At the beginning of this month, analysts at Goldman Sachs made headlines by suggesting that JPMorgan Chase (NYSE:JPM), the nation's biggest bank by assets, would be worth more if it were broken into pieces than it is as a coherent whole.
"Our analysis suggests that a breakup into two or four parts could unlock value in most scenarios, although the range of outcomes we assessed is wide, at 5% to 25% potential upside," the Goldman analysts wrote.
JPMorgan didn't respond to the report at the time, but 10 days later its chairman and CEO Jamie Dimon took time on its quarterly conference call to offer a number of reasons Goldman's suggestion is, to put it mildly, misguided:
1. Breaking up JPMorgan may seem easy in theory, but it would be very complicated in reality.
Look, unscrambling it would be extraordinarily complex and it would be extraordinarily complex in debt, in systems, in technology, in people and where certain things go and the businesses would start competing with each other right away, which I think is perfectly reasonable if they were all separate stand-alone. So look, we're very conscious of the narrative, which has become out there about this, but it is far more complex than that.
2. Separate companies wouldn't benefit from the cost savings and top-line benefits JPMorgan currently enjoys.
Even the people who wrote about this talk about the superior franchises, the benefits of synergies, the good things the Company brings to bear. So the first way to look at a business first and foremost has been and always will be what you do for customers, not what you do for yourself and your own returns. And on the customer franchise in every business we're gaining share. We have good returns, we've got good marketshares, we've got good customer satisfaction levels. The synergies are huge, both expense and revenue synergies, etc. and some, not all, disappear under the various schematics of a breakup or something like that, but that's number one.
3. In times of trouble, like the financial crisis, it's good to have massive banks like JPMorgan.
This company was a port in the storm in the real crisis in 2008 and 2009 and that was after we bought Bear Stearns and Washington Mutual. We had no issues whatsoever.
4. JPMorgan is currently safer than ever.
We have a lot more capital now, we're more conservative now. We've got less credit exposure as a percent of the balance sheet. We've got less risk as a percent of the balance sheet. We've got more long-term debt, we've got more liquid assets. We've got more -- so it's even more true today. The fact is the Company is an extremely powerful thing.
5. Stock valuations, like those relied on in the Goldman Sachs' report, fluctuate.
When you all talk about P/E ratios and sum of the parts, P/E ratios are temporary, they change over time and the real question you should be asking is whether the earnings are going to be much higher or much lower under scenario A or B, not just what is the P/E going to be because I could give you a lot of scenarios where your earnings are going to be a hell of a lot lower and that dwarfs the effect of the P/E ratio change and the P/Es themselves are temporary.
6. JPMorgan is currently earning a superior rate of return.
JPMorgan is already earning its cost of capital and you're comparing its P/E ratios to a lot of guys who aren't earning their cost of capital. Meaning people expect them to have dramatic growth in earnings, which they will and so it's -- you've really got to have a much more forward-looking view of what P/E ratios will be, what values will be, what earnings will be, what the franchise will be then just the sum of the parts breakup based on current P/E ratios and false comparisons.
7. America needs large, universal banks.
America has been the leader in global capital markets for the last 50 to 100 years. It's part of the reason the country is so strong. I look at it as a matter of public policy. I wouldn't want to see the next JPMorgan Chase be a Chinese company because someone has to be serving the global multinationals around the world and all the things that that means about knowledge and experience and research and capabilities. So I think that if you look ahead 10 years, you're going to have large global companies who compete and we may have to be slightly smaller than we might otherwise have been, but so be it. If we can do that and do a good return for shareholders, we should do that.