Jamie Dimon's 35-page letter to JP Morgan Chase shareholders is an interesting commentary on how his bank has navigated the financial crisis. The letter offers extensive insight into discrete elements of the WaMu acquisition. Dimon even proffers several surprising opinions about TARP, Dodd-Frank, and the CFPB. While he extends some support for each, he is less than content with either the Durbin Amendment or the new Basel rules.
Tom Brown says that JP Morgan Chase's letter, penned by Jamie Dimon, is an outstanding letter.
Dimon has a few interesting things to say:
JPM expected to make a profit from the Washington Mutual acquisition, but its means for realizing those earnings are unexpected. JPM has already lost $5 billion of the $10 billion that it expected on the mortgage book, and there is more to come. They have trimmed the WaMu credit card business. It turns out that small business lending and business with the BRICs is much better, though. JPM is going to see $500 million in annual profits from lending on legacy WaMu's multi-family real estate portfolio..
They want to let shareholders know that they are going to be facing lots of legal expense in representing the tort claims that they inherited from WaMu.
Dimon is contrite about JP Morgan's falsely filed foreclosures on military families: "There is one error," he writes, "
in particular, from our recent past that I would like to highlight: the mistakes we made in servicing mortgages held by U.S. military families. Our firm has a great history of honoring our military and veterans, and the errors we made on these loans, including foreclosures, were a painful aberration from that track record."
Dimon then goes on to make some interesting comments about the regulatory changes to the banking system:
a) "we have been very supportive of certain changes in compensation rules. In fact, long before they were mandated, JPMorgan Chase already had instituted most of these compensation practices. One particularly good new rule...was the ability to clawback compensation from senior executives when appropriate"
b) "I have long been on record giving huge credit to the U.S. government and governments around the world for the drastic, bold actions they took to stop this rapidly moving crisis from getting considerably worse. A great number of the actions that the Treasury and the Federal Reserve took... helped sustain numerous institutions and probably prevented many from failure and bankruptcy."
c) "..there were many good reasons that led to the creation of the CFPB and [we] believe that if the CFPB does its job well, the agency will benefit American consumers and the system. Strong regulatory standards, adequate review of new products and transparency to consumers all are good things. Indeed, had there been stronger standards in the mortgage markets, one huge cause of the recent crisis might have been avoided. Other countries with stricter limits on mortgages, such as higher loan-to-value ratios, didn’t experience a mortgage crisis comparable with ours. As recently as five years ago, most Americans would have called the U.S. mortgage market one of the best in the world – boy, was that wrong!"
But Dimon is not supportive of one reform in particular:
"The Durbin Amendment was passed with no fact-finding, analysis or debate, had nothing to do with the crisis and potentially will harm consumers."
a) the Durbin Amendment amounts to price-fixing. Forcing some banks to charge only the "incremental costs" of transactions means that there is not way to recoup the sunk costs of the system. It costs money to issue cards, to prepare and send statements, and to build out an ATM network. Third-party players, such as prepaid debit card issuers and government-benefit card providers, enjoy the chance to free ride onto this system.
b) Low-income consumers will be hurt the most. The new rule will push an additional 5 percent of American households out of the formal banking system.
c) institutions with fewer than $10 billion in assets may be excluded from the Durbin Amendment's rules, but they will still be impacted. They will not have access to as many ATM machines, fewer stores will take their cards, and the funding stream will wither.
He has an interesting idea to change how the FDIC manages the closure of a failed bank. He writes that the means through which the FDIC takes over a failing bank should be re-examined. If WaMu had been able to convert its $128 billion in unsecured debt into equity, then it would have been overcapitalized. It might have been able to work out a new agreement that allowed it to remain as a going entity. If liquidation does go forward, then the former holders of unsecured debt should keep their existing position in line ahead of a priori equity holders. With a suddenly capitalized balance sheet, the FDIC would be less likely to assume losses. In turn, banks should pay for losses when they are realized, and not beforehand through deposit assessments.