JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon’s public questioning of Federal Reserve Chairman Ben S. Bernanke on bank regulatory costs has “thrown down the gauntlet” in the industry’s increasingly aggressive fight to curb higher capital requirements and other rules.
“They threw out the first ball, now can they play the game?” said William Poole, former president of the Federal Reserve Bank of St. Louis, in an interview yesterday. “How persuasively can Dimon and others make their case?”
Dimon, head of the most profitable U.S. bank, took an unusual step in pressing Bernanke in a public forum on June 7 on whether regulators have gone too far in reining in the U.S. banking system and are slowing economic growth. The U.S. unemployment rate rose to 9.1 percent in May as the S&P/Case-Shiller index of property values in 20 cities showed that U.S. home prices slumped in March to their lowest since 2003.
Poole, who warned of Fannie Mae’s and Freddie Mac’s risks years before the mortgage giants collapsed and who also supports higher capital requirements for banks, said Dimon had a valid point. Excessive regulation in the U.S. is slowing the economic recovery, Poole said.
“The issue is whether intellectual leaders across a wide variety of industries, think tanks can be persuaded,” Poole said. “He’s thrown down the gauntlet. Now what is needed are detailed studies of the costs of regulations.”
An unprecedented bailout of the financial system in 2008 spurred Congress to pass hundreds of rules last year as part of the Dodd-Frank Act. Bank regulators worldwide also are devising new capital requirements. After Republicans won control of the U.S. House of Representatives last year, banks have stepped up their fight to blunt or head off the rules.
Dimon, 55, asked Bernanke if he’s concerned that overzealous regulation will stymie an economic rebound.
“I have a great fear someone’s going to try to write a book in 20 years, and the book is going to talk about all the things that we did in the middle of the crisis to actually slow down recovery,” Dimon told the Fed chairman during a conference of bankers in Atlanta.
Bernanke, 57, said Dimon’s points are valid and that the Fed lacks the quantitative tools to study the net impact of all the regulatory and market changes over the past three years.
“It’s too complicated,” Bernanke said, adding that he thinks there’s a way to safely regulate banks while preserving their ability to deliver “basic financial services.”
Federal Deposit Insurance Corp. Chairman Sheila Bair, when asked about Dimon’s comments in New York today, defended higher capital buffers for the biggest banks and said U.S. regulators must guard against pressure to ease up on oversight as the nation recovers from the 2008 credit crisis.
“I see a lot of amnesia setting in now,” Bair said today during a question-and-answer session at the Council on Foreign Relations. “Banks are not doing a lot of lending now, and the ones that are doing the better job of lending are the smaller institutions that have the higher capital levels.”
Dimon once labeled as President Barack Obama’s “favorite banker” by the New York Times. The CEO's public challenge to Bernanke was privately cheered by Wall Street peers, with senior executives at four rival firms saying they agreed with his point about the dangers of over-regulation. One of the four, who spoke anonymously because they weren’t authorized to comment, said Dimon’s complaint may become counterproductive by leading to a backlash against bankers.
A fifth executive, who said government regulatory efforts aren’t excessive, said Dimon’s stature in the industry grants him the confidence and clout to challenge Bernanke.
“Wall Street has no friends, and the banks have no friends, and Jamie Dimon is out there as kind of a lightning rod when he says things like this,” said Michael Holland, who oversees more than $4 billion in assets at New York-based Holland & Co.
JPMorgan, which has fallen 4.8 percent this year on the New York Stock Exchange, is Holland’s only bank holding.
“Jamie Dimon has raised the issue in a very public forum that people in Washington are part of the problem, not part of the solution,” Holland said in a phone interview. “It’s unfortunate that the environment is so poisoned that people can’t even raise the question.”
Howard Opinsky, a JPMorgan spokesman, and the Fed’s David Skidmore declined to comment.
Dimon, who often says JPMorgan maintains a “fortress” balance sheet, is one of a few bank CEOs with the moxie and standing to openly criticize the Fed, according industry analysts including FBR Capital Markets’ Paul Miller, a former examiner for the Federal Reserve Bank of Philadelphia.
$20 Billion Profit
JPMorgan was the only major U.S. financial firm to remain profitable throughout the recession and was among the first to repay the U.S. Treasury Department’s Troubled Asset Relief Program. Dimon, who’s also JPMorgan’s chairman, said he took the $25 billion to set an example, not because the bank needed it.
Profit at the New York-based company will top $20 billion in 2011, according to the average estimate of 22 analysts surveyed by Bloomberg. That would make JPMorgan the first U.S. bank to do so since 2006, when Citigroup Inc. earned $21.5 billion under then-CEO Charles O. “Chuck” Prince.
“What else does he have to lose?” Miller said of Dimon. “He played nice as much as he could and got nothing out of it. They are coming out with more and more rules every day that are just going to affect him negatively.”
Miller cited a U.S. Senate vote yesterday as an example of the industry’s waning influence in Washington. The Senate rejected a proposal to delay rules set to take effect July 21 that limit the so-called swipe fees banks collect on debit-card transactions. The Fed’s proposed caps would reduce annual revenue at the biggest U.S. lenders by about $12 billion.
Bank lobbyists have fought other parts of Dodd-Frank to blunt its impact on business. They argue that a new Consumer Financial Protection Bureau, being set up by Obama adviser Elizabeth Warren, may make demands that threaten firms’ soundness, if separate from prudential regulators. Last month, 44 Republicans wrote to Obama saying they wouldn’t vote to confirm anyone as director without changes to its structure. Wall Street lobbyists have also sought to shape sweeping rules for over-the-counter derivatives.
The exchange with Bernanke gave other bankers, hesitant to wage a public war with their main regulators, cover to criticize proposed international capital standards that would impose a 3 percent surcharge on top of a 7 percent minimum requirement on the largest global systemically important financial institutions, or SIFIs. The rules are being drafted by a group of bank regulators who are scheduled to decide on a preliminary plan later this month and present their final proposal to the G-20 group of nations in July.
“It feels like we’re going a little bit too far,” Wells Fargo & Co. Chief Financial Officer Timothy Sloan said at an investor conference yesterday, referring to the proposal.
Barclays Plc CEO Robert Diamond told lawmakers in London yesterday that 10 percent may be too much.
“I do worry that we’re making some of the capital levels too high,” said Diamond, 59.
Dimon may face a backlash from the public, which views bankers as overpaid, under-regulated and responsible for the worst economic slump since the Depression. Only 1.8 million of the more than 8.7 million U.S. jobs lost since January 2008 have been regained. Dimon was awarded $23 million for his performance last year. Bernanke’s salary was $199,700.
“How can he ask this with a straight face?” Grahame Freeland, 62, an accountant in Toronto, said in an e-mail. “Unbelievable hypocrisy, nothing has really changed. This man, who went to the trough on taxpayers’ money, has the nerve to question the minimal controls Bernanke is pushing for!”
While JPMorgan may be popular on Wall Street, the institution isn’t as well regarded as Bernanke, according to a Bloomberg poll of 1,263 traders, investors and analysts surveyed last month. JPMorgan was viewed favorably by 57 percent of respondents, compared with 64 percent for Bernanke. The public’s estimation of the industry is less favorable.
“Across the board, there’s still high negative perceptions of big banks and Wall Street among voters,” said Corry Schiermeyer, spokeswoman for pollster IBOPE Zogby International in Utica, New York. “The majorities of voters polled have said they would like to see stronger regulation of the banks.”
Dimon’s confrontation with Bernanke may foreshadow a House Financial Services Committee hearing next week on international financial regulatory coordination. Federal Reserve Board Governor Daniel Tarullo and a senior JPMorgan executive are among those tentatively scheduled to testify, according to two people familiar with the matter.
Dimon’s position on the board of the Federal Reserve Bank of New York, as well as at the helm of the nation’s second-largest bank by assets, should give him access to Fed officials without airing his complaints in public.
“Most bankers operate behind the scenes,” said FBR’s Miller. “Why did Jamie feel he had to come out public with this? Is he not getting any satisfaction behind the scenes, because you would think he has access.”