Opinion

Felix Salmon

Chart of the day: JP Morgan’s excess deposits

By Felix Salmon
May 21, 2012

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Many thanks to Ben Walsh for putting this chart together for me. What you’re seeing is JP Morgan’s excess deposits — the size of the bank’s deposit base, minus the amount of its loans — both in absolute terms and as a ratio. Either way, it’s going up and to the right.

JP Morgan clearly has a certain amount of control over the amount of deposits it takes in. What you’re looking at here isn’t entirely a flight-to-quality trade: JP Morgan’s total deposits actually fell in the two years following the financial crisis. They were just over $1 trillion at the end of 2008, they dropped to $940 billion at the end of 2009, and then they fell again to $930 billion at the end of 2010.

But then, in 2011, they shot straight back up — and now they’re at a record high of $1.13 trillion, with JP Morgan having failed to lend out more than $400 billion of that amount. That’s a record not only in absolute terms but also in relative terms: for every dollar that JP Morgan has on deposit, it has managed to lend out just 64 cents.

To put it another way, JP Morgan has $9,900 on deposit per US household — and of that, $3,600 per US household is “excess deposits” which are mostly being farmed off to London rather than being invested in helping US individuals and businesses grow.

The ostensible purpose of JP Morgan’s Chief Investment Office is to take the bank’s excess deposits and invest them in a way which manages to hedge the rest of the bank’s exposures. But if you’re spending 57 cents on hedging operations for every dollar you’re making in original loans, which is the case here, then something’s clearly very wrong. JP Morgan’s loan book isn’t that risky, or difficult to hedge. And if it is, JP Morgan needs some new loan officers.

The real story here, of course, has nothing to do with the difficulty of hedging JP Morgan’s loan exposures. Rather, the hotshot CIO traders in London were managing to get a higher return on their “hedging” operations than the loan officers were getting on their bread-and-butter loans. And so Jamie Dimon started taking in all the deposits he could find, and sending them straight to London, where they could be “hedged” to the tune of billions of dollars a year in profits.

It’s easy for JP Morgan to bring in huge amounts of deposits, of course: corporate balance sheets are bloated with cash, and those corporations want to deposit their funds with a too-big-to-fail institution. But if those deposits are being attracted by JP Morgan’s implicit government backstop, then it’s incumbent upon JP Morgan to lend them out into the US economy, to get it moving again. Rather than sending them off to London to be gambled away by the likes of Bruno Iksil, even as JP Morgan’s total loan base remains lower today than it was in 2008.

Comments
25 comments so far | RSS Comments RSS

I imagine you’ve already see this interview with Amar Bhidé. The most relevant line from the interview, given this post: “What scares me is not the $2 billion that JPMorgan lost. It’s the record $19 billion profits that JP Morgan made.”

(See the whole thing here: http://www.businessweek.com/videos/2012- 05-15/dimons-tarnished-crown)

JP has become a casino guaranteed by the US taxpayers.

Posted by f.furst | Report as abusive
 

I imagine you’ve already see this interview with Amar Bhidé. The most relevant line from the interview, given this post: “What scares me is not the $2 billion that JPMorgan lost. It’s the record $19 billion profits that JP Morgan made.”

(See the whole thing here: http://www.businessweek.com/videos/2012- 05-15/dimons-tarnished-crown)

JP has become a casino guaranteed by the US taxpayers.

Posted by f.furst | Report as abusive
 

“JP Morgan clearly has a certain amount of control over the amount of deposits it takes in.”

Somebody enlighten me – do banks refuse deposits? Or can they just demand that people deposit more money in their accounts? How do they have control over the amount of deposits they take in?

But the point that Felix makes here is clear and valid – wealth in the U.S. is being accumulated, and not re-invested. If a certain percentage of each dollar of profit is siphoned out of the economy, and placed in a magical box that increases its value (or not), it will ultimately shrink the size of the economy. If businesses and wealthy individuals are not re-investing their income, and just depositing it in banks or lending it to the government, it’s not being used. It used to not work that way, when you put money in the bank, it was lent out to finance homes and businesses. Banks are necessary in the capitalist model not just to hold money, but as a vehicle for re-distributing capital. When they instead just put it into different bins, the model falls apart.

Posted by KenG_CA | Report as abusive
 

“Somebody enlighten me – do banks refuse deposits?”

No, but they can refuse to give you an account. They can make it a pain to withdraw large sums, or to switch to another bank. Basically, they try to make it so that money more easily flows in than out, unless the outflow involves fees and interest.

Posted by Moopheus | Report as abusive
 

Irresponsible lending is what got us into this situation – the banks have learned that, but some others (Ahem..) haven’t, apparently. This is no excuse for the irresponsible trading that JPM has done, but it is an explaination of both JPM’s conduct and our tolerance (so far) of trading rather than lending.

What that chart tells me is that the Fed has put too damn much money in circulation. That’s the “original sin”.

Posted by MrRFox | Report as abusive
 

Good points throughout and an all around great post.

I agree with Felix that JP Morgan can and should be loaning out those funds to people with business ideas.

Hopefully we’ll have at least a congressional hearing on this where Jamie Dimon will patiently explain to all assembled, in the most condescending and pedantic tone imaginable, that he is NOT responsible for “lending deposited funds out into the US economy, to get it moving again”, and that he only is responsible for “investing the company’s capital where it will generate the greatest rate of return for shareholders” and count on the uninformed or uninterested American public to forget about the implicit taxpayer-provided backstop. Wait for it.

Posted by Strych09 | Report as abusive
 

Come on, guys – there are VCs shaking every tree looking for opportunities. That deadbeats can’t borrow money isn’t really a bad thing, is it? It’s not ’cause there’s no money – it’s because they can’t be trusted to pay it back.

That JPM is doing dangerous things with this money that it has too damn much of on its hands is a different matter. Maybe that money shouldn’t have ever been QEed into existence at all?

Posted by MrRFox | Report as abusive
 

The elephant in the room that Felix’s post doesn’t mention is the Fed’s zero interest rate policy, which has created all sorts of distortions in short-term credit markets.

The yields on commercial paper are next to nothing, which has presumably pushed money into bank deposits at too big to fail banks – if you can’t earn anything in short-term credit markets, why not park it at JP Morgan and earn nothing with an implicit government backstop? Ultimately, the money has to go somewhere, but it seems to be sloshing around the system and mostly either (i) funding government deficits – which we need if we’re going to continue to run US federal deficits near 10% of GDP or (ii) funding run-ups in asset prices / speculative trading strategies. After the housing bubble, are we really still surprised that low short-term interest rates have unintended consequences?

Posted by realist50 | Report as abusive
 

Two quick questions:

1) In the phrase: “if you’re spending 57 cents on hedging operations for every dollar you’re making in original loans,” is 0.57 the cost of hedging per dollar or the value of collateral supporting the activities of the CIO? If it’s the latter, then it doesn’t appear quite so sensational. If I were long a share of stock and “perfectly” hedged myself by going short the same share, I’d be expected to overcollateralize the my stock borrowing.

2) Are hedging operations that valueless? The article suggests that loans to US individuals and business are welfare-enhancing while the activities of the CIO send cash into a black hole. The funds allocated by the CIO might well find their way to projects that generate returns. The alarm shouldn’t be raised over the activities of the CIO, but over the question of whether US taxpayers should be subsidizing investment activities abroad when only holders of bank equity stand to reap the benefits.

Posted by nmph | Report as abusive
 

moopheus, other than poor people, when does a bank refuse to give you an account? And other than poor people, or those who have used their accounts as collateral for loans, how do they keep people from withdrawing it?

MrFox, I think there’s a chicken and egg question with regards to the QE that you have such disdain for. Was QE the cause of the problem, or a response to lack of investment? I think it’s the latter. When the financial crisis struck, investment disappeared as individuals lost faith and business execs didn’t want to risk their careers on investing their company’s profits. At that point, if there was no source of capital to take the place of re-invested profits, the economy would have spiraled into chaos. The infusion of capital by the Fed and the massive government spending halted the collapse, but private investment did not return once the economy stabilized (at a lower operating point than before the collapse). Once private investment re-appears at a level that can sustain our population, the government can and must reduce it’s spending. But the accumulation of profits, as exemplified by Felix’s post, is telling us the private sector is not ready to re-circulate those profits back into the economy.

Posted by KenG_CA | Report as abusive
 

@R50, @NMPH – +1, each.

@KenG – this part -

“Was QE the cause of the problem, or a response to lack of investment? I think it’s the latter.”

You’re half-right, IMO – it’s both the cause of the problem and the Fed’s response to it. IMO the sub-prime debacle, like the dot.com collapse and the stock market bust and the S&L crisis were all the result of bubbles directly traceable to excessive money creation. It’s always the politically correct answer to any economic distress of any sort – and it’s cumulative. The collapse of one bubble engenders a Fed-response that crates the next, larger bubble – like the one we’re in now.

OBTW: +1, too – Ken.

Posted by MrRFox | Report as abusive
 

MrFox, thanks for the +1, and I agree, QE is part of a vicious circle, but at some point the big guys have to step up. It’s the only way to break that cycle. Which is why I take every opportunity, including this one, to push for a tax system that rewards investment and penalizes hoarding, because the big guys with capital to burn are not stepping up.

Posted by KenG_CA | Report as abusive
 

Can we switch gears for a minute – if you’re Dimon Jamie, what do you do now? How do you get out of this position that’s costing you 10′s of million$ every day?

There’s no market to cover into, except the guys already on the other side when they close their positions – which they have no reason on Heaven or Earth to want to do; they make exactly what Jamie loses.

Prediction – Jamie’s gonna get the Feds to get him off the hook. It’ll be over bagels and Gefilte Fish with brother-Benny and cousin-Timmy and the promise of good thing$ if they get him out of this.

Posted by MrRFox | Report as abusive
 

Why does JPMC have excess deposits? Because they have excess capital they need to deploy and earn a rate of return on.

Why do they have excess capital? Because until recently the Fed prohibited capital actions by even healthy banks.

Why did the Fed prohibit healthy banks from using capital to pay dividends and repurchase stock? Because they felt the “system” as a whole was “too fragile.”

From the ProPublica story:

“Margaret “Meg” McConnell, a wiry and intense macroeconomist from the New York Fed, raised the possibility that the Fed might bar even healthy banks from paying dividends, if the regulator thought the environment was still too fragile. This is dubbed a “macroprudential” approach. Generally mild-mannered, McConnell surprised people with her emotion. She spoke “with a bit of pique,” a person at the meeting recalls.”

And of course a prescient line three sentances later:
“Preventing even ostensibly healthy banks from returning capital for a period of time might be destabilizing in and of itself.”

Posted by ExaminerCarter | Report as abusive
 

@ Mr Fox –

“Bagels and Gefilte Fish” flagged as abusive. There is no need, here, for old-fashioned anti-Semitic slurs about cosmopolitan bankers. Surely the willingness of the Federal Reserve and the US Treasury to help money-center financiers is extended to Jews and Gentiles alike.

Posted by AndrewTyndall | Report as abusive
 

Just ’cause Timmy’s a Gentile (? – a matter of some dispute, apparently) doesn’t mean he doesn’t like bagels.

Posted by MrRFox | Report as abusive
 

I know, I know. And Dimon’s a Greek. Which makes the Gefilte Fish reference all the more gratuitous.

Posted by AndrewTyndall | Report as abusive
 

Damn right – nobody likes Gefilte Fish.

Long FB, are you, AT? (Me either.) Today is the first day of the rest of Z’berg’s life. Hope his marriage works out better than his IPO – she seems like a nice lady.

Posted by MrRFox | Report as abusive
 

KenG, there is only so much you can effect with monetary stimulus. If people aren’t spending, and the government isn’t spending (just gimmicks and tax rebates), then the economy isn’t going anywhere. You can flood the market with cash (as they’ve already done) and the economy STILL isn’t going anywhere.

QE wasn’t the problem, but it isn’t really the solution either. Liquidity trap, perhaps?

Posted by TFF | Report as abusive
 

Doesn’t the rise in excess deposits have a lot to do with the Feds decision to start paying interest on excess reserves. Simple solution to start getting banks to lend money out in the real economy is to stop paying them for parking their deposits in the Fed.

Posted by GenLee | Report as abusive
 

TFF, I don’t see QE or government spending so much as stimulus as it’s setting the floor for the economy. In the absence of private investment, the economy collapses. Think of government spending as bridge financing – without it, the economy won’t last until the investment capital starts to flow.

No, you know my plan. Did you make a lot of money this year? Yes? Good, now either invest it or give it to the government. The government won’t be anywhere nearly as good or efficient as you will be in deciding what to do with it, so I suggest you invest it in something. I’m guessing you’ll get a better return on it than you would if you pay it in taxes or do nothing at all with it.

Posted by KenG_CA | Report as abusive
 

“Did you make a lot of money this year? Yes? Good, now either invest it or give it to the government.”

Yes. Gave much of it to the government. Used the rest to pay down debt. Spent the usual. Also sold some investments to pay down debt. Not ideal for stimulating the economy.

If everybody did as we do, the economy would collapse into a deflationary spiral. But then, if everybody did as we do, there wouldn’t have been a debt/credit bubble in the first place.

Government spending serves as a floor, perhaps. But much of the “stimulus” has been rebating taxes to people. Much of that rebated money has been used to PAY DOWN DEBT (or accumulate cash hoards). Spending money is a more effective stimulus than tax cuts.

Posted by TFF | Report as abusive
 

TFF, that question isn’t targeted at you, but those who make far more than they need to live on, or companies that just accumulate their profits and put them under virtual mattress.

If everybody has been doing what you have been, the economy wouldn’t have grown as large as it has, as only debt has allowed it to reach its current size, and as you say, there wouldn’t have been any debt crisis. But when profits are earned and not used in any way, they are effectively taken out of circulation, and that shrinks the economy.

Spending money is more effective stimulus than tax cuts, and that’s what I’m calling for.

Posted by KenG_CA | Report as abusive
 

I would like to put forth an alternitive vision to the base case:

-Base caes = JPM is sucking up lots of deposits from small US based businesses, big US based businesses, richey rich, Scrouge McDuck, widows and oprphans ect. They are then too stingy or lazy to lend them out to growing businesses but instead gamble them abroad.

-my take. JPM is the largest us based money center bank. As such they hold dollar denominated profits generated abroad by Multinationals who cannot repaterate about a trillion dollars that the IRS has absolutely no right to tax but thinks it can. Cisco, Walmart, Intel, Coke and about 400 other of the S&P 500 companies have cash trapped abroad. Is it possible that this cash (almost alwasy held in US dollars form) is counted in JPM’s fast growing “excess deposit” hoard?

If my uneducated guess is correct JPM could very well be lending more in the United States than it is taking in in deposits. I bet lots of Italian companies and individuals like the idea of JPM deposits in a worse case outcome for Europe.

If your sure that the basecase is accurate by all means “move your money” Felix’s federally insured member owned credit union or my federally insured mutual community bank would love to have your business!

Posted by y2kurtus | Report as abusive
 

BE A SPORT – show Jamie Dimon how turn his Whale of a losing position into a minnow, and win a book from Felix’ desk. My secretary has one on her desk in CA from that OWS thing a few weeks back. First one to post the answer that turns Jamie’s turkey into an eagle (relatively speaking) will be awarded the tome. Here are the ground rules -

The successful exit strategy will require a little help from the Bros in DC – it can’t be anything that isn’t apparently neutral on its face, plausibly necessary to protect the stability and functioning of the financial system, and yet effectively puts all the high cards in JD’s hands.

Hint I: Like all vexing problems, cracking this one requires that you appreciate all the unusual strengths that arise from the existing status of the client – in this case, JPM.

Hint II: The client’s adversaries may also enjoy a similar status – maybe, but that doesn’t mean they’ll be permitted to utilize it the same way JD does.

(With all the cash JD has already stuffed into Demo pockets, he’s entitled to at least a little help when he’s desperate – we are in an election year, aren’t we? Who’s gonna say “No” to Jimmy-the-ATM? He just needs you to help him figure-out what to ask for that his soul brothers can politically deliver.)

I’ve already posted the solution on another site, so it’s been time/date-stamped. When this drama is all played-out – shouldn’t be long now – I’ll post the link, or sooner if someone nails it before then.

Posted by MrRFox | Report as abusive
 

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