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JPMorgan Chase Reports to Shareholders and the Angelides Commission

Jamie Dimon

Jamie Dimon

Jamie Dimon, the CEO of JPMorgan Chase (JPM) testified at the hearings held by the Financial Crisis Inquiry Commission that JPM acted wisely and well for the most part. Don’t make us get smaller, he says. Then JPM issues its results for 2009, and it’s what we have come to expect. Profits are up and loans are down. Loss reserves are increasing, and bad loans are increasing. But, profits are up.

On the revenue side, about 30% comes from the investment banking business, including trading for its own account, gains on securities held, and investment banking fees. This last category includes underwriting the sale of securities for others, and JPM is holding its own there: it claims to rank number 1 in most categories. Page 10. Net interest income dropped steadily quarter by quarter, decreasing 11% from 4Q 08. Charge-offs and non-performing assets are up.

Consumer lending is down about 11% over the same period 2008. JPM bought a bunch of troubled loans when it acquired Washington Mutual and Bear Stearns. It reports these loans separately from its internally generated loans. For its own loans, JPM reports that home equity loans, subprime mortgages and option ARMS are all down, which is to be expected, since these categories have serious charge-offs. Prime mortgages are also down about 7% over 4Q 08. There are several possible explanations for this, one of which is that despite its vast reach, it isn’t lending into this market. We’ll have to wait to learn the reason when the 10-K comes out.

This report doesn’t provide much information about the swaps portfolio, or the operations of JPM in that area.

So what did Dimon tell the Financial Crisis Inquiry Board about his company?

While the last year and a half was one of the most challenging periods in our company’s history, it was also one of our most remarkable. Throughout the financial crisis, JPMorgan Chase never posted a quarterly loss, served as a safe haven for depositors, worked closely with the federal government, and remained an active lender to consumers, small and large businesses, government entities and not-for-profit organizations.

It was an active lender, if reduction in loans counts as active. Dimon says that small business loan applications were down 37% in the third quarter of 2009 over 3Q 2008, a fortuitous choice of periods. The great recession began at the end of 3Q 2008, and wiped out a whole lot of small businesses, including many which couldn’t get loans or had their loans jerked.

Dimon argues that huge financial conglomerates are necessary to handle the needs of enormous corporations. He says the diversification of JPM made it easier for the company to survive the great recession. His solution is to set things up so that failure of a giant won’t put taxpayers or the economy at risk. He thinks shareholders and unsecured creditors should bear the risk of failure, as if something has changed, and the financial elites will just accept their losses and not demand taxpayer bail-outs. He is arguing for tweaks to the current system which failed so dramatically. He makes this explicit when he says that regulators did a bad job. I like this one: “…insurance regulators were essentially unaware of large and growing one-sided credit insurance and credit derivative bets by some companies…. (p.9)

He also says he supported proposals to move towards clearinghouses for credit default swaps and other derivatives. That’s not quite what he told the NYT. He told them that requiring all derivatives to trade through clearinghouses would cause a material loss in revenues to his bank.

Historically, financial markets fail to control stupid excess. In times when there was no regulation, such as the 1890s and the 1920s, financial markets crashed. In times when there is serious regulation, like the 1950s, the economy goes up and down, but the financial markets don’t crash. When regulation is shoddy to non-existent, as in the 2000s, financial markets crash.

But that’s just history. Mr. Dimon is sure it won’t happen again.

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