Is Jamie Dimon too powerful at JPMorgan? I have a wonderful, simple test in mind, though it may be impracticable; anyway here it is:
- if a majority of shareholders vote in favor of the nonbinding proposal to strip him of his role as chairman of the board, and
- he remains chairman of the board, then
- he’s probably too powerful!
Let’s find out!
Honestly, who cares who cares who cares who cares if JPMorgan’s board has an independent Chairman or just an independent Presiding Director? The board’s job is to keep an eye on Jamie; if it failed to do that then giving it a fancy new title doesn’t seem likely to improve performance. Is it your impression that Jamie Dimon, who apparently rides roughshod over pissant Presiding Directors,1 will nonetheless be meek and subservient when faced with a Chairman?
Discussion about this proposal is confused because some people think that having an independent chairman is a good thing in all circumstances, or at least say they do; CalPERs’s governance czar, for instance, believes that “There’s a fundamental conflict in combining the roles of chairman and C.E.O.” and so CalPERS will vote to split the roles at JPMorgan just as they did last year. Others think that, y’know, it depends on the people. The people here would presumably remain the same though there’s some rumbling that Dimon would take his toys and go home if he couldn’t be chairman too.
Outside of CalPERS, though, the universal-good-governance theory doesn’t seem to move anyone much. Here, if you’re interested, are JPMorgan’s top 20 shareholders: Read more »
Yesterday Citi sued Barclays over an indemnity that Barclays gave Citi during the collapse of Lehman Brothers, and while, yes, the lawsuit is boring in the way that only lawsuits over indemnities can be, I’m nonetheless going to tell you about it under the heading “laugh at Citi doing stupid stuff.” The stupid stuff here is roughly:
- Citi was the clearing bank for Lehman Brothers FX trades, with gross exposures in the tens of billions of dollars.1
- Lehman ran into some trouble in September 2008, as you may have heard.
- On September 9, 2008, one week before Lehman’s bankruptcy filing, Citi decided it might be a good idea to get some security for its Lehman FX clearing exposure, in the form of getting set-off rights against $2 billion that Lehman Brothers Holdings (the public parent company) had on deposit at Citi.
- On September 15, 2008, after Lehman Brothers Holdings had filed for bankruptcy, Citi decided that it might not be a good idea to continue extending credit to Lehman Brothers Inc. (the non-bankrupt broker-dealer subsidiary) and so terminated its FX clearing arrangement.
- Lehman Brothers Inc. begged Citi to reconsider, and Citi agreed to provide basically two more days of clearing (through September 17) in exchange for $1 billion of new collateral posted by Lehman.
- Lehman Brothers Inc. continued to not pay Citi amounts that it owed.
- So Citi again stopped clearing for Lehman.
- This time Barclays, which had agreed to purchase the Lehman U.S. broker-dealer operations, begged Citi to reconsider, and Citi agreed to provide basically two more days of clearing (through September 19) in exchange for $700mm in new collateral posted by Barclays.
- Lehman Brothers Inc. again continued to not pay Citi amounts that it owed, and was placed into SIPC liquidation on September 19.
- Citi again stopped clearing for Lehman, for real this time, and closed out its positions at a loss of something like $1,260mm.
- It set off $1bn of these losses against the collateral posted by Lehman.
- Then Barclays called Citi, in October 2008, and asked if it could have its $700mm of collateral back.
- Citi said yes!2 Read more »
A simple model of banking regulation and, like, counter-regulation goes something like this:
- Regulators are conservative and dumb, and want to safeguard banks from bad risks even at the cost of preventing good risks,
- Bankers are aggressive and smart, and want to take lots of good risks even at the cost of taking some bad risks, and
- Sometimes bankers can find people to put up with their shit and sometimes they can’t.
“Put up with their shit” is meant in the broadest sense – Can banks defeat Dodd-Frank? Brown-Vitter? Is Lloyd Blankfein a hero or a villain? Jamie Dimon? Etc. – but one particularly interesting question is, if you’re trying to do trades that evade or bend or optimize or whatever regulation, will someone do those trades with you? You could write a history of recent finance with the answer to that question: in 2007 you could chuck all of your mortgage risk off-balance sheet via securitizations, in 2008 you … could not, and in 2013 if you’re looking for someone to provide regulatory capital relief all you have to do is call a Regulatory Capital Relief Fund. Six years peak-to-peak, same as the S&P.
You could probably use words like “bubble” in characterizing that cycle but I prefer the approach taken in this new NBER paper by Guillermo Ordoñez of Penn (free version here), both because it mathematically formalizes that basic model of regulation and counter-regulation in an interesting way, and because it is congenially cynical. As he puts it, “banks can always find ways around regulation when self-regulation becomes feasible, and it is indeed efficient for them to do so.” Bankers, of course, always think that it would be efficient for them to find ways around regulation. They only do so when they can find someone to trade with them. Read more »
I’m beginning to get the hang of how Deutsche Bank works, which seems to be:
- When they lose money, that strengthens their capital position, and
- When they make money, that weakens their capital position, requiring them to sell shares.
Maybe? Three months ago we talked about how … well, I said “Deutsche Bank Improved Its Balance Sheet By Losing A Lot Of Money,” which I guess seemed funnier at the time, but to be fair (1) Bloomberg said “Deutsche Bank ‘took pain’ in the quarter by booking a loss to boost its capital ratio without selling shares,” which is about equally funny or unfunny, and (2) Deutsche did in fact have a 4Q loss of €2.2bn and yet increased its Tier 1 capital ratio by 90bps.
Today, on the other hand, Deutsche pre-announced – good! positive! €1.7bn! – first-quarter earnings and also:
The Management Board of Deutsche Bank AG resolved today, with the approval of the Supervisory Board, to execute a capital increase, which is intended to raise gross proceeds of approximately EUR 2.8 billion. The purpose of the capital increase is to strengthen the equity capitalisation of the bank. Read more »
Citi announced its quarter this morning and there are various ways to tell that it was good, of which “the stock was up” is probably the main one. A possibly less objective test is that, back in March, Mike Corbat told everyone how he would grade himself, if he was grading himself. As he put it today:
Last month, I presented three targets we aim to reach by the end of 2015. First is achieving an efficiency ratio in Citicorp in the mid 50% range. Second, we want to generate a return on Citigroup’s tangible common equity of over 10%. And third is reaching a return on Citigroup’s assets of between 90 and 110 basis points in a risk-balanced manner.
Today Citi announced $4.0 billion of net income (excluding CVA/DVA), or $1.29 per share, which I work out to around 82bps of ROA, 9.86% ROTCE, and a 55.6% Citicorp efficiency ratio.1 So … pretty good, all in all?
One oddity of Corbat’s three-part plan is that two of the parts sort of collapse into each other. Read more »
Yesterday JPMorgan research released a 328 page report arguing that global tier 1 investment banks were “un-investable,” and today JPMorgan reported record first-quarter earnings of $1.59 per share versus $1.40 consensus, so I guess it sort of looks like there’s a disconnect. But not really? Here are the analysts on banking regulation:
We believe Tier I IBs are un-investable at the moment and the right time to make a switch into Tier I IBs would be if we get more clarity on regulations providing us comfort around the ROE potential of Tier I IBs or we see IBs having to spin-off their businesses leading to capital return to shareholders. We believe Tier I IBs will continue to remain more exposed to the IB regulatory changes as they try to “defend their turf” while Tier II IBs have the option to step back more aggressively.
Jamie Dimon, meanwhile, responded to analyst questions this morning by more or less begging the analysts themselves to call their congresspeople and defend JPMorgan’s turf, arguing that banks are safer than ever, that JPMorgan’s size and scale and universality provides services that clients want and is good for the world, and that “I hope at one point we declare victory and stop eating our young.”1
The analyst report is a fascinating bit of business. The claim is that global investment banking – by which they mean of course FICC trading – will see market share move toward top-tier banks, driven mainly by the commoditization of the FICC business with clearing and greater price transparency around derivatives, as well as higher capital requirements and more complex and Balkanized regulation around trading activities. The result: Read more »
There’s a surprisingly large and vocal group of people who think that capital ratio requirements for large banks should be much higher than they are now (like, 15+%), and that those ratios should be based on total assets rather than any sort of regulatory risk-weighting. It’s surprising not because those are especially bad or counterintuitive ideas, but because who would have guessed a year ago that that would be a thing that people talked about? Good work, Admati & Hellwig.1
Anyway the latest is a bill that Senators Sherrod Brown and David Vitter are planning to introduce, which you can read about at Bloomberg, and read the draft of on Quartz. The gist is:
- Every U.S. bank would have to have a minimum 10% capital ratio,
- The biggest banks – those with over $400 billion in assets – would have to have up to 15%,
- The ratio is just (Tangible Common Equity) ÷ (Total Assets plus some off-balance-sheet things including lending commitments); i.e. it’s not risk-weighted at all, and
- “the [Federal Deposit Insurance] Corporation, the [Federal Reserve] Board, and the Comptroller [of the Currency] shall be prohibited from any further implementation of [Basel III].”
This feels like it may not be intended all that seriously, but whatever, let’s do the math and see what it gets us. Roughly speaking, it gets us the following:
Read more »
I’ve occasionally pointed out that one problem with the antitrust Libor lawsuits is that the allegations are mostly “the banks lied about Libor in order to trick each other about their creditworthiness and/or screw each other on some swaps trade,” so it’s hard to claim that they were all working together in a big antitrust conspiracy. But Judge Naomi Reice Buchwald, who mostly dismissed a batch of Libor lawsuits on Friday, has an even better objection, which is that even if it was a conspiracy, it was supposed to be a conspiracy:
[T]he process of setting LIBOR was never intended to be competitive. Rather, it was a cooperative endeavor wherein otherwise-competing banks agreed to submit estimates of their borrowing costs to the BBA each day to facilitate the BBA’s calculation of an interest rate index. Thus, even if we were to credit plaintiffs’ allegations that defendants subverted this cooperative process by conspiring to submit artificial estimates instead of estimates made in good faith, it would not follow that plaintiffs have suffered antitrust injury. Plaintiffs’ injury would have resulted from defendants’ misrepresentation, not from harm to competition.
As Judge Buchwald points out, in a delightfully sensible 161-page opinion, antitrust violations require a competitive market that can be subverted by a conspiracy. Here, there was no competitive market to subvert, and the injury that the plaintiffs suffered – manipulated Libors – could have come as easily from individual bank manipulation as from a grand conspiracy. Normal markets don’t work that way: if I just decide to charge you twice the going rate for my product, and no one else does, that tends not to work. If I submit twice the real rate for my Libor, and no one else does, that kind of still works, though I guess it works better if everyone joins in.
So, so much for antitrust. Read more »
It’s a good day to be wholly cynical about banks so let’s be mean to the Basel III monitoring exercise. This is a thing where periodically the BIS looks into how far away banks are from meeting their Basel III capital requirements, with about a nine-month lag. The answer is always “pretty far away,” which isn’t that big a deal since they have until 2019 to get there, but the good news today is it’s getting less far away:
On Tuesday, the Basel Committee said the average capital ratio of 101 large banks was 8.5%. In total, large banks—defined as having Tier 1 capital in excess of €3 billion ($3.89 billion)—need to raise €208.2 billion in capital to hit the ratio of 7%, which includes an extra buffer against financial shocks.
This shortfall has decreased by €175.9 billion since a similar test was conducted using data as of Dec. 31, 2011. The committee noted that these 101 large banks generated €379.6 billion of pretax profit between July 2011 and June 2012. Instead of being redistributed in pay and dividends, profit can be stored to boost capital reserves.
Yay. Here’s what that looks like as of June 2012 – again, this thing is on a nine-month delay for some reason, so that’s the latest: Read more »
One of the nice things about last year’s Fed bank stress tests was that they were released, and everyone was like “OMG Citi failed!!,” and then we all calmed down and realized that all that meant was that Citi’s capital return plans had failed, so it couldn’t launch a big share buyback, but it wasn’t going to be smashed into dust as a warning to its compatriots. That turned out to be cold comfort for Vikram Pandit but was soothing for the rest of us. This year, in part to avoid the Vikram thing, the rules have changed: today the straight-up stress test results were released, while the Fed will approve or reject capital return proposals next week, and there’ll be a lot of weird disclosure gamesmanship in the interim. Early signs point to Citi being out of the doghouse, and Goldman possibly being in it.
Also Ally Bank failed, sorry! Legit failed, not failed pro forma for capital return. So, smashed into dust.
Here is a chart you may or may not find amusing:
This chart is intended to answer the question: how many a 1-in-100 terrible days would these banks need to have in order to get the Fed’s estimated trading losses?1 Read more »
I realize it doesn’t actually work this way but I always imagine that sell-side analysts at big banks who cover other big banks enjoy sabotaging each other a little. “Take that, you Deutsche Bank jerks!,” Jernej Omahen might have thought as he hit send on this one:
Deutsche Bank AG fell the most in more than five months after Goldman Sachs Group Inc. cut the company to sell from hold, saying it may have to transfer $13 billion to its U.S. unit under new capital rules.
Deutsche Bank slid as much as 6.2 percent, the biggest intraday drop since Sept. 26, and traded at 33.07 euros at 1:40 p.m. in Frankfurt [closing at 33.66 / down 4.6%]. The stricter requirements may hurt profit at Europe’s biggest bank by assets and require it to ask shareholders for more money, Goldman Sachs analysts including Jernej Omahen wrote in an e-mailed report from London today.
Goldman’s note addresses two impacts of recent Fed moves to make international banks’ US operations safer: the capital impact, and the funding impact. The capital stuff is wholly imaginary, though I guess the economic consequences might be real enough. Start with this chart, and note that “Taunus” is basically shorthand for “Deutsche Bank’s US operations”:
If GS is right – I have no idea, I’ll just assume they are, but there are some assumptions and guesses here – the problem with Deutsche’s U.S. operations isn’t that they’re undercapitalized; it’s that they have negative capital. Read more »