Can it be that just 30 months after the Panic of 2008, some smart bankers have forgotten the main lesson of the financial system's epic fail? Not too long ago, virtually every large financial institution in the U.S. stood at the precipice of failure, in large measure because they didn't have anywhere near enough capital to back the debt they had accumulated. You would think that it would be obvious that regulators should err on the side of caution when drafting new capital requirements. You would think that bankers who survived September 2008 would appreciate the toxic combination of arrogance and incompetence that characterizes their peers. You would think they'd have some sense of perspective on how much their survival rests on the indulgence of taxpayers.
Well, you would be wrong.
On Wednesday, as the Financial Times noted, James Dimon, the CEO of J.P. Morgan Chase, appeared at a Chamber of Commerce event. Speaking of calls for banks to be far less leveraged than they were in the past, Dimon urged caution. Capital ratios set too high, he warned, would be "the nail in our coffin for big American banks." Regulators should eschew the calls heard in the U.K. and elsewhere for banks to hold 15 percent of capital or more. Sure, that might ward off wholesale failure. But at what price?
"If you want to set it so high that no big bank ever goes bankrupt. . .I think that would greatly diminish growth," Dimon said. And, the FT continues: "'If you think that's helping growth, it's not,' Mr. Dimon said, adding that a 7 percent capital ratio would be adequate."
Ordinarily, it's hard to argue with Jamie Dimon. The Last Man Standing (as he was dubbed in the fine book by Duff McDonald) was one of the few executives to come through the financial crisis with his reputation intact. Dimon seems to be the rarest of birds: a smart banker with a preservation instinct. But while self-awareness isn't really in the lexicon of bankers, this is really quite (to use a word that is bankers' lexicon) rich.
First, let's start with the notion that any regulation enacted now would somehow be fatal to banks. Over the past decade, bankers essentially assembled their own coffins and nails. They designed the regulatory system to their liking, then proceeded to destroy themselves, inflicting huge costs on the public and their own shareholders.
Second, Dimon seems to be claiming that the price we must pay for economic growth is a highly leveraged banking sector prone to blow-ups and bailouts. In a word, bull. All we did in the debt-fueled years of 2006 and 2007 was steal growth from the future. When financial systems blow up — whether it's because of excessive stupidity, criminality, pathetic regulation, poor central banking or all of the above — it stunts an economy's growth for up to a decade. That's the thesis of This Time is Different, the comprehensive history of financial debacles by Ken Rogoff and Carmen Reinhart. The growth in the U.S. economy since the summer of 2009 has come in spite of the financial sector, not because of it. Credit of all types — except for government debt— has been shrinking.
Finally, it's just plain bad manners for a banker of any sort to complain about government interference in his business. In fact, it's astonishing how much the success and survival of every bank — including J.P. Morgan —rests on government interference. The Federal Reserve helped facilitate J.P. Morgan Chase's 2008 acquisition of Bear Stearns for next to nothing by taking on $30 billion of Bear's junky assets. The FDIC, which insures deposits at J.P. Morgan Chase and other banks, in the fall of 2008 started a program that let banks issue debt guaranteed by the FDIC. J.P. Morgan took part in the program, and had $40 billion outstanding in late 2009. J.P. Morgan Chase, like other banks, borrows tons of money from the Federal Reserve at very low rates.
Finally, J.P. Morgan Chase's "fortress balance sheet" would look a lot more like the Maginot Line if the U.S. government and taxpayers hadn't bailed out Fannie Mae and Freddie Mac. By making good on those companies' interest payments, taxpayers spared them the agony of writing down the value of assets. And here's the supreme irony: Even with all this extraordinary help, J.P. Morgan Chase's shareholders haven't fared that well. Here's a five-year chart of the company's stock.
Some businesses are highly regulated because they're strategically important to the economy at large, like utilities. And some are highly regulated because they can be extremely dangerous to the commonwealth if operated imprudently, like nuclear power plants and airlines. Banks — especially big banks — fall in the latter category.
Dimon is welcome to liberate himself and J.P. Morgan Chase from regulatory burdens he regards as onerous. But he'll have to give up all the government and regulatory support, too. The bank could forswear FDIC insurance, retire FDIC-guaranteed debt, and try to get money from banks and bond investors instead of from the Fed. Then it can run with as little capital as investors and the markets will permit.
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