JPMorgan: Structured derivatives vs. aircraft engines
Political, business, and media elites are at the World Economic Forum, a.k.a. "Davos," this week to network and share their wisdom. It's a rare opportunity to hear the considered views of some of the world's "best and brightest." Take this comment from JPMorgan Chase (NYSE: JPM ) CEO Jamie Dimon, who tried to refute the notion that large banks are excessively opaque or complex:
Businesses can be opaque. They are complex. You [policymakers] don't know how aircraft engines work, either.
Indeed, Mr. Dimon, it's true that very few people understand how an aircraft engine works, but there are some elementary differences between derivative products and engineering products. Most people understand that:
- There is no such thing as a "notional" aircraft engine. A 30-year-old engineer at GE cannot make $10 billion worth of aircraft engines materialize based on a few telephone calls and a bit of legal documentation.
- Aircraft engines are manufactured solely with an end user in mind. Engineering firms do not manufacture them to speculate on them or to hedge a balance sheet risk by trading them with aircraft-engine-focused hedge funds.
- Aircraft engine manufacturers aren't leveraged 10-to-1. Leverage magnifies the risks associated with complexity.
Jamie Dimon is a talented bank CEO -- arguably even the best in his peer group. He's smart and forthright, which are two important qualities. However, no one is immune to bad thinking, and when he says things that are obviously stupid, the media ought to call him on it.
With big finance firms still trading at deep discounts to their historical norms, investors everywhere are wondering whether this is the new normal or finance stocks are a screaming buy today. The answer depends on the company, so to help you figure out whether JPMorgan is a buy today, I invite you to read our premium research report on the company today. Click here now for instant access!