Felix Salmon

Dimon vs Vickers

By Felix Salmon
September 12, 2011

It’s beyond ironic — closer to moronic, really — that Jamie Dimon would give an interview to London’s very own Financial Times, complaining that international bank-regulation standards are “anti-American,” on the very day that the Vickers ReportRobert Peston calls it “the most radical reform of British banks in a generation, and possibly ever” — is released.

It’s literally unthinkable that the US Treasury would ever dream of doing to JP Morgan what the UK Treasury, here, seems to want to do to the likes of Barclays and RBS. This is a Volcker Rule on steroids — all retail banking will be ring-fenced and forced to operate with enormous amounts of capital, much more than Dimon is complaining about. It’s essentially a break-up, in all but name, of the big banks with both retail arms and investment-banking operations. And it’s designed, quite explicitly, to strengthen the UK’s banking system by reducing the amount of risk and bolstering financial stability.

But Dimon doesn’t care about what’s going on in the UK. He’s just looking at Basel, which — incredibly — he wants the US to withdraw from.

“I’m very close to thinking the United States shouldn’t be in Basel any more. I would not have agreed to rules that are blatantly anti-American,” he said. “Our regulators should go there and say: ‘If it’s not in the interests of the United States, we’re not doing it’.”

I have no idea what Dimon thinks is anti-American about the Basel standards, which are certainly in the interests of the United States. In fact, by all accounts it was the US which was pushing for stricter rules, and had to compromise with the laxer Europeans, whose banks are much less well capitalized right now.

US banks, including JP Morgan with its “fortress balance sheet”, are very well placed to navigate through the Basel rules and come out strong and dominant on the other side. European banks, by contrast, will have to raise a lot of very expensive equity. And UK banks, if the Vickers proposals are adopted, will be much less formidable in the international arena than they are right now, with most of their assets ring-fenced and unavailable for merchant-banking misadventures.

And in any case, as we learned during the financial crisis, the world is so interconnected that whatever is good for the global banking system is good for the US banking system. Which point seems to be lost on Dimon:

“I think any American president, secretary of Treasury, regulator or other leader would want strong, healthy global financial firms and not think that somehow we should give up that position in the world and that would be good for your country,” said Mr Dimon.

This makes no sense. The more capital America’s banks have, the stronger and healthier they are, surely. Why would enhanced capital-adequacy standards mean giving up a position of having healthy banks? It would mean quite the opposite, it seems to me.

But I suspect that what Dimon is talking about here isn’t healthy banks, but rather healthy bank shareholders. He wants to go back to the casino model, with himself sitting in the role of the house which always wins. (Except when it loses, and is bailed out by the government.) The American president, secretary of Treasury, regulator or other leaders have no particular interest in seeing bank shareholders and employees make lots of money — that’s not what healthy banking is about. The best banks, indeed, are the invisible middlemen who make very little money.

Vickers understands that, as do the regulators at the Federal Reserve who helped to negotiate the Basel agreement. And in his heart of heart, Dimon probably does too. Not that he’d ever admit it.

11 comments so far | RSS Comments RSS

And ring fencing the retail banks in the UK would have stopped the collapse of Northern Rock, B&B, HBOS and RBS how exactly?

Posted by Danny_Black | Report as abusive

“And ring fencing the retail banks in the UK would have stopped the collapse of Northern Rock, B&B, HBOS and RBS how exactly?”

1. Is your argument “that wouldn’t have prevented everything, therefore it’s not worth doing”? Would ring-fencing have helped in any other situation?

2. Even after it all that has happened, would you argue that those banks should not have raised capital in 2007-August 2008? Because one part of ring-fencing is higher capital levels for the retail operations.

3. Reform of financial institutions isn’t about preventing the last crisis as it happened in the U.K., it’s trying to prevent future crises of uncertain character, including those that might not originate in, but are contagious to, retail operations of global financial institutions (see Citigroup for those fears).

4. Higher capital levels mean better funding availability for the retail operation and less chance of depositor run on the retail bank based on fears about the i-banking/broker-dealer arm. Avoiding a bank run usually means less public money at risk. It won’t stop true insolvency at the margins, but as you know illiquid can lead to insolvent, particularly in banks.

Since there appears to be some benefit to it, what are the downsides you see that overwhelm the upside? And please discuss in terms of benefit/harm to society overall, and not financial institution income statements.

Posted by SteveHamlin | Report as abusive

Dimon sounds like Baghdad Bob. Or Tokyo Rose. Does he not realize that by any sane measure BAC, C and WF are already insolvent?

Posted by lexalexander | Report as abusive

Dimon’s sheer gall is absolutely stunning to me.

My guess is that Jamie might have WAY more exposure to European banks through both his “fortress” balance sheet and off-balance sheet derivatives than he is willing to admit, and is worried that events are about to “hit the fan”, and so he’s preemptively lashing out like a cornered dog

Posted by EconMaverick | Report as abusive

Right on EconMaverick …

Felix, I appreciated this portion very much, as what a healthy banks should be would not be what this TBTF bank thinks… but also added {} a couple of words.

“The American president, secretary of Treasury, regulator or other leaders {SHOULD HAVE} have no particular interest in seeing bank shareholders and employees make lots of money — that’s not what healthy banking is about. The best banks, indeed, are the invisible middlemen who make very little money.”

Of course they want out of Basel. They can’t muster the capital. Unless putting their employees on the street does it, or adding new numbers of food stamps and of course, outsourcing more to the JP Morgan call center employee in India, but fear not, they also are lobbying heavily at home for less regulation and to stop that nasty interference into their involvement in the foreclosure scandal and robo-signing and know that the Fed teat, oops, cashier window is always open if exorbitant fees aren’t cutting it…

Posted by hsvkitty | Report as abusive

Jamie Dimon believes that socialism is only applicable to capitalists and capitalsim only applies to socialists.

He wants to have the ability to make unlimited profits in good times and have the government backstop his losses in bad times. In return, he is permitted to foreclose or liquidate people and entities that have borrowed from his bank, so the minions who are presumed to be sucking on the government’s teats are supposed to be put out of business or their assets taken away.

The primary outcoming of ring-fencing volcker rules is to prevent entities from getting to big to fail. It is unlikely that we would have needed anywhere near the amount of government intervention in 2008-2009 if the financial entities had distinct areas of specialization with little overlap. As far as I can tell, the only “negative” that would have ocurred in the prior years would have been less “innovation” that turned out to be toxic in the end.

Posted by ErnieD | Report as abusive

SteveHamlin, in answer to your questions:

1) No it clearly would not have helped. Two of the four banks that failed were solely retail operations, HBOS barely had a i-bank business. The three of the four major UK banks with large investment banking arms did not suffer runs and did not need taxpayer aid – despite BARC coming under strong government pressure to take aid, including leaks to the BBC’s “journalist”. Furthermore , 2 of those 4 banks were weathered the storm pretty well.

2) How did it help HBOS? or RBS? BARC raised some short term cash which it then retired. HSBC raised cash – from recollection – well after the crisis passed. What makes you think that a bank with more capital is less likely to suffer a run?

3) If it would not have helped even with the crisis we know about why are you confident it will help with “unpredictable” ones?

4) Again this is clearly nonsense. What “fears about the i-bank operation” brought down NRK? Or B&B? or HBOS? In fact the opposite is true, the UK banks with large i-bank operations were the ones which DIDN’T suffer runs.

Given the claims you are making for this are entirely spurious maybe you can show how this would actually help?

Posted by Danny_Black | Report as abusive

ErnieD, think you are confusing JPM with Frannie. What “losses” at JPM has the US government backstopped?

Posted by Danny_Black | Report as abusive

“But I suspect that what Dimon is talking about here isn’t healthy banks, but rather healthy bank shareholders. ”

Dimon doesn’t care about his shareholders any more than he cares about the general public. What he is talking about here is the financial health of BANKERS, himself and the rest of the vastly overcompensated criminals who got rich by looting their companies, conning their customers and blackmailing the government.

Posted by chris9059 | Report as abusive

Seems to me a healthy U.S. banking sector means banks that function internationally, and that means under the rules of the country where it does business. JPM can withdraw from Basel, its competitors will certainly be willing to take its place. As to blackmailing Europe with JPM’s withdrawal and applying American pressure, I think Jimmie ought to have a few words with Steve Ballmer on how that works.

Posted by ARJTurgot2 | Report as abusive

ARJTurgot2, JPM can’t “withdraw” from the Basel regulations because they are, erm, regulations.

Posted by Danny_Black | Report as abusive

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