“If you want to speculate, don’t call yourself a bank, call yourself a hedge fund,” Clark said, in an interview with Bloomberg Television’s Erik Schatzker a day before Dimon announced a $2 billion loss at JPMorgan Chase & Co. “A huge portion of Wall Street’s earnings were built around the model of ‘I’m going to bet against my clients.’”
Clark’s “old-fashioned” approach of lending money to businesses and consumers has helped Canada’s second-biggest bank post a three-year return that is 11 times higher than JPMorgan’s, with almost half the volatility. Toronto-Dominion is among four Canadian banks that rank among the world’s 10 strongest, based on a survey by Bloomberg Markets magazine this month.
Dimon, chief executive officer of JPMorgan (JPM), said the trades at the chief investment office unit that led to the loss may not break the Volcker rules on proprietary trading, though they go against his own guidelines at the New York-based bank.
“We do believe you need to have the ability to hedge in a CIO-type position, and that Volcker allows that,” he said on a May 10 conference call. “This trading may not violate the Volcker rule, but it violates the Dimon principle.”
Dimon, 56, told investors that his bank took flawed positions on synthetic credit securities, which may cost the lender an additional $1 billion this quarter or next. JPMorgan plunged 9.3 percent on May 11, the biggest drop since Aug. 8.
Dimon said yesterday he was “dead wrong” in initially dismissing news reports scrutinizing trades that led to the loss and that the incident gives ammunition to proponents of tighter regulations.
“This is a very unfortunate and inopportune time to have this kind of mistake,” Dimon said in an interview broadcast on NBC’s “Meet the Press.” After news broke on the magnitude of the bank’s bets, “we got very defensive, and people started justifying everything we did,” he said.
Clark, without referring specifically to JPMorgan, said banks should stick to what he calls old-fashioned banking and avoid speculative bets with the lenders’ own money.
“What fundamentally happened in the mid-90s is that banks -- particularly the ones that were securities dealers -- started to drift away from saying ‘I’m here to help my clients,’ to saying ‘Geez, I can make money taking deposits and investing them and speculating with them and get proprietary profits’,” said Clark, 64. “I think it’s a very unfortunate drift.”
By recording fewer writedowns than his peers and not needing government bailouts during the financial crisis, Clark’s Toronto-Dominion was named the fourth-strongest bank in the world in a ranking by Bloomberg Markets magazine. JPMorgan, the largest and most profitable U.S. bank, was ranked 13th.
Clark cites Canada’s principle-based regulations and high capital requirements with helping the country’s lenders avoid the losses that have hurt banks in the U.S. and Europe. Canada’s financial system has been named the soundest for four straight years by the Geneva-based World Economic Forum.
The Canadian banking model has “much closer attention paid to the core banking operations, the traditional things that banking does,” said Kurt Schacht, a managing director at the CFA Institute in New York. “Everybody likes that and I hear people kind of constantly point north and say ‘why can’t we get it right like the Canadians got it right?”’
Clark, who has spent about $25 billion expanding into the U.S. over the past six years, said Toronto-Dominion has a consumer bank focus that puts clients’ needs before those of bankers and short-term investors. The bank, which has more branches in the U.S. than in Canada, exited a structured-products business that included collateralized debt obligations in 2005 because Clark said he didn’t understand the risks associated with it.
“The irony is that if you actually do that, I think shareholders turn out to be better served in the long run,” said Clark. “You should get up every morning and say ‘my job is to figure out how my client can make more money, and I know that I’ll be rewarded doing that.”’
Toronto-Dominion climbed 78 percent over the last three years, compared with a 9.2 percent gain for JPMorgan. In addition, TD had a risk-adjusted return of 3.71 percent over the period, compared to 0.3 percent at JPMorgan. Toronto-Dominion is one of just four banks rated Aaa by Moody’s Investors Service, three notches higher than JPMorgan.
Clark, who became CEO in 2002 and said this year he is in his “final years” at the head of Toronto-Dominion, said he’s in favor of the world’s largest banks paying capital surcharges as a cushion against potential drops.
“It makes me a little unpopular with my colleagues,” said Clark. “I do think we have to recognize that as you get bigger and bigger and more complex -- and I think that most people would say it’s the complexity that’s the issue less than pure size -- the consequences of you getting it wrong for society are larger.”
Dimon is among executives who say that excessive capital surcharges on the largest banks could limit lending. JPMorgan may face a top capital surcharge of 2.5 percentage points, according to a provisional list prepared by global regulators and obtained by Bloomberg News last year.
The list was drawn up as part of plans by the Group of 20 nations to force banks whose failure could damage the global economy to boost their reserves by 1 to 2.5 percentage points above minimum levels agreed on by international regulators.
Clark Versus Dimon
Clark and Dimon also differ on proposed regulations such as the Volcker rule that would limit banks’ proprietary trading. Clark says there is tension between “old-fashioned” bankers and those opposing Volcker and new capital requirements under Basel III.
“There’s tremendous regulatory pressure to say ‘why don’t you get back to old-fashioned banking?’ Clark said from a bank branch below his Toronto office on Bay Street. “And I think there’s some of us that cheer that and say that’s fundamentally right.”
Dimon has said the Volcker rule places domestic banks at a disadvantage to foreign rivals that aren’t subject to the same restrictions in their home countries. The ban, named after former U.S. Federal Reserve Chairman Paul Volcker, is part of the Dodd-Frank financial-reform law.
JPMorgan spokesman Joseph Evangelisti didn’t return a phone call seeking comment.
Clark called Dimon “a phenomenal banker.”
“If we had to choose, most people would choose him and not me,” Clark said, adding that regulators are trying to get JPMorgan and others to change the business model.
“Do I think 10 years from now JPMorgan will be out of business because of Basel III? No,” said Clark. “They’ll figure out another way to make money, but in a way that may be more investing in the economy and less speculating against competitors.”