Macaskill on markets: Sunset approaches for the Sun King
When JPMorgan CEO Jamie Dimon delivered the welcome news to employees that he had been given the all clear after a recent bout of throat cancer, senior managers in attendance rose to applaud.
As if to demonstrate that he was back at his best, Dimon soon afterwards made a crucial intervention in a move to roll back part of the US Dodd-Frank legal reforms to tighten regulation of banks. A bill to provide funding for the US government was under debate and interest groups were rushing to insert clauses into an omnibus piece of legislation that could be agreed by a fractious Congress before year end. JPMorgan and Citigroup took the lead in an attempt to repeal a clause in the 2010 Dodd-Frank legislation that would have forced US banks to shift some derivatives such as credit default swaps into subsidiaries that are separate from their main insured deposit-taking units.
JPMorgan remains the biggest trader of credit derivatives, while Citigroup would suffer more than most of its peers from increased costs if it were forced to move default swap deals to a lower rated subsidiary.
The successful move to exploit confusion and greed for advantage in Washington seemed to demonstrate that Wall Street had got its mojo back, and that Dimon was once more the dominant player on the Street.
While Citigroup’s worker-bee lobbyists drafted language for insertion into the omnibus bill that would eventually be incorporated by Congressional staffers with minimal changes, Dimon took a higher profile role. He worked the phones, calling senior politicians directly to cajole them into supporting the bank-friendly changes and no doubt hinting that while rewards might be great in heaven, JPMorgan and its employees can help you with hard cash when you are next up for re-election.
It seemed like a classic Dimon coup – the big man on Wall Street stepping in to close a deal and in turn defending the interests of the entire financial services industry against misguided regulation.
In the short term it undeniably worked. The $1.1 trillion spending bill passed, complete with a repeal of the derivatives push-out clause from the Dodd-Frank legislation. This Wall Street-friendly clause took its place among other examples of horse-trading in Washington, such as language supporting tourism in Las Vegas (there was plenty in the bill to rile critics of a casino economy) and erosion of rules to lower the salt content in school meals.
One negative consequence of the successful repeal of a section of Dodd-Frank might come in the form of a re-energized opposition to Wall Street and all its actions.But Dimon’s public victory will also have negative medium-term consequences for JPMorgan and Wall Street, while a separate development in December might signal that the influence of the Sun King of Wall Street has already begun to wane.
Senator Elizabeth Warren condemned Citigroup for shaping the amended legislation in a speech on the Senate floor as the bill passed, and Dimon came in for plenty of personal criticism in the following days, as details of his role in twisting arms emerged. The liberal media was most outraged, predictably enough, but the Wall Street Journal also denigrated what it saw as a sneaky move to reverse regulatory reform with minimal debate, which indicates that JPMorgan might have misjudged the mood, even among natural supporters.
Warren is currently viewed as unlikely to challenge Hillary Clinton for the Democratic nomination for the 2016 presidential election, but she is becoming the effective leader of the liberal wing of the party, and her focus on attacking Wall Street might force Clinton to adopt a more populist tone as the election campaign gets underway.
The Republican dominance of both arms of Congress that takes effect when the new legislative year begins in January will undoubtedly serve to soften the effect of some banking regulation, as Wall Street sympathizers on both sides of the aisle find reasons to slow implementation of rules and starve government agencies of funding.
Dimon and other banking lobbyists might accordingly have been better advised to continue to pursue a stealthy death by a thousand cuts for reform, rather than a high-profile reversal of legislation. It also seems odd that JPMorgan would even want a public debate over credit derivatives, just as memories were starting to fade of its embarrassing $6.2 billion London Whale default swap trading loss from 2012, and as default swaps outstanding have fallen to less than a third of their peak of almost $60 trillion in 2007.
Interest-rate derivatives, by far the biggest section of the market, had already been exempted from the Dodd-Frank push-out provision.
A more important sign that Dimon’s influence might have already peaked came in the form of confirmation that the Federal Reserve will add a large levy to globally agreed capital surcharges for the biggest banks and a curious leak by the regulator of the detail that this will affect JPMorgan far more than any other bank.
The Federal Reserve in December announced that its systemically important surcharge will range up to 4.5% of risk-weighted assets. A substantial surcharge was not unexpected, even if it was higher than might have been hoped by JPMorgan, the biggest US bank by assets.
Then Stanley Fischer, vice-chairman of the Federal Reserve, delivered a bombshell by telling a sizeable group of employees that a $21 billion projected industry capital shortfall resulting from this charge in the US was entirely due to an estimate of how much money will need to be found by JPMorgan.
Fischer only took up his current position this year, but he is an enormously experienced regulator who has served as deputy head of the IMF, as well as governor of the Bank of Israel.
The imposition of a capital charge that hits JPMorgan hardest had previously been interpreted as a signal that regulators did not want the bank or its closest competitors to contemplate any big mergers.
The details of the surcharge and the leaked information that JPMorgan is likely to need to find around another $20 billion of capital came close to announcing that regulators think JPMorgan should shrink from its current size, especially in investment banking and derivatives trading.
Fischer had also delivered what was effectively a regulatory snort of derision about Dimon’s frequent assertion that JPMorgan is distinguished from its peers by its ‘fortress’ balance sheet.
JPMorgan is certainly a formidable revenue-generating machine, and its stock price took the leak of the likely capital need in its stride. The new capital rule will not come into force until 2019, which gives JPMorgan plenty of time to retain earnings and manage its balance sheet to meet a capital surcharge.
But a board that must surely be planning for a succession to Dimon – even after his return to health – would have to be unusually obtuse to ignore the signs that a slimmed down, less aggressive JPMorgan will be able to generate improved shareholder returns in future years.
Just as Dimon seems to be in his pomp as the Sun King of Wall Street, the seeds of an end to his era of bellicose banking might already have been sown.