The announcement of management changes at JPMorgan at the end of July sparked much gossip about succession planning, after chief executive Jamie Dimon’s reputation was tarnished over substantial losses in the bank’s chief investment office. The bank is combining its previously separate corporate and investment banks onto one balance sheet.
Mike Cavanagh, previously head of treasury and securities services at JPMorgan, and Daniel Pinto, previously head of EMEA and global fixed income, are thrust further into the spotlight as eventual successors to Dimon, now as co-CEOs of a newly enlarged corporate and investment bank. It has not been a comfortable spot for previous occupants: ask Bill Winters.
Jes Staley, the former chief executive of the investment bank who was once seen as a potential successor and recently talked about as candidate to take over as chief executive at Barclays, instead stays on at JPMorgan. He now moves upstairs into a strategy role as chairman of the newly combined wholesale organization, leaving executive leadership to the younger men.
Investors, analysts, customers and rivals are struggling to work out the significance of the organizational changes, rather than the personnel moves, and especially how they fit with the new regulatory landscape.
The first response of Jason Goldberg, analyst at Barclays, was: "This could help fuel the speculation that some of the larger banks may look to more formally separate their consumer and investment banking operations."
The implication is that such a move might presage some eventual break-up of the biggest US banks, which more and more prominent commentators are now urging – one of the latest being Sandy Weill, architect of the merger of Salomon Brothers and Citicorp that anticipated the repeal of Glass-Steagall.
On the eve of the JPMorgan announcement, Weill advocated on CNBC a separation of investment banks from deposit-taking banks. His partner in that era-defining and ultimately doomed merger, John Reed, former chief executive of Citicorp, made a similar call for a return to Glass-Steagall in a comment letter on the Dodd-Frank Act.
In fact, by merging the corporate and the investment bank on to a single balance sheet in search of greater scale, efficiency and market share, JPMorgan looks to be setting its face against the prevailing regulatory wind.
In a chest-beating internal memo, Cavanagh and Pinto boasted "of being able to make aggressive, forward-looking changes, even at a time when our industry faces numerous challenges". There’s no talk of separating bread-and-butter deposit-taking and lending from investment banking – rather the opposite.
Cavanagh and Pinto say: "Last year alone, we raised $430 billion in debt and equity for clients, and provided $500 billion of credit. We are the largest clearer of US dollars, and the combined franchise holds about $350 billion in deposits and $17 trillion in custodial assets."
|Jes Staley targets further investment in flow trading and higher trading margins|
And he explained JPMorgan’s intention further to invest in flow-trading businesses, in the expectation that financial assets as a portion of GDP in emerging markets, such as China and Brazil, will grow rapidly from the present one-times GDP much closer to the five-times GDP seen in mature economies, so giving the bank more stuff to trade.
Rivals have doubts on both scores. One senior investment banker, who left a leading bank to set up his own advisory firm, says: "That’s an old western construct that used to hold the Anglo-Saxon financial market model as the benchmark towards which emerging markets’ progress should be measured. But while those countries used to revere the western financial system, now they are scornful of it. I don’t think an excess of financial asset trading is their development goal."
Return to the future
The head of global capital markets at another leading bank says: "You may be surprised how big the school of thought is among many of us inside large banks that it would be better for us to go back, if not to Glass-Steagall then at least to some clearer separation of commercial banks taking deposits and making loans from capital markets firms, intermediating between investors and issuers.
"I’m surprised the JPMorgan announcement hasn’t attracted more attention because it looks so directly contrary to the way many policymakers and regulators are moving."
In Copenhagen, Staley chose his words carefully. "One of the structural changes since 2008 is that legislators now want regulators to be not witnesses to financial markets but participants in financial markets. That is an enormous burden on regulators and will require a partnership that’s new to all of us."
He’s not beyond offering some advice though. "The single riskiest thing a bank can do is take a deposit, make a loan and ring-fence that activity. That’s what we did in the US before the S&L crisis. And there’s an irony that the eventual remedy for stand-alone investment banks was to create universal banks, with Bank of America taking over Merrill Lynch, and Bear Stearns coming into JPMorgan."
Staley also managed to get in some special pleading, while discussing business-model changes. "We’ll look to businesses that require less capital, but we compete with private equity firms and hedge funds that don’t have the regulatory constraints we do. When you look at the role these firms play in the credit industry, it is going to create a shadow banking system."
Building on strength
He also revealed the bank’s determination to seek advantage from its strong position as one of the world’s largest banks. "Profitability in the wholesale loan book is significantly higher than it was pre-crisis. There’s a scarcity of balance sheet and that’s reflected in the pricing of credit. One of the reasons why S&P500 corporations are sitting on $1.5 trillion of cash is concern about the cost of funding."
When they have to borrow, JPMorgan intends to profit and makes no apology for tying its wholesale deposit-taking and lending business even closer to its securities and derivatives trading investment bank, claiming this now follows more of an agency model. Staley says the bank has pulled off the impressive trick of reducing risk-weighted assets (RWAs) with no reduction in returns on equity.
Last month, however, after the internal merger announcement, regulators were chipping away at JPMorgan, requiring it to restate downwards its Basle I common tier 1 capital ratio for the first and second quarters of 2012. The implication is that regulators did not like the bank’s classification of RWAs.
Betsy Graseck, analyst at Morgan Stanley, says: "Our interpretation is that RWAs in Q1 ’12 are now $65 billion higher than originally reported and are $50 billion higher than originally reported in Q2 ’12."