By Paula Dwyer
Today's Bloomberg View editorial on taxpayer subsidies for large banks, including JPMorgan Chase & Co., came up at this morning's House Financial Services Committee hearing with JPMorgan Chief Executive Officer Jamie Dimon. Representative Brad Sherman, a California Democrat, asked Dimon if his bank qualifies as "too big to fail," as the subsidy seems to indicate, citing the editorial.
Dimon said he disagreed with the conclusion that his bank gets a subsidy in the form of lower borrowing costs. He also argued that his bank's bigness was beneficial in the financial meltdown. Here's the exchange:
SHERMAN: Now, I'd like to, without objection, put in the record an editorial by the wild socialists over at Bloomberg. They point to a study just published by the IMF that says that your bank enjoys a $14 billion subsidy, that its cost of funds is some 0.8 percent lower because of the implicit federal guarantee. What we saw in 2008 is a belief around the world that if a bank your size was going to go under there would be a bailout, not just of insured depositors, but of all creditors. And that belief, which reduces your costs by 0.8 percent of your total funds, is responsible for $14 billion.
You are in a position where you are simply too big to fail. You lost $2 billion or some multiple of that. You happen to be very well financed. But you bet over $300 billion. You're lucky and fortunate and wise that you didn't lose more. Can you say on behalf of all the banks with over $100 billion in assets that all of them could have survived a mistake this size? The question is, why should we allow you to be so big that if you go under we are going to have to bail out your creditors?
DIMON: So banks should take risks relative to their size and capability. So you can't compare all the banks. And I would venture -- and I'm not going to change what you believe -- but a lot of banks were a port in the storm. I know it's convenient to blame them all for everything. But JPMorgan's size and capability and diversification in '08, '09 and 2010 allowed us to continue to do the things that you wanted us to do. We never stopped making loans. We bought Bear Stearns at the request of the United States government. We helped the FDIC fund by buying [Washington Mutual]. We lent money to California, New Jersey. It allowed us to do it. So we try to be a conservative company that does the right thing. Every now and then we make mistakes.
SHERMAN: And how can medium size banks compete against you when your cost of capital is reduced by 80 basis points, 0.8 percent, because of a belief that if they go under we'll let 'em go under, but if you go under we'll bail out your creditors?
DIMON: And I don't believe that's true. I'm going to give you two facts, if you don't mind. Fact number one is, we borrow in the marketplace, unsecured, with the smartest people in the world. It costs us 200 basis points over Treasury. It costs the average single A industrial like 100 basis points over Treasury. So if everyone's so smart and knew that we're too big to fail, we'd be trading at 10 basis points over Treasury.
SHERMAN: Well, after you lost all that money in London, I would expect that creditors would be reluctant to loan to you.
DIMON: Most of that $350 billion predominantly is in the United States, it's not in London. Most of it's here. The second is the FDIC report, which looks at average funding costs, because we have studied this report a way back, and almost all of it, if I remember correctly, was related to mix. We're a money center bank. We have a tremendous sum of money which we keep very short term and overnight, which costs us very little right now, because of the way the yield curve is. But we're the checking account for large corporations, including some nations, and so we invest that money very short and make almost no money on it. It shows up as a low funding cost, but our actual cost of funds for retail deposits, middle market deposits and negotiated deposits is probably pretty much like everybody else.
SHERMAN: There isn't a small- or medium-size banker who agrees with you.
(Paula Dwyer is a member of the Bloomberg View editorial board. Follow her on Twitter.)-0- Jun/19/2012 20:42 GMT