Asked on a conference call about exposure to Europe's Faltering Five, JPMorgan Chase (NYSE: JPM ) CEO Jamie Dimon held nothing back:
So Greece, Italy, Ireland, Portugal, and Spain is still about the net exposure, so it's net of collateral and it's nonsovereign collateral, about $15 billion. [Those] exposures are to banks, sovereign and corporates. And we're managing that exposure. We have a big business in those countries, and we intend to be in those countries for long time. So we're not going to cut and run. In my chairman's letter I wrote about worst case, which I do not expect to happen even today, that if it causes me $3 billion after-tax. That's my best guess, by the way.
Not bad -- $3 billion for a bank with $180 billion in equity isn't much to lose sleep over.
What could get ugly, Dimon goes on to note, are the indirect knock-on effects of a European unraveling:
The real impact of failures over there would be on what does it do to the global economy, what does it do to other exposures in Europe, what does it do to exposures in the United States? And you can guess that as well as I can.
This is exactly what underlined the 2008 financial crisis. It didn't matter if you avoided subprime mortgages. If you were a bank in 2008, you had exposure to someone who owned them, or had exposure to someone who had exposure to someone who owned them. This is what many reckoned would have made AIG's (NYSE: AIG ) collapse so devastating: Even if a bank had never done business with AIG, it was at least a distant cousin through marriage. When Charlie Rose asked Warren Buffett if counterparties besides Goldman Sachs (NYSE: GS ) would have been exposed to AIG's collapse, the Berkshire Hathaway (NYSE: BRK-B ) boss was succinct: "Everybody would have been exposed, Charlie. Everybody."
After an analyst hinted that JPMorgan's European exposure might be closer to $100 billion, Dimon elaborated:
[T]hat $100 billion does not include collateral. It does not include hedging. And we do a lot of hedging, both specific name and country hedging. So that's the issue with that. So my $15 billion is net of hedging, net of collateral, and I mean nonsovereign collateral. So we wouldn't include Greek collateral -- Greek sovereign collateral for a Greek repo. We only include collateral outside of Greece. So that's where the $15 billion comes from.
While Dimon is scrupulously upfront and candid -- analysts on Citigroup's (NYSE: C ) conference call couldn't pry such information out of management -- his comments should be taken in the context of another hallmark of the 2008 financial crisis: What banks thought was collateral wasn't worth the paper it was written on, and what they thought was a hedge turned out to be leverage.
Exposure is exposure in the heat of a crisis, and if JPMorgan is any indication, U.S. banks might have a lot of it.