. Under such a system, a failed bank's shareholders should lose their value; unsecured creditors should be at risk and, if necessary, wiped out. A regulator should be able to terminate management and boards and liquidate assets. Those who benefited from mismanaging risks or taking on inappropriate risk should feel the pain. We can learn here from how the Federal Deposit Insurance Corp. closes banks. As with the FDIC process, as long as shareholders and creditors are losing their value, the industry should pay its fair share.
Interesting and a great read but useless in practical application. Does Dimon really believe this? With $81 TRILLION in notional derivatives exposure, I don't see how an FDIC for investment banks could possibly unwind such a tangled mess in an orderly fashion. He's joking, right?
He is right in that if there is no safety net, there is little encouragement for TBTF to grow beyond healthy proportions but for now, what's to stop them?