Most banks during the financial crisis went to the U.S. government for help. But it was the exact opposite case with JPMorgan Chase (NYSE:JPM), which answered the government's call to rescue not one but two ailing banks during the darkest days of the crisis. The person who positioned the New York City-based bank to play this role was Jamie Dimon, its chairman and CEO.
Listen in to this segment of Industry Focus: Financials, where we discuss what makes Dimon one of the best bankers of the modern era.
A full transcript follows the video.
This video was recorded on Aug. 7, 2017.
Gaby Lapera: Let's turn to Jamie Dimon, who actually has a fair bit in common with Richard Davis when it comes to this other kind of metrics-driven thing that we're going to talk about when it comes to great banks, which is a fortressed balance sheet.
John Maxfield: Jamie Dimon is the chairman and CEO of JPMorgan Chase, which is the largest bank in the country. JPMorgan Chase, if you think about the history of banking in the United States, and if you had to think about one brand, JPMorgan is probably the one that comes to mind most readily. And they've had these incredible bankers throughout the year, starting with J. Pierpont Morgan himself, and then they had a series of bankers in the teens, twenties, thirties, forties that were also incredible bankers. Well, Jamie Dimon is right along with them. He's a phenomenal banker. There's no question about it.
And he's a phenomenal banker for two reasons. No. 1, he understands the importance of what he calls a fortressed balance sheet. Banks, we've talked a lot on this show in the past about, the banking business model is predicated on leverage. You can put in a little bit of capital, you put in $1 worth of capital, and you go out and borrow $10 worth of debt from depositors and institutional investors. You lend that out to people and you make more money because you charge a higher interest rate on the loans that you lend out than the interest rate that you're being charged by depositors and institutional investors. And that's really where you make your money. Well, that leverage makes you very fragile, because only 10% of your assets would have to default and your entire bank is totally kaput. Well, Jamie Dimon understands this so fundamentally. He talks about concept of a fortressed balance sheet. And what he means is, you have to have a lot of high-quality capital that can absorb losses in times like that. And they have something like an upwards of $190 billion in extremely high-quality capital. $190 billion, it's easy to get lost in how big some of these numbers are. That's a lot of money. There are not a lot of banks that are that big on the asset side. The other thing that Jamie Dimon talks about in the context of a fortressed balance sheet is liquidity. This is having cash, having assets in a form that is easy to turn into cash that you can then satisfy depositors in the event that you have a run on your bank. So, that's either cash itself or some type of short-term government security that can be easily traded.
So, those are the two fundamental principles of a fortressed balance sheet, but let me bring up one more point about Jamie Dimon. This is when, in my mind, as someone who has read dozens of books about banking and bankers and by bankers, this is when it really clicked to me what we're dealing with in terms of Jamie Dimon. In his 2006 shareholder letter, which would have been written at the beginning of 2007, so probably February or March of 2007, he issues this apocalyptic warning, basically saying, "We don't know when trouble is going to strike, but when it does, we think we're going to be ready. We don't know where it's going to come from," all these different things. Well, you go and you look at the other big bank CEOs at the time -- Chuck Prince at Citigroup, Ken Lewis at Bank of America (NYSE:BAC), and at other banks and you read their shareholder letters, they were all talking about, "Growth, growth, growth, oh my God, everything is so great, keep going, keep pushing, keep growing." Well, in August of 2007, when the first tangible sign of the financial crisis struck, and that's when this French bank, the BNP Paribas, suspended redemptions for these mortgage-backed security investment funds that they had. Then, in March of 2008, Bear Stearns went under and it was purchased by JPMorgan Chase at the behest of the government because the government needed somebody to help them. And then, in September of 2008, Lehman Brothers failed and the real crisis struck. Again, in that time, JPMorgan Chase came in and rescued a $300 billion bank based out in my neck of the woods called Washington Mutual. In fact, I was up in Seattle yesterday and I saw the old Washington Mutual building. Sheila Bair, who ran the FDIC at the time of the crisis, who was actually a very controversial figure, as I've come to learn from a lot of bankers, she had a great point about JPMorgan Chase and Jamie Dimon. She said, "In times of crisis, most bankers will come to the government for help. But there are some banks that are so well run that the government will go to them for help." And JPMorgan Chase was one of those.