Jamie Dimon, CEO of mega-bank JPMorgan Chase (NYSE:JPM), just released his annual letter to shareholders. In it, he covers a wide range of topics, including JPMorgan Chase's business strategies, current political issues, and cybersecurity.
Dimon is one of the most influential people in banking (and in business generally), so investors tend to take his comments rather seriously. With that in mind, here are Dimon's thoughts on where the banking industry stands today, whether stock buybacks are a good or bad thing, socialism as a cure to America's problems, and more.
1. The banking industry has come a long way since the financial crisis
For any investor who might be worried about another 2008-style banking crash, Dimon offered these reassuring words: "The strength, stability and resiliency of the financial system have been fundamentally improved over the course of the last 10 years. These post-crisis reforms have made banks much safer and sounder in the three most important areas: capital, liquidity, and resolution and recovery."
Dimon points out how large banks have more than doubled their highest-quality capital and tripled their ratio of liquid assets to total assets, which should allow them to weather virtually any economic storm.
2. Banking regulation is a good thing -- if done properly
It may surprise some readers, but Dimon does not want to get rid of all banking regulations. Even though there has been a push in recent years to get rid of the Dodd-Frank crisis-era reforms, Dimon made it clear that he's not supportive of that idea.
"I want to be very clear that we do not advocate for the repeal of Dodd-Frank. We believe that the strength and resilience of the U.S. financial system have benefited from the law," Dimon said.
Having said that, Dimon said that there's certainly room for improvement when it comes to regulation. He specifically pointed out the rise in "shadow banking" -- things like non-bank mortgage lending and student lending -- as one area that should be watched closely. With the surge of fintech start-ups over the past few years, these types of lenders have grown rapidly, and a lot of the regulations that apply to traditional banks don't apply to these lenders. This could be trouble during a downturn.
Dimon also points out that mortgage regulations could use an overhaul and that bank capital requirements may have gone a bit too far.
3. The stock buyback controversy is overblown
There has been a lingering controversy since the 2017 Tax Cuts and Jobs Act lowered the corporate tax rate on stock buybacks. In a nutshell, while many had hoped that the extra profits would be reinvested to create wage and job growth, a large amount of the profits coming from the lowered tax rate instead has been used by corporations to buy back stock in record volumes.
In his letter, Dimon defended buybacks as an "essential part of proper capital allocation." He points out that, although buybacks did indeed increase in 2018, so did corporate capital expenditures and research and development (R&D) spending. He said that companies are actually spending more today (as a percentage of GDP) on capital improvements and R&D than they were during the 1950s and 1960s.
Finally, Dimon reminds investors to see buybacks for what they really are -- money that's being returned to shareholders. As Dimon put it, "the capital that was used to buy back stock did not disappear -- it was given to shareholders who then put it to a better and higher use of their own choosing."
4. Cybersecurity may be the No. 1 threat to the U.S. financial system
Dimon says that JPMorgan Chase spends nearly $600 million every year on protecting privacy and sensitive data, and that the industry as a whole is doing a good job of fighting the threat of cybercriminals.
Dimon also emphasized the need for solid national policies designed to protect consumers and their data, but that the policies need to be done right. "It is imperative that the U.S. government thoughtfully design policies to protect its consumers and that these policies be national versus state-specific," said Dimon.
5. Socialism is not the answer to our problems
If you've been following the news at all, you've probably noticed that the field of 2020 Democratic presidential candidates continues to grow. Many of the leading candidates have policy proposals that could arguably be described as socialism.
Dimon wants to be very clear -- while capitalism isn't perfect, socialism is the wrong way to go.
"Socialism inevitably produces stagnation, corruption and often worse -- such as authoritarian government officials who often have an increasing ability to interfere with both the economy and individual lives -- which they frequently do to maintain power. This would be as much a disaster for our country as it has been in the other places it's been tried," wrote Dimon.
To be fair, Dimon emphasized the importance of society having a safety net, and that pure capitalism isn't the way to go, either. However, he said he feels that a society can't have true freedom without free enterprise.