IIF 2019: Dimon and Gorman on regulation and why it sucks to be public

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By:
Mark Baker
Published on:

The CEOs of JPMorgan and Morgan Stanley worry about the consequences of capital and liquidity regulation – and are not surprised that companies prefer to stay private.

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The Friday lunchtime US bank chief executive chat is the star turn at the Washington DC meetings of the Institute of International Finance (IIF). This year the October 18 event was pared down to its essentials: the double act of JPMorgan's Jamie Dimon and Morgan Stanley's James Gorman.

It started promisingly. Gorman sounded mildly startled by the opening music.

"Is that the Magnificent Seven?” he asked. “We're a few short here!"

That was a taste of things to come. Perhaps conscious that Dimon usually steals the show when it comes to the one-liners, Gorman upped his comedy game this year. Having deftly navigated his way through a school tour party to get to the security scanner at the Ronald Reagan Building on DC's Pennsylvania Avenue, he repaired to one of the media lunch tables to scribble some notes.

If he was penning jokes, it was time well spent.

Since it was earnings week, and both JPMorgan and Morgan Stanley had reported decent numbers, IIF chief executive Tim Adams wanted to know their secret sauce.

It hardly seems possible that Dimon could appear to care less about what he says than on any previous occasion, but yet he managed it. Here he was at his brisk best.

"I don't pay much attention to quarterly earnings," he said. Most companies made money in a given quarter as a result of decisions made many years before.

Gorman looked quizzical: "I do pay a little attention to quarterly earnings – maybe I have to more [than Dimon]."

Several years ago, Morgan Stanley began the process of de-risking the business model and building businesses with a much more predictable flow, and that was working, Gorman said.

The ambition was not to have the negative surprises that characterized the crisis.

Optimism

The two chief executives noted the dichotomy between an apparent nervousness among businesses and market participants and the reality of a global economy that is growing.

Dimon usually needs little encouragement to dish out some breezy optimism.

"The world is growing at 3.5%... that's still $3 trillion of global growth," he said.

And at home things felt good: US consumers, their balance sheets and spending, were strong. Business confidence was down because businesses paid more attention to geopolitics and trade issues. That was starting to affect decisions: some companies are slowing the pace of investments.

"Will that cause a US recession? Probably not," said Dimon.

Gorman was of a similar frame of mind. "The consumer balance sheet is in strong shape, absent student lending, which is a particularly odious thing that has happened in the last 30 years," he said.


The world is growing at 3.5%... that's still $3 trillion of global growth 
 - Jamie Dimon, JPMorgan

He also argued for perspective when it came to geopolitics: "In the last 100 years there were real wars, but we are not in that stage now. We are in a trade dispute phase."

He said that he and Dimon were optimists and realists: "It's not that bad right now."

That said, they were both worried about the prospect of a prolonged period of low interest rates. The reliance on the policy tool of rate-cutting and the existence of some $16 trillion of negative yielding debt had been referenced in almost every session of the week.

Dimon and Gorman both praised the Fed, and didn’t doubt its ability to maintain its independence in the face of pressure from the executive branch of the US government.

Gorman reminded the audience that the Fed's job is to manage excesses and prop up weaknesses, but added: "There is no rule book that [Fed chairman] Jay Powell has on the shelf behind him".

That's why you had the Federal Open Market Committee (FOMC), he added.

In their place, Gorman would have been more cautious on rate cuts, "because you are using up one of the tools you have". But he recognised that markets felt differently to him, given that they were pricing in two further cuts.

So, what does $16 trillion of negative yielding debt tell us?

Dimon is a bankers' banker, following his father and grandfather into finance. The idea of debt with a below zero yield is anathema to him. He looked physically ill at even being asked to think about it.

"I would do anything but buy debt below zero – never in my whole life,” he said. “There's something irrational about it."

And via a surprising aerodynamic analogy about airflow over a wing, he dismissed the theory that rates going from 1% to 0% was pretty much the same as going from 3% to 2%.

"I beg to differ,” he said. “I'm not sure the monetary rules are the same at negative as positive."

Repo man

The unintended consequences of regulation were also occupying minds in Washington, and Dimon and Gorman are old hands at this topic.

There was, noted Adams, a perception in the country that regulators had deregulated the financial services industry. Did Dimon also see that?

"No."

A pause for laughter. But he had serious points to make: Dodd-Frank had fixed the lack of capital and had introduced important things such as resolution planning; and the collapse of Lehman Brothers would not happen today as it did 11 years ago.

"If it happened today, it would have had 2.5 to 3 times as much equity capital,” Dimon said. “If it did happen, it would have had $120 billion of TLAC [total loss-absorbing capacity] and it would have been the most over-equitized firm in the world at the moment of failure."

All the industry was asking for today was calibration, he added. "[The regulators] are not backing out of regulation."

I don't pay much attention to quarterly earnings 
 - Jamie Dimon, JPMorgan
I do pay a little attention to quarterly earnings – maybe I have to more [than Dimon] 
 - James Gorman, Morgan Stanley
Gorman agreed that post-crisis regulation had been necessary and the right thing to do. But this is a theme that he regularly explores on his quarterly earnings calls, and had done so earlier in the week when he expressed his optimism that the regulatory direction of travel was more towards capital rather than leverage.

Such a move would likely benefit Morgan Stanley, which in his opinion is over-capitalized.

"How much is enough capital?" he asked the IIF audience. "Let's do at least what you would have needed to get through the financial crisis. Fair start. And let's dial it up a bit because things could get worse. Fair enough. And let's add a buffer to that because there are always unintended things. And let's add another buffer because we can…

"Well, hang on."

The industry was now at this "hang on" mark, he said.

The point was that if banks were so hampered as to be uninvestible, then that also made them unsound.

"Is it time to make some changes to the dials?” Gorman asked. “Sure. Most people would say the dials feel like they are at the buffer-buffer level."

For Dimon, an example of the way in which regulation had hampered the ability of the banking sector to intervene for good in times of stress was the recent turmoil in the repo market.

Reporting earnings earlier in the week, he had already explained how JPMorgan's cash with the Fed fluctuates between $60 billion and $120 billion each day; but unlike in the past, the bank didn’t feel able to deploy any of that excess elsewhere because of so many regulatory requirements.

He ran through this again for the IIF crowd, and noted that there was probably some $4 trillion of liquidity in the overall system when one considered liquid assets at the Fed, plus repo and treasuries, but the industry was at the point where none of that could be used for anything else.

In the recent repo stress, he would have moved all of JPMorgan's cash into the market if he had been able to.

Regulation had created other risks, too. Financial market utilities, said Dimon, should be stress tested in the same way as banks.

Dimon argued that when Lehman Brothers collapsed, derivatives did not cause the collapse of any other company. But now things were different.

"We've now concentrated a huge amount of risk in some clearing houses, and if one of these financial market utilities goes down, that's a whole different thing,” he said. “And they are thinly capitalised."

To his knowledge, Dodd-Frank brought such institutions under the regulators' umbrella. "And I think they should spend more time with them than with us!"

The tech question

There were regulatory questions around tech too. Gorman only spends about $4 billion a year on tech. Dimon spends $11.5 billion, but saw the investment on technology as something that had gone on through the whole of his life.

"You wouldn't have mutual funds if you didn't have mainframe computers," he noted. Everything was just faster now.

Adams wanted to know if new regulation was needed to cope with the new risks presented by the development of cyber and the cloud.

Gorman was sceptical: "I'm not sure I'm going to recommend new regulatory regimes on this stage."

He thought common standards would be the key rather than regulation, and that these were starting to come. And like Dimon, he saw tech development as a continuum.

"We're not a technology company but technology infuses everything we do," he said. "We started doing electronic equities trading in the 1990s. What's different now is that the pace of change is spectacular."

But the two chief executives saw another challenge from the kinds of tech companies that scrape bank data, although they accepted them as competitors.

Dimon said that JPMorgan had sought safe ways of giving firms the benefit of data aggregation, pushing its data to such companies rather than allowing them to enter its systems. The bank's customers are also told what data can be taken and by whom – and they can withhold permission for that to happen if they wish.

Gorman said that in an open capitalist world, one took on all manner of competitors; he likened the situation to the emergence of online brokerages some few decades ago. But he thought the threat of tech competition was probably less relevant for his set of businesses than it was for JPMorgan.

And what did Dimon think of Libra, the Facebook digital currency initiative? "It was a neat idea that will never happen,” he said. “And I have nothing else to say about it…"

But this is Dimon.

"…And we already have stablecoin, so they're not the first to do that. We have a JPMorgan stablecoin called JPMorgan Coin. It's backed by a dollar, so it's really stable."

Private vs public

The drop in the number of public companies was also on the chief executives’ minds.

They have plenty of experience: JPMorgan is smarting from its failure to take WeWork public after having backed it through its extraordinary growth as a private company, while Morgan Stanley is still trying to shake off the stigma of having led this year's float of Uber, another company that ballooned in size in private markets but whose stock has disappointed since going public.

"We've gone from 8,000 to 4,000 [public companies] – and I don't think that's a good thing," said Dimon. "I'm not against private equity […] When shareholder meetings end up being a farce, when litigation can be crippling to companies, it's just easier to be private.

"I would go private if I could."

For Gorman, the phenomenon of companies staying private for longer was the confluence of a number of things. For one, there was money available in a professional private equity industry that didn't exist 40 years ago.

Also, the burden of being a public company was hard. Why not just report revenues every three months and then do a full earnings report every six months, he wondered. "Would the world really be worse off for that?"

And then there are the shareholder meetings.

“We have more security guys in our shareholder meetings than shareholders – although actually they're shareholders too. It's kind of insane.

He turned to Dimon:Maybe you get a lot more people coming to yours – probably do. Ours are in Westchester if anyone wants to come. It gets so lonely up there."

Gorman has been on the board of the IIF for the last seven years, and he is now leaving.

Adams remembered their first meeting, when Gorman had told him: "Tim, you work for the board, the board doesn't work for you."

Gorman remembered it too: "That's what my board told me."