To the casual observer, it would seem like JPMorgan Chase (NYSE:JPM) can't catch a break. It's true that CEO Jamie Dimon has faced a barrage of scandals recently, yet somehow, both his firm and his reputation remain relatively untarnished in the echo-chamber of Wall Street. I find that curious. Here's why.
The origins story
Back in 1982, financial juggernaut Sandy Weill hired a whiz-kid named Jamie Dimon straight out of business school. At the time, banks were relatively simple institutions designed for lending against their deposits. The two would eventually pioneer what we recognize as the model of too-big-to-fail banks when they merged Citicorp and Travelers into a single financial behemoth. The value proposition of a multi-purpose institution was to create the Costco of financial services: a one-stop shop for all banking and investing needs.
And it worked.
Citigroup (NYSE:C) became the largest firm in the business, its market cap once peaking at $277 billion in late 2006. Of course, Dimon never got the chance to bear the fruits of his labor because Mr. Weill fired him soon after the merger. Jamie Dimon is no quitter, however. He went over to JP Morgan and steered the company through the 2008 economic collapse using the same wits and banking philosophy that transformed an entire industry just one decade before. However, with all credit to their ingenuity, because it's been a successful strategy at creating shareholder value, noticeably absent in Weill and Dimon's value proposition is the notion of social costs. Their calculus ignores the crucial role that banks play in the overall economy, and it's an oversight that continually haunts our financial system
Banks occupy a unique role in the larger scheme of things. The creation or destruction of credit runs from the Federal Reserve, down to the banks and other financial institutions, before finally reaching the real economy. By the "real economy," I mean companies that produce an actual good or service which people or other businesses consume.
Banks are emphatically not that. They're intermediaries designed to facilitate the movement of capital from savers to borrowers. If that sounds boring, it's because it should be. Banks aren't natural growth stocks, because people don't magically save more and more money every year and give it to banks to lend out. That doesn't make any sense. The growth comes from leverage and speculations -- and it's the pressure of shareholder expectations that force banks to diversify into higher risk/reward activities. Since Dimon and Weill made shareholder value central to their governance philosophy, the result is more risk-taking activity than is safe or necessary. To borrow a line from Jon Stewart: investors realized they could privatize their profits, while socializing their losses. That's a moral hazard.
When shareholders put up equity in a business, it doesn't mean they are the only stakeholders in that company. If bank deposits are federally insured, then it logically follows that taxpayers are also stakeholders in banks. The insular nature of Wall Street makes it easy to avoid that truth, though.
Those stakeholders are not happy, either. Outside of Wall Street's bubble, populist anger against JPMorgan remains widespread. This is thanks in part to alleged mortgage violations, the London Whale fiasco, and the questionable hiring of a Chinese minister's daughter (just to name a few of the company's issues!). The company's disastrous Twitter outreach attempt proved how out of touch these executives can be.
Does any of that even matter? I mean, year to date, JPMorgan's share price is up an impressive 29% despite some of the highest litigation costs in the industry. An additional $4 billion was set aside for legal expenses this quarter, bringing the total to over $30 billion in just three years. While shareholders might think the slate is being wiped clean, it's obvious Mr. Dimon's leadership has had some costs.
Don't get me wrong. I understand why his supporters like him. By all accounts, he's a brilliant guy, he steered JPMorgan through the financial crisis, he communicates well, and he has a sense of humor. I've got nothing against him personally. Washington Mutual and Bear Stearns were purchased under his watch, though, moving their liabilities into his column. More importantly, his philosophy of banking, the one that prizes a profit over stability... it has proven unsustainable. If you're not a fan of stock market crashes, stop treating banks like growth stocks. It only feeds the problem.