JPMorgan: Not Breaking Up Any Time Soon

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One silly thing to think about JPMorgan's executive reshuffling announced today is "fuck you Sandy Weill!" Before today JPMorgan looked a bit like a loose confederation of financial services businesses, including in particular three different institutional units: the Global Corporate Bank, a bank that lends money to companies, the Investment Bank, an investment bank that does mergers and trades securities, and Treasury & Securities Services, which I think of as sort of a meta-bank that offers big companies checking accounts and safe deposit boxes but, like, bigger. Now all of those things are being combined into the Corporate & Investment Bank, irrevocably mixing corporate (good!) and investment (bad!) banking into one unholy mess seasoned liberally with credit default swaps. The combination will sadden anyone with any hopes of bringing back Glass-Steagall, but it's paying dividends for JPMorgan already, as the C&IB "will be looking to our global leaders to help implement strategy and deliver top-line synergies, while optimizing the model across all functions in the regions," a masterpiece of jargon that I doubt any of its businesses could have managed on their own.

"Top-line synergies" of course means that now when you open a cash management account with former TSS you get not a toaster but a meeting in which you're pitched on a loan from the former corporate bank and a potential M&A deal opportunity with the former investment bank, and vice versa mutatis mutandis if you instead enter JPMorgan through the lending or advisory or trading doors. Because the goal is not merely for JPMorgan to do all of the financial-services functions that some people think should be separated from each other, but for JPMorgan to do all of those functions for all of the clients in the world, because some people just don't worry that much about "too big to fail."

JPMorgan is the biggest and unfailingest of the too-big-to-fail banks and so this way of hunting for top-line synergies by getting bigger and more interconnected might, if you are of a certain temperament, worry you a bit. That said if you're a Sandy-Weill-ophile you might actually find this encouraging. JPMorgan is, of course, in the business of making money, and in particular it's in the business of making more money each quarter than it made the previous quarter, whenever possible. Two obvious ways of doing so are (1) selling more profitable products to more clients and (2) sitting in a room betting on credit default swaps.

Having lots of different independent businesses is a good setup if #2 is more your speed: among other things, you might feel less conflicted (and/or have more effective Chinese walls) trading against your firm's clients if they're clients of a different bit of the firm. If you're a trader and nobody is bothering you to cross-sell, er, deliver top-line synergies while optimizing the model across all functions in the regions*, you have more time to dream up prop trades that can make you money while freeing you from the misery of actually interacting with clients. And if you're in a client business already, and it's culturally or operationally difficult for you to make $10mm off a client by flinging an M&A banker at them, you might be more inclined to make that $10mm by hiding a shady derivative in their FX purchasing program, or deflating the interest rate they receive on their checking account, or doing something else to justify your paycheck.

On the other hand, if sitting in a room betting on credit default swaps isn't an attractive option, for regulatory or reputational or market-risk reasons, then you're left with choice #1, selling more services to more clients. You have to be a little cynical whenever bankers say that they're re-aligning their businesses to serve their customers better: that means serve their customers more, and more banking services are not always better.** But doing anything to serve clients anyhow is arguably a good sign: top-line growth from cross-selling is probably less capital-intensive, and less risky, than top-line growth from CDX-whaling.

* "The regions" is actually my favorite piece of businessy jargon here. You could say, like "everywhere," but you say "the regions" because there's some guy who's the deputy co-COO of Asia ex-Japan or whatever and he reads this and is like "oh, cool, shout-out to the regions!" and then works harder on optimizing things.

** For the client, I mean. ALTHOUGH. If we're critiquing rhetoric, let's give some credit to this memo from Jamie Dimon, which is as always non-jargony and perfect and weirdly honest. "We also recognize the need to structure ourselves in the most effective way to grow our businesses and support our clients, and ensure that we comply with all of the new regulatory requirements," surely lists those things in exactly the order that he cares about them.


It's Probably Best Not To Think Too Hard About JPMorgan's Revenue-Per-Trade Breakdown

Despite its overwhelming brown-ness I was kind of mesmerized by this slide from Jes Staley's presentation for use later today at JPM's investor day: The table shows the "number of trades" and revenue per trade for a bunch of JPMorgan's investment bank trading products, which it's disclosing now for reasons that are unclear but you can guess. Bloomberg does:

JPMorgan's Voldemort Probably Isn't That Magical

John Carney has hilariously convinced a bunch of people that JPMorgan whale-wizard Bruno Iksil could actually be running a synthetic bank on top of JPMorgan's actual bank. The theory, propounded to him by a mysterious trader and sort of supported by an old PIMCO client note, is that Iksil was tasked with hedging JPMorgan's inflation risk and did so by putting on a trade that was (1) long TIPS (for the inflation) + (2) long [write protection on] CDX (for the yield). Now I will tell you a thing, which is that I hedge my inflation risk by being (1) long TIPS (for the inflation) + (2) long MegaMillions tickets (for the yield),* but nobody calls me Voldemort. Here is Doug Braunstein's theory about Iksil: On a conference call with analysts, Braunstein said the positions are meant to hedge investments the bank makes in “very high grade” securities with excess deposits. (J.P. Morgan has some $1.1 trillion in worldwide deposits.) Braunstein said the CIO positions are meant to offset the risk of a “stress-loss” in that credit portfolio. He added the CIO position is made in line with the bank’s overall risk strategy. What can that mean? Presumably the sensible view to take from this is that this is actually part of a "stress-loss" hedge; the CIO is short (bought protection on) a lot of shorter-dated corporate credit and funds it by being long (selling protection on) a lot of longer-dated (5-year) corporate credit, so as to be relatively DV01-neutral but long jump risk. This has the advantage of (1) actually hedging a stress loss in high-grade short-term corporate securities, (2) fitting in with the relative lack of noise in the CIO portfolio,** (3) being what people have told Bloomberg he was doing, and (4) being what JPMorgan has actually said it's actually done in the CIO during the crisis. So it's probably true no? But it's fun to pretend! If you pretend Carney is right you can have one of two views.*** One is Izabella Kaminska's, which is "sure, I guess this is a hedge, but boy is it a mysterious one." You can buy this if you have - as she does - a pretty postmodernist view of what a hedge is. I do too, mostly.