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On Size, JPMorgan Chase CEO Jamie Dimon Is Plain Wrong

By Alex Dumortier, CFA - Apr 7, 2016 at 12:27PM

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You can listen to JPMorgan Chase CEO Jamie Dimon when it comes to the business of banking, but take his views on banking regulation with a whale-sized pinch of salt.


JPMorgan Chase CEO Jamie Dimon. Image source: Steve Jurvetson, republished under CC BY 2.0.

U.S. stocks are lower in early afternoon trading on Thursday, with the S&P 500 (^GSPC 0.01%) and the Dow Jones Industrial Average (^DJI 0.03%) (DJINDICES: $INDU) down 0.97% and 0.89%, respectively, at 12:20 p.m. ET. CNBC is blaming "global growth concerns" for the decline; if that's the case, it's no surprise that shares of one of the world's largest banks, JPMorgan Chase & Co., are down 1.56%, underperforming both indexes.

JPMorgan Chase CEO Jamie Dimon is arguably the dean of U.S. bankers. At the head of the largest U.S. bank by assets, one whose "fortress balance sheet" enabled it to sail through the 8-year storm of the global financial crisis without so much as a single quarterly loss, he enjoys a credibility and an authority that is essentially unmatched in the industry.

In the post-crisis era, Dimon has used that authority to push back against financial regulators that he thinks are hamstringing the U.S. banking industry by combining excessive zeal and a misunderstanding of the global financial services industry (or industries, to be more accurate).

One of his bully pulpits is his well-regarded annual letter to shareholders. In February 2012, no less a figure than Berkshire Hathaway CEO Warren Buffett told CNBC:

Jamie Dimon, I think, writes the best annual letter in corporate America. I think every viewer will learn something by reading his annual -- they'll learn a lot by reading his annual report. He thinks well, and he writes extremely well. And he works a lot on the report -- he's told me that -- and that's an annual report worth reading. Most annual reports aren't worth reading, but that one is.

Coming from someone who is himself the author of the most widely followed annual letter in corporate America (and the world, for that matter) and, arguably, the greatest student of business in history, that's a meaningful compliment.

In his latest letter, Dimon pushes back against the notion that "too big to fail" banks need to be broken up, which has gained traction in the run-up to the U.S. presidential elections. In an eight-page section, he argues that JPMorgan's "large, global Corporate & Investment Bank does things that regional and community banks simply cannot do."

I don't disagree with that, but he doesn't make an effective argument that lending and investment banking activities need to be under one roof. In fact, the academic literature has largely shown that, in the U.S., investors apply a conglomerate discount to financial supermarkets -- i.e., higher diversification across financial activities is associated with lower share valuations (this is also true of Chinese institutions, incidentally – more on this below).

His appeal to economic nationalism is also bizarre:

I do not want any American to look back in 20 years and try to figure out how and why America's banks lost the leadership position in financial services. If not us, it will be someone else and likely a Chinese bank.

The notion that Chinese banks are positioned to take the baton of financial leadership from U.S. banks is fanciful for anyone with even a passing familiarity with the Chinese banking system.

Finally, even if we accept that Dimon's arguments hold for JPMorgan, what's good for his bank -- the exception among too-big-to-fail banks in terms of the quality of its operations and management, not the rule -- is not necessarily the right prescription for its peers.

By all means, read the annual letter -- it's well worth it, as Warren Buffett points out. However, it's also worth remaining skeptical when Dimon makes banking policy recommendations: After all, when was the last time you heard a CEO argue for the government to reduce the size of his domain?

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