Dimon at the Bat for Big Banks

The JPMorgan CEO is caught between officials and shareholders on too big to fail. He should keep swinging.

If there's one person with the credentials to defend the right of too-big-to-fail banks to exist, it's probably Jamie Dimon. 

During JPMorgan Chase's investor day in February, the issue came up when analyst Mike Mayo asked Dimon about it. You would think this would be a softball of a question for the CEO of one of the nation's largest banks, and what better slugger to be at the plate than Dimon? Sure enough, he took some giant swings. And, well, while it may be an exaggeration to say the Mighty Casey struck out this time, it's also safe to say he didn't exactly rip the cover off the ball. 

From the transcript:

Mike Mayo: If I wanted to explain to my mother-in-law why being a big bank is good, in simple terms your best argument, what would be your answer?
Dimon: A 787 is a good airplane, it is very safe. If you want to try to explain to your mother, how the lithium battery or the turbine...
Mayo: My mother-in-law. 
Dimon: ...engine, that's really hard to do. And that's -- we have a hard time explaining those things to the public. We make loans. We help  companies. We help communities. We were a rock of Gibraltar in the tough times.

He went on to use JPMorgan's purchase of Bear Stearns and Washington Mutual during the financial crisis as an example of the firm's stabilizing influence and outlined all the roles the bank plays in servicing smaller banks as well as cities, schools, states and hospitals.

Who knows, maybe Mayo's mother -- or even mother-in-law 1 -- would be impressed by this, but there are more  important parties looking to carve up big banks and the buzz of their chain saws is growing louder and louder.

That buzz is coming from two sides now. In addition to those motivated by a desire to make the financial system safer, like Bernie Sanders and Minneapolis Federal Reserve President Neel "I'm the guy who bailed out the banks" Kashkari, even some JPMorgan shareholders are now wondering whether they'd be better off if the bank split up. (Citigroup could come under similar or worse pressure, considering it doesn't have a relatively well-performing share price to use in its defense.)

Divergent Paths

JPMorgan shares have kept pace with the market since the end of 2007, which may provide the bank a stronger defense than Citigroup when it comes to resisting shareholder pressure to break up

Source: Bloomberg

The JPMorgan shareholders want an independent study of whether the bank should separate into one company focused on traditional consumer and business banking and a separate investment bank and trading firm. JPMorgan, not surprisingly, is advising shareholders to vote against that proposal and another to split the chairman and CEO roles.

We wouldn't bet too much money that the proposal to study a breakup will pass. However, this type of expert, independent deep dive into the issue is exactly what this debate needs. As the proponents of the study said: “We recognize management opposes a breakup on the grounds of value generated by scale and synergy. Ideally, such arguments will withstand the scrutiny of an independent study.”

The problem, as Dimon hinted at, is that for an industry built on data and hard numbers, it's hard to prove quantitatively why individual companies -- not to mention the entire financial system and overall economy -- would be better off if big banks were broken up. Dimon clearly gave the issue more thought and devoted a lot of words to it in his letter to shareholders in the firm's annual report released Wednesday.

In one argument, he elaborated on the idea that the little lenders need big banks like JPMorgan to keep them going, detailing services provided to 339 small banks and 10 credit unions such as financing to facilitate everything from cash management and trading to raising capital.
He pointed out that the five largest banks in the U.S. are actually less dominant than the biggest lenders in other countries: 

Top Five

Some nations' banking sectors are even more dominated by the largest lenders, according to JPMorgan

Source: JPMorgan Chase annual report

This argument became almost Donald Trump-like in its warning that if large U.S. banks aren't allowed to be diversified and competitive, China's banks could take over as the dominant players in international finance: "I do not want any American to look back in 20 years and try to figure out how and why America’s banks lost the leadership position in financial services."

Both of these are somewhat compelling arguments, but again more study and data are needed. Kashkari just this week held a town hall Q&A session and his response to bankers worried about international competitiveness was, literally, "too bad." 

"It's almost as though European citizens and voters have just accepted that their banks are too big to fail and it's just a way of life," he said. "I don't accept that for us. I think we can do better." 

Ultimately, proving which side is right may be impossible to do with cold hard figures, so rhetorical skills may carry the day.

It would be illuminating to hear Dimon and Kashkari debate these issues head-to-head. Alas, Kashkari invited large banks to his recent too-big-to-fail forum, but they declined. If another invitation arrives, we'd like to see the Mighty Casey step up to the plate. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
  1. From our experience, the mother-in-law is always a harder sell. 

To contact the author of this story:
Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net

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