Key Pieces of Dimon's Annual Letter: Risks, Rates and Trading

Jamie Dimon: Fed May Raise Rates Too Fast
  • Brexit outcomes are `large and potentially unknown,' he says
  • He and Pinto list areas where investment bank is recruiting

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon used his annual letter to shareholders to warn about emerging geopolitical risks, predict U.S. interest rates are more likely to rise -- potentially too fast -- than go negative, and explain why he’s standing by certain types of trading while rivals pull back.

Here are some key passages of his 50-page letter, which in the past has often stoked debates on Wall Street, as well as Washington and beyond.

Jamie Dimon
Jamie Dimon
Photographer: Andrew Harrer/Bloomberg

Brexit Risks

If Britain decides in its June referendum to leave the European Union, the outcomes are “large and potentially unknown,” Dimon wrote. In the best-case scenario, Britain quickly renegotiates hundreds of trade agreements with the EU and countries around the world. “Even this scenario will result in years of uncertainty, and this uncertainty will hurt the economies of both Britain and the European Union,” he said.

But in one bad scenario -- “and this is not the worst-case scenario,” he said -- the exit would trigger trade retaliation against Britain by EU countries, hurting both sides. “It is hard to determine if the long-run impact would strengthen the European Union or cause it to break apart,” he said.

Brazil, Argentina

JPMorgan, which has made money in Brazil the past three years, could lose $2 billion under an extremely adverse scenario, Dimon said. The bank’s exposure to the South American country is about $11 billion, he said.

“We are not retreating” from Brazil, he said, “because the long-term prospects are probably fine -- and for decades to come.”

JPMorgan also has made a modest profit in Argentina for the past 10 years, despite the Latin America nation being “an example of terrible public policy,” he said. “This year, we took a little additional risk in Argentina with a special financing to help bring the country some stability and help get it back into the global markets,” he said, without elaborating.

U.S. Rates

Dimon, 60, said he isn’t worried that U.S. policy makers might resort to negative interest rates, as he cited job growth and consumer strength. Instead, he’s more concerned rates may rise faster than expected. Increasing consumer and business confidence could reduce investors’ demand for the “safe haven” of Treasuries, while the biggest buyers -- the Federal Reserve, foreign nations and commercial banks -- also recede, he wrote.

“If this scenario were to happen with interest rates on 10-year Treasuries on the rise, the result is unlikely to be as smooth as we all might hope for,” Dimon wrote.

Standing by Trading

Dimon posed this rhetorical question: Why is JPMorgan investing in sales and trading, as well as its investment bank, when some rivals are cutting back?

His answer: “Trading is an absolutely critical function in modern society -- for investors large and small and for corporations and governments. As the world grows, the absolute need for trading will increase globally as assets under management, trade, corporate clients and economies grow.” The business is cyclical, he said. But “we are convinced that our clients will continue to need broad services in all asset classes and that we have the scale to be profitable through the cycle.”

Still, “much of the investment we are making in sales and trading is in technology, both to adjust to new regulations and to make access to trading faster, cheaper and safer,” he said. The bank will keep investing in areas including electronic trading in currencies and commodities, analyst research and investment-banking coverage. That means recruiting senior bankers in areas such as energy, technology, health care and China.

The investment bank also is hiring in media and telecommunications and in places such as Germany and the U.K., according to a separate letter from Daniel Pinto, who runs JPMorgan’s Wall Street operations.

Revisiting Regulation

Financial regulations need to be revisited and subjected to a comprehensive review -- but not in the current political climate, Dimon said.

“We are not looking to rewrite or to start over at all -- just some modifications that make sense,” he wrote. For example, rules governing mortgage originations, servicing and securitization should be simplified, helping to “create a more active mortgage market at a lower cost to customers.”

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