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Wednesday, 11 March 2009


Larry Roibal ballpoint on newsprint sketch of JAMES DIMON CEO JP MORGAN CHASE
If any banker has succeeded in remaining above the carnage, and to the extent of, marvel of marvels, beinmg considered a hero of the hour it is Jamie Dimon, CEO of JPMC ($2.2 trillion assets). I watched him today give a judicious rabble-rousing confidence-boosting speech about our prospects of getting out of the credit crunch and recession crisis. He message was refreshingly simple, "THE TIME FOR NEW IDEAS IS OVER" going on to say that the ideas currently being proceeded with a good enough, not perfect, but if the government, US Treasury and Federal Reserve work well together, and Congress and Senate pull together and stop being a 'House divided', we'll be out of the worst and winning this by the end of the year, 'one of few defining moments in American history' equivalent to an war economy emergency. He had a clear idea of the three-pronged assault: $5 trillions in liquidity measures, TALF of so far $1 trillion in toxic asset funded sales and work-out, plus TARP $0.75tn, $1 trillion in credit insurance guarantees = 55% ratio to US GDP. He could have added $1-2 trillion in fiscal deficit, and a few trillions more in asset protection swaps for bank funding (by my reckoning, $3-4 trillions)over 2 years = total of 82% ratio to GDP, but 70% of it off-budget. If the auhorities continue with their current plans, including managing mortgage defaults by a waterfall system that goes through various contractual adjustment options to get monthly payments down to at most 31% of borrowers' legally verified income. It helps that Jamie Dimon has a look and demeanour of a cross between funny but politically-savvy talk-show hosts, David Letterman and Jon Stewart. He can take technically complex issues and make them easy to think they are well enough understood to be televisual and readily commanded with gusto, which is not how most experts ever discuss fair value mark to market accounting! Dimon talks expansively about reform priorities that he sees including doing something about the fragmntation of regulation, also sticking with mark-to-market accounting, but only where it strictly belongs, within bounds of elsewhere sticking with traditional custom of not applying M2M were it doesn't belong i.e. long term investments, inventory and loan accounting, and investment funds shouldn't be adding to volatility by reporting M2M valuations constantly. Some things he clearly sees as problems for next year, not worth getting to grips with just now when the only show in town should be to win through out of the present recession and credit crunch. He acknowledges there is too much accounting flexibility in market risk trading books and this needs severe tightening up - the problem that wiped the share value of Bear Stearns. he believes strongly in the wake-up call of strtes-testing and acknowledges how challenging that is for the banks. He also clearly believes in forensic due diligence accounting. This follows from JP Morgan's culture, and that of Chemical Chase too. These firms were among the leaders in the late 80s in using high powered computing for risk correlation of volatility VaR analysis, across and between all tradable instruments and asset classes. Unfortunately it did not continue on that path long enough and led the charge into derivatives and ultimately also into structured products. JP Morgan has had risk culture as central to its brand immage for decades. Dimon says it is policy at the bank to be afraid. In recent year the bank has been engaged in integrating and networking all its accounting systems onto a high quality common platform. It remains to be seen how well that translates into holistic risk management and economic capital performance. The clues of success are not yet there in its Pillar III public risk statements, but it is noteworthy that despite acquisitions it has a high reserve capital ratio of over 12% to risk-weighted assets, and after taking $35 bn in writedowns and credit losses or 3% of its $1.2tn assets, but that is probably just about the funding support it received from Government. Its share price has largely fallen because its quartely profits have fallen by three-quarters, but any profit is good performance. It should be generating $4bn quarterly net income, over half of it net interest, but is running with about $3bn crystallizing in quarterly credit risk impairments - still very healthy in my view. Basel II he says needs major improvement by the addition of Liquidity Risk (something he may have missed in the regulations literature, or something he wants to see translated into systematic technical detail, not just principles, however prudential and mandatory?) Liquidity management must be a major focus right now in the bank, and if done properly in all and every part of it, monitored in real time every which way on a super-computing platform. He expects to see securitizations become more plain vanilla with originators and arrangers remaining at the table of the issues much as syndicated loan lead arrangers do - a point that goes straight to what brought down lehman Brothers. He and his bank have worked closely with the authorities and the administration, which is one reason for his bank's relative success. He emphasised that JPMC works "on the ground" in 60 countries, which implies of course the emerging markets and global reach that protected HSBC and Santander and Standard Chartered from the credit crunch in North America and Europe. He didn't say that, but it was a message. He said the US Treasury and The fed asked JPMC to take over Bear Stearns, a tough call, but like WaMu too, this is working out. This is important for JPMC's current share price that has slalomed since September when Lehman Brothers was allowed to collapse. I noticed he did not say that the work-out of unravelling the derivatives exposures of Lehmans was going well and causing far less embarassments than expected, as some people do. He also did not mention AIG, the other spider in the cobweb of CDOs and CDS that is thought to be heavily risk-networked to JPMC. But actually, just as the Federal support to JPMC for absorbing Bear Stearns has never been disclosed (somewhere north of $30bn) so too has the ripple through to JPMC of positive cash-flow from funding of AIG or how Lehmans residual exposures have been netted off. He had an interesting back-hand swipe at ABS investors for complaining overmuch about trivialities in their uncertain cash-flows "get over it!" The implication, which I fully agree with as with much else he said or implied, is that direct ABS investors are actually doing relatively well compared to the generality and still earning more than reasonable cash-flow returns when base-rates are at historical lows. Also, of course, foreign investors are doing especially well out of the high $ exchange rate on their ABS interest-income. He delivered a big paeon of praise for Hank Paulson and Ben Bernanke for not be standing back, for getting stuck and fighting the good fight! Jamie Dimon has long had a reputation for being one of the best numbers men around. Whatever he says of the bank's performance or of its acquisitions representing good long-term value, Wall Street listens. Lloyds Banking Group's Eric Daniels has a right to, the skill too, and could and should emulate Jamie Dimon more. jamies doesn't just step to the plate to swing for his bank but also for the American can do culture and for strongly endorsing government for doing exactly the right things with fortitude and intelligence. Gordon brown and Alistair Darling and mervyn King have proven themselves no less, and even been ahead of the curve, compared to their American counterpart colleagues. Those British bankers still standing should be playing the same stalwart innings as Dimon.
The 53-year-old, Noo Yoycker is second-generation Greek-American, has led JP Morgan for two years, steering the bank away from the reputational pitfalls of the credit crisis in a way that Thomas Lamont of JP Morgan would approve by keeping close to Government. In October 1929 in the midst of the collapse five of the country's most influential bankers hurried to the office of J. P. Morgan & Co., and after a brief conference gave out word that they believe the foundations of the market to be sound, that the market smash has been caused by technical rather than fundamental considerations, and that many sound stocks are selling too low. This caused a rally that lasted a day or two. This time round, Dimon is intelligently saying he dislikes making forecasts but if we all pull together and stop political bickering there will be recovery by next year, if not we face several years of severe problems i.e. the 1930s D-word. Dimon said of his own bank that how well it (and by implication all other banks) do is dependent on how long it takes for the economy to recover - and that much is of course exactly right. Today, JPMC and the other banks are crossing the 3% tail risk loss heading for over 5%, and thus we might expect to see JPM book another $30bn writedown and losses in 2009, but that will be easily absorbed within the bank's capital reserves. Dimon's career is the stuff of Wall Street legend. He began with a degree in biology and economics at Tufts, before MBA at Harvard. He befriended and worked with Sandy Weil for 16 years before parting of ways in dark circumstances; Dimon was sacked for holding to a point of moral principle. He became CEO of Bank One, becoming President of JP Morgan Chase when it bought the bank after the recession. He said today that half of all financial crises and recessions involve property collapses, and that is probably what hit Banc One. Despite taking home some tens of $millions in salary, Dimon is not vulgar with it. On bonus-culture he sayd JPM always rewarded on long term performance, not for "hitting a home run", and not just for financial performance either, which suggests a partnership waterfall trickle down system? It seems as if the government's proposals for reforming remuneration systems will take a leaf out of JPM's policy.
Dimon is pugnacious, direct dealing, who, according to The Times, "can punch the air to punctuate his shouts", and "he invests heavily in philanthropy, does not play golf and is known as a family man who likes nothing more than playing tennis with his three daughters". Those are skills they should teach more of at Harvard.
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