I’m not a huge fan of Roger Lowenstein’s NYT Magazine piece on Jamie Dimon, which comes complete with a positively glowing cover photo. It seems altogether too sympathetic to the man—who is, it must be said, a good banker—while failing to make the point that we can’t regulate a banking system on the assumption that the biggest banks will always be run by good bankers.
Dimon gave Lowenstein a very impressive degree of access for this article and from a PR perspective that decision makes perfect sense. Dimon is a good bank CEO and can make a very credible case that he’s part of the solution rather than part of the problem. One can’t necessarily blame Dimon for taking the banker-bashing personally—but I think it’s fair to blame Lowenstein for failing to point out that Dimon’s “l’état, c’est moi” attitude is itself problematic. The problems with megabanks like JP Morgan are not problems that Dimon or anybody else can solve: they’re endemic to any bank with assets of $2 trillion and growing. Here’s Lowenstein, on Dimon:
He was adamant that government officials — he seemed to include President Obama — have been unfairly tarring all bankers indiscriminately. “It’s harmful, it’s unfair and it leads to bad policy,” he told me again and again. It’s a subject that makes him boil, because Dimon’s career has been all about being discriminating — about weighing this or that particular risk, sifting through the merits of this or that loan.
The point here, surely, is that government has to be indiscriminate when it comes to bank regulation. Yes, on a case-by-case basis, the government can play favorites—and indeed it did so, during the crisis, when it engineered the transfer of both Bear Stearns and Washington Mutual into Dimon’s safe pair of hands. But equally the government can’t soft-pedal its regulation of banks and bankers on the grounds that one particular banker happens to have come out of the crisis with his reputation for risk management largely intact.
Lowenstein continues:
There are, believe it or not, reasons for wanting banks to be big, including safety. A large bank with many loans is less prone to failure than, say, a bank in Texas that lends to only oil drillers. For related reasons, as a bank gets bigger, its credit will generally be stronger, its borrowing costs lower. But as Dimon points out, banking also suffers from diseconomies of scale, like the lack of attention to detail and the “hubris” that can undermine a large organization. Such sins are precisely what crippled Citigroup and A.I.G. Nonetheless, Dimon insists that for a bank that gets it right, the positives of consolidation are overwhelming. Since J. P. Morgan’s acquisition, in 2008, of Washington Mutual, each Chase branch spends $1 million less on overhead and technology than it did before.
This is too credulous. Yes, big banks are less prone to failure than small banks—but that just makes them more dangerous, from a systemic perspective. If a lender to Texan oil drillers goes bust, the systemic repercussions are de minimis. If Citigroup or AIG goes bust, the whole world feels the impact. If a lot of small banks all make very similar loans to very similar people, then they can collectively approach the systemic impact of one large bank—but even then they won’t be so interconnected and so international that taxpayers are essentially forced to bail them out.
And I really don’t know what to make of that $1 million a year figure. If it’s true, it implies that Chase was a very inefficient retail bank and that Dimon was not half as good at running it as he’d like us to think. It also means that if small banks and credit unions found it hard to compete with Chase before, they’ll find it impossible to compete with Chase now. But I do wish I knew where the number came from, because I have to admit I’m suspicious.
Lowenstein then lauds Dimon’s exceptional risk-management skills:
That he manages to be the exception to the rule is a credit to his radar for trouble. Judy, his wife, whom he met at Harvard, claims he has an instinct for danger. Jay Fishman, who worked with Dimon in the ’90s (today he is chief executive of Travelers), says: “Jamie has a healthy regard for the idea that we will go through crises and that we will be lousy at predicting them. The flip side is he will run his businesses more carefully.” In the early ’90s, when banks were racking up huge losses in commercial real estate, Dimon ordered Fishman to study what would happen to Primerica if Citibank should fail. It was the sort of far-fetched risk that no other banker would worry about. A few years later, Primerica acquired Travelers, which had been weakened by Hurricane Andrew. Dimon demanded to see the catastrophe risk in every region the firm covered. Dimon did not have day-to-day control over insurance, but he routinely trespassed over organizational charts. He told Fishman to limit his exposure so that even a once-in-a-century storm would not cost the company more than a single quarter’s earnings. That was a highly unusual, and unusually conservative, approach.
THIS FALL, DIMON SPOKE at a conference sponsored by Barclays Capital: a thousand people crammed into the ballroom at a Manhattan Sheraton to hear him. The master of ceremonies began by noting that Dimon was also the lunchtime speaker at the conference in 2006, just before the mortgage bubble burst. It was interesting to recall, he said, who else spoke then: Kerry Killinger, the chief executive of Washington Mutual; Michael Perry, chairman of IndyMac; as well as executives from the subprime lender Countrywide Financial and Lehman Brothers. “Jamie told us that day about subprime exposure — his was the first major bank to talk about that,” the master of ceremonies said. “All of those other firms disappeared.”
What Lowenstein doesn’t do, at this point, is talk about how all this only serves to underscore how weak the U.S. banking system’s risk-management systems are: JP Morgan Chase survived in large part thanks only because it was lucky enough to have Dimon at its helm. If Stan O’Neal had been in charge, things would have turned out very differently indeed. As a result, it becomes not only sensible but necessary to hobble JP Morgan more than Dimon feels is warranted. You don’t set speed limits on the basis of how fast the very best drivers can safely travel.
Lowenstein shows just how uncritical he’s being in his section on credit cards:
Dimon laments that people — he means the Congress — don’t really understand the credit-card business. Last year, Congress enacted a law that restricted pricing flexibility — for instance, banks must give a 45-day notice before raising their rates, even when a borrower misses a payment. The legislation was meant to prevent sudden interest-rate increases that had caught cardholders unawares.
Dimon argues that all businesses charge for some things and not for others. For instance, restaurants give you the tablecloth and the silverware free and “mark up” the food. (Dimon loves to illustrate banking verities with examples from more familiar, and less threatening, industries.) Credit-card companies provide a service — convenience — “free,” but the business entails significant risks. In a typical month, Chase lends $140 billion to people, with no form of security. The bank earns interest on those loans, of course, but it has to pay expenses and eat the bills of cardholders who fail to pay them back. Before the bust, unpaid bills totaled roughly $6 billion; in 2009, when unemployment rose to double digits, credit-card losses soared to $18 billion, and the business plunged into the red. How to set rates that keep such a business both profitable and an attractive proposition for customers is what bankers do — or at least, what they try to do.
To compensate for its inability to quickly raise rates, Chase has decided to lessen its exposure by no longer offering cards to a portion of its customers that it deems the riskiest. This isn’t necessarily bad; if the mortgage mess taught us anything, it is that banks should exercise discipline.
It has been amply documented that exploding interest rates on credit cards are not a way of pricing the “significant risks” of default; instead, they’re a way of sweating the maximum amount of money out of borrowers so that when they do default, the card company has already made a tidy profit. If banks can no longer wring monster interest payments and penalties out of people who clearly can’t afford them, then sure, they’ll drop those people as customers—that’s the whole point and the intended effect of Congress’s intervention here. The discipline being exercised is in the law, not within the banks.
And then there’s this:
Dimon acknowledged to me that in Chase affidavits, individuals incorrectly said they had reviewed loan files when in fact they relied on the work of others. So far, he says, Chase has not found cases of homes foreclosed on in error; payments on its suspended foreclosures are, on average, 15 months overdue.
The implication here—that if a homeowner is in default, then they can’t be foreclosed on in error—is simply false. It doesn’t matter how overdue the mortgage payments are: if you don’t legitimately own the mortgage, then you can’t foreclose. But, of course, many banks do just that—including Chase.
Or there’s the literally parenthetical treatment of hedge funds:
Perhaps naïvely, he was disappointed that political concerns played a large role in shaping the legislation. (An example is that Dodd-Frank limited bank investment in hedge funds, even though the latter were peripheral to the crisis.)
For one thing, the crisis began with Bear Stearns’s investment in its own subprime funds going horribly wrong. But in any case, Dodd-Frank was always intended to prevent future crises, not the last one. And having banks invest in hedge funds can’t conceivably improve systemic stability. Banning investments in hedge funds is hardly a “political concern”—it’s an important way of keeping banks sticking to their knitting, rather than branching out into dangerous areas which can hole them below the water line.
Dimon’s clearly a charmer—it’s the only way to explain passages like these:
Bear Stearns modestly added to J. P. Morgan’s franchise (Dimon says he was largely motivated by a desire to ease the crisis)…
Dimon could remain at J. P. Morgan for another decade — he says he has forsaken any thought of public service.
I haven’t spent months following Jamie Dimon around private meetings and dinners, but how is it possible not to burst out laughing when Dimon says with a straight face that has forsaken any thought of public service? All powerful CEOs live in a reality-distorting bubble, of course, and I suppose it’s not Lowenstein’s job to puncture that bubble in the presence of such greatness. But really.
What I’d really like to see is some bonus online material, surrounding this episode:
The new “systemic regulator” that the Dodd-Frank act established is meant to unwind a failing institution without rewarding its creditors or investors. Dimon is a huge supporter of the concept. “No one should be too big to fail,” he tells me. And J. P. Morgan? “Right,” he says. “Morgan should have to file for bankruptcy.” Suddenly, he begins to scratch out how a putative bankruptcy of his company would look, dissecting the capital structure line by line.
Lowenstein leaves it there—with no indication whatsoever of how Dimon thinks a bank could ever successfully declare bankruptcy. It’s never happened before, and there’s a strong case to be made that, at least in the case of a big international bank like JP Morgan Chase, it can’t possibly happen in the future, either.
My biggest problem with Lowenstein’s piece is that he never really grapples with JP Morgan’s sheer enormity—the root cause of substantially all the enmity between Dimon and those who would seek to hobble his plans for global domination. Is JP Morgan too big to fail? If so—and surely the answer is yes—then how can Dimon justify its existence, or his own plans to make it even bigger? To read this profile, you’d be forgiven for thinking that if Dimon is qualified to run a big bank, he should be allowed to do so. But he shouldn’t—no one should—if the cost of failure, no matter how unlikely, is a massive taxpayer bailout and another devastating global recession.
Felix Salmon is a financial writer, editor, and podcaster. A former finance blogger for Reuters and Condé Nast Portfolio, his work can be found at publications including Slate and Wired, as well as his own Substack newsletter.