Wednesday 22 November 2017

'Banks aren't markets. The market is amoral. The market doesn't care who you are. You're a trade'

China. The crash. The recovery. John Micklethwait gets the view from the very top on Park Avenue

James "Jamie" Dimon, chairman and chief executive officer of JPMorgan Chase & Co., stands for a photograph on the third day of the World Economic Forum (WEF) Annual Meeting 2011 in Davos, Switzerland, on Friday, Jan. 28, 2011. The World Economic Forum in Davos will be attended by a record number of chief executive officers, with a total of 2,500 delegates attending the five-day meeting. Photographer: Simon Dawson/Bloomberg

What is the future of finance? Will Silicon Valley challenge Wall Street? Can China build global banks? There are few better places to contemplate such questions than Jamie Dimon's office, high in JPMorgan Chase's HQ in New York above Park Avenue. It's now more than three decades since Dimon, the son and grandson of stockbrokers, teamed with Sandy Weill at American Express.

Together they helped transform the financial industry - first at Travelers and then with Citigroup. Ousted by his mentor, Dimon became chief executive officer of Bank One, which he later sold to JPMorgan.

In Dimon's 10 years as CEO, JPMorgan Chase has delivered a higher total return than every major American bank except Wells Fargo. Dimon has also endured setbacks, such as the huge trading losses run up by the "London Whale" and more than $36bn in settlements and fines since the financial crisis.

Over Dimon's career, financiers soared to become glamorous masters of the universe only to crash to earth in the credit crunch. Regulators who once set banks free to merge with brokerages and expand around the world are now keener to shackle them. A bank as sweeping as JPMorgan would be tougher to build today. Here Dimon reflects on his career, names his biggest mistakes, and looks to the future.

John Micklethwait: Your career has seen a host of companies trying to challenge the status quo in finance; some have succeeded, others fail. The new threat is Silicon Valley. All kinds of fintech startups are coming for Wall Street. Where do you feel most vulnerable?

Jamie Dimon: The best way to look at any business is from the standpoint of the clients. So there are these certain basic things that aren't going to change. Companies are going to have needs for equity, debt, advice, FX, and derivatives. Individuals are going to have needs for loans, mortgages, something that looks like a deposit account, and the ability to send money to people. Those things aren't going to change.

JM: Won't technology change some of them?

JD: My father and grandfather were stockbrokers, and they would actually take stock certificates from a vault, give it to a runner, and send it to another vault. Then somebody said, "Let's digitise it and have one vault." Now the DTCC clears and settles almost everything, and the cost of doing a trade is a tenth of what it was before. We use technology to make it cheaper, better, and faster for the client. And then if you have the most flow, you can win. Now, having said that, Silicon Valley wants to take on this business. They think they see an opening.

JM: Is there a meaningful one?

JD: Let's look at lending, where they're using big data for the credit side. And it's just credit data enhanced, by the way, which we do, too. It's nothing mystical. But they're very good at reducing the pain points. They can underwrite it quicker using - I'm just going to call it big data, for lack of a better term: "Why does it take two weeks? Why can't you do it in 15 minutes?"

For example, they might lend to one of our customers who's got a $200,000 JPMorgan Chase loan, and this person wants to get another $20,000 for a new truck or a piece of equipment. And what does he do? He goes with them, because he gets it in 15 minutes. If he goes back to the bank, he may have to go through this whole big long process for that $20,000.

Can we do something like that? Of course we can. I've asked our people, "Why don't we just put a revolver on top of our basic loan?" Make it easier for the client. If you ask me, the biggest risk will be in the payment systems. I think the banks are pretty good at using digital technology to make it easier for customers. We have 23 million customers who bank on their phones now. It will be a challenge for anyone to be better, faster, cheaper than us. But some people think branchless banks can compete, and that can prove true in some cases.

JM: Isn't part of the reason it's harder for you is because you're regulated in a way they're not?

JD: Not for the loan example I mentioned. It might be harder for us to charge a higher interest rate, like they do, so it might not be as profitable for us. But we can either compete or partner, like we've announced with On Deck, which does some of the stuff we just spoke about.

JM: But these new players are going to keep coming at you. When you look forward to what a bank actually looks like in 10 years, is it still that list of things you gave me earlier?

JD: For the most part I think those things will still be taking place in the banking system, although some will maybe move on. I'm hoping not the main payment systems and deposit businesses, but it's possible someone comes up with something great.

JM: What challenges do you see for fintech?

JD: One of the issues with some of these lenders is going to be, where will their provider of credit be when there's a crisis? That's why some of these smarter services, to support their operations, are courting more permanent capital. They want a source of longer-term funding that can survive a crisis.

JM: So you're not worried the regulators have given these new startups too much leeway?

JD: No. Look, if they become big and significant, they're going to be regulated, too, eventually. The government isn't going to say, "We're going to regulate banks, but we'll leave these other companies alone." I think the regulators want to make sure that they have some form of regulation on anything systemic. We like our hand. But, you know, honestly, who owns the future? Just because you have a good hand today doesn't mean it's good tomorrow. And some of the things we're doing may become very disadvantageous at some point.

JM: At Davos I moderated a panel where Blackstone's Steve Schwarzman effectively said, "My policy for making money is to get everywhere that a regulated bank can't." I know you're generous, but surely that irritates you.

JD: We make money, too, so I'm not that upset. I expect them to do that; that's what they do. Banks don't want certain asset classes, and that's created opportunities for private equity, hedge funds, Silicon Valley. In this case I think he was referring to some of the European banks shedding assets, and the big buyers are probably not going to be big American banks. Someone like Blackstone may have a very good chance to buy those assets, leverage them, borrow up a little bit, and do something good there.

JM: Are there parts of finance, though, that you think are better done by non-banks?

JD: You've seen certain credit type products that are going to be in non-banks, like sophisticated CLO [collateralised loan obligation] tranches and stuff where the capital charge is so high a bank simply will not own it. Someone will buy it, hedge it, trade it. But it won't typically be a bank.

JM: You mentioned Europe. Why have the banks there generally come back from the financial crisis less strongly than American ones, especially seeing the crisis started in America?

JD: I haven't studied it deeply, but the American banks started the crisis with far more capital and what I would call "good liquidity". The riskiest funding is unsecured wholesale funding. It's the most fickle. Not repo, which the government focused on, too. Unsecured. JPMorgan Chase had almost none of that -virtually zero. Some of these other banks were at 30pc. We also had far more capital, partly because our models demanded it. We think that for some institutions, for exactly the same book, they were holding half as much capital. I also think the US regulators were much tougher quicker.

JM: How much of it was the banks' fault?

JD: I don't want to put all the blame on them. Remember, in those countries, their positions were often sanctioned by their regulators and governments. That's how it ran, and it ran quite successfully for a long time. And so it was a bigger rule change for them than it was for us.

I also think you have to be very careful. I mean, the heritage of our company is very strong, and building some of these businesses into leading players is extremely tough. You and I can both build a trading business, and it looks like you're doing OK, and it looks like I'm doing OK. But, really, I am, and you aren't. It comes down to the quality of clients, quality of systems, quality of risk controls.

If you're making all your money simply betting on interest rates, that's not a business. Flow is a business. On the outside, they look the same for a while. But when you dig into them, no, they weren't exactly the same.

JM: And for the Europeans, was the euro crisis a big distraction?

JD: Yes, that probably made it a little bit worse. And, remember, part of the concept of the Eurozone was to establish a common market. The banks were going to bank across all their countries like we bank across states. But that concept got killed for a whole bunch of reasons that I won't get into. That was a good concept, by the way. It may yet return, because there are huge economies of scale in banking. That's another thing people don't quite get.

JM: This is your 60th birthday. You've been in the industry for more than three decades now. Your grandfather and father were both stockbrokers ... Back then, being a stockbroker wasn't a mundane career, but it wasn't an amazingly glamorous one either. That all changed on your watch. Financiers rose to become "masters of the universe." Now they are often vilified, albeit very well compensated. Can you explain that story? What changed?

JD: Finance went from being a small business, effectively, to being a big business. In part, that's the growth of the world's wealth. That's called savings. As countries get wealthier - all of them, together - you're going to have financial assets. That is a good thing. You could argue the assets were traded too much, or that they're too highly valued, or too leveraged. But in general, as countries get wealthier, there's going to be more savings, which means you're going to have intermediation. So part of it is just the huge growth in wealth, and part of it was globalisation - these companies, these clients getting much bigger and much more global.

JM: And how has regulation changed?

JD: From my point of view, the American financial system - including banks and investment banks - is far safer because of capital and liquidity requirements. Despite all the turbulence so far this year, I don't think anyone's questioning our system. And that, obviously, is a good thing.

JM: How have the regulators themselves changed in your career?

JD: I think one could argue that there's more political input into the regulatory side, and on the regulatory side there seem to be fewer people with financial and banking experience - there are more lawyers, academics, economists, maybe politicians, now.

JM: And that's to the detriment of the system?

JD: I'm not going to say that, because then I'll get in trouble. Look, in any system, you want highly ethical people who really understand issues to form policies and make tough decisions. You need all the right people in the room. But there's a general view in Washington now by many politicians that if you ever were on this side, you're conflicted for being on that side.

JM: Were you surprised by the technocrats in China who seem to know about markets, and then suddenly they were pulled apart?

JD: A little bit, yes. First of all, in 20 or 30 years, China will probably house about 30pc of the world's largest companies. They'll probably be a fully developed nation. The road there just is not going to be that easy. You're going from a macromanaged, top-down economy to a market-managed, micromanaged type of economy, with all the potential corruption issues, SOE [state-owned enterprise] reform, and market reform that come with it. And I think what you've seen them do recently in the markets is what most of us learn doesn't ultimately work. But I think everyone has to figure that on their own.

JM: I suppose one problem in China was the political intervention, and the other was that the technocrats weren't quite as good as we thought. Was there any element that was because the technocrats weren't ex-bankers -that they tended to be, as you said, economists?

JD: They have very smart, experienced people. I don't want to paint them all with the same brush. There was a little bit of a feeling that the stock market, which went from something like $4 trillion in valuation to $10 trillion, that the Chinese wanted that. In the summer months, something like 120 million retail accounts were opened. People thought they were going to make a lot of money. And then at one point, it got too hot, and the government wanted to knock it down. Trying to get it up and then knock it down, both were a mistake. And part of the reason, some people think, is that they wanted to equitise some of their companies. A healthy stock market helps equitise companies and reduce the country's debt burden.

JM: Where will China's banks be in, say, 20 years?

JD: My guess is the big Chinese banks will be in 100 countries by then. They will have very sophisticated operations, and they may very well have bought banks around the world in countries that allow it. I mean, I don't think the American government would allow them to buy JPMorgan. But they will be able to buy a sizable big bank in the US at some point. Whether they do or not, or if it's allowed or not, I don't know.

JM: Would you accept that the idea of a universal bank, despite your success, has on the whole, in the West, fallen out of fashion?

JD: Not with the customers, which is where you need to start. Look at it from the standpoint of the client. Our global corporate investment bank competes with Goldman Sachs, Citibank, and a bunch of others that are in those businesses. We may have slightly different products or services, but so what? That's always been true in American business. Our investment bank looks like it does because its customers like our expansive network and want to do equity, debt, M&A, custody, move money, deposit money, etc.

JM: What do you ask people before they come to work for you?

JD: I always tell people, "There's a book on everyone." I get some of that book before I do anything. If I want to deeply understand someone's reputation, I'll talk to their friends, their former bosses, their peers, and I'll learn a lot about them. I want them to be trusted. I want them to be respected. I want them to give a s---. Then there are the intangibles: physical and emotional stamina, the ability to confront issues. I can ask all I want about those things, but I also have to see a lot of it.

JM: What's the best way to make an impression?

JD: I want you to say to me right from the start, "We are here to serve customers. We're not here for me to make a lot of money. We're not here to bet on interest rates or credit spreads. We are here to serve our customers really well over a long period of time, and that's how you build a successful business." And so I want to see that, too, you know? And if you're going to be a leader, you know what I ask myself? Would I want to work for you in this job? Would I let my children work for you? Would I give you this job if I wasn't there to provide oversight? If you went to run another company, would I, as an investor, invest in that company?

JM: So how do you balance that with the "London Whale" trading disaster, where you'd left people to get on with it, and it came back and hit you?

JD: Look, every institution will make mistakes. I acknowledge we make mistakes, and they can hurt my reputation and our company's. But you also must be willing to let go a little bit, trust others, and not always be so stringent, provided you have robust controls. If I ran the whole place like it was my way or the highway, we would not be as good a company. I'm going to have mistakes-they'll be made on my watch and will embarrass me. But I'll also make sure the company learns from them so it can become a better company. I do think I could have spotted it, though. That's why I'm so mad at myself. I could have, the heads of our risk groups could have, several people could have.

JM: What's your biggest mistake?

JD: I've made so many. The toughest are people mistakes, when you put the wrong person in a job. Sometimes you're too slow to move them out. Or not getting the right people involved to solve a problem, or doing something out of anger; you learn, just don't do that.

JM: Why does an overall reputation matter that much, if individual customers know you and trust you?

JD: That's a very good question, but remember, we have 200,000-plus employees who are on the front lines and see firsthand the populist anger, deserved and not. Regulators, litigators, Department of Justice, governments-they all see us every day. They show the charts of all the settlements; JPMorgan is always up there. That's a negative message for our company, our clients, our reputation. But I understand your point, too. For a lot of clients, it didn't affect their view of us.

JM: You're saying your image, it's changed. That's a huge thing.

JD: Well, look, if you were the American public, you saw a catastrophe. In general, you would say, "The biggest institutions of America -Washington, broadly, and Wall Street, broadly -they're to blame." And, broadly, they're right.

That does not mean everyone did something wrong. Not every company went bankrupt. Not every bank needed TARP [Troubled Asset Relief Program]. So I'm very proud that JPMorgan, throughout that time period, was completely steadfast. Remember that banks aren't markets. The market is amoral. The market doesn't care who you are. You're a trade to the market. The market will sell you if they think you're riskier. Banks didn't do that.

JM: Banks are more moral than markets?

JD: Yes, because a bank is a relationship. I can't desert you and expect to have a strong relationship afterward. If I told someone, "I know you've been buying milk from me and you need milk to survive. But the price is no longer $2 a gallon. It's going to be $40 a gallon. I'm going to bankrupt you." What do you guys think of me? You would hate us. I mean, obviously some of these banks did bad stuff. Yet even in the depths of the crisis, banks didn't materially change the prices for clients.

Banks also have to say no to customers. We can't always give clients what they want; it may not be in the client's best interest. When you walk into a store and you want to buy something, you give them cash and they sell it to you. But very often, you walk into our "store" and you want something - a credit card, maybe, or a loan - and very often the answer is "No," even if you're a large corporation. And so we have this relationship with our clients where sometimes, because we want to help them, we have to say no.

JM: I suppose there's an image of finance, and then there's an image of capitalism - the general idea that capitalism is there to help, that it's an integral part of society.

JD: I think the free-enterprise system has been great for society. That doesn't mean it's completely perfect. And also, when people say capitalism, I'm not really sure what they mean. I've been regulated my whole life. We have progressive taxes. It's not a free-market free-for-all. I completely understand that society has a perfectly legitimate right to put in structures and regulations and rules that make it fairer, better, cleaner.

JM: So let's bring it back to you. Has your view of what finance does changed over time? Have you been forced to actually think harder about what exactly the role of finance in society is?

JD: I've always wanted to help build a better society and build a better company, and I always wanted a healthy, vibrant company, a healthy, vibrant society. We take care of our people, we provide them with opportunity. But I've always believed business is here to serve your clients, your shareholders, your communities. If we do this well, everyone benefits. We have to do a good job for all of them.

John Micklethwait is the editor-in-chief of Bloomberg.

• 1956: James "Jamie" Dimon is born in New York. His father and his grandfather, a Greek immigrant, were both stockbrokers.

• 1982: Harvard MBA in hand, Dimon spurns Goldman Sachs and Lehman Brothers for American Express, where he joins Sandy Weill, whom he had courted with an essay.

• 1991: Weill, now Primerica chairman and chief executive officer, makes Dimon president.

• 1993: Travelers and Primerica merge; Weill is again CEO/Chairman and Dimon president at Travelers.

• 1998: Travelers merges with Citicorp to create Citigroup, the world's largest financial conglomerate. Weeks after their biggest achievement, Weill fires Dimon, ending their 15-year relationship.

• 2000: Following a year in the wilderness (and a job offer from, Dimon joins the ailing Bank One in Chicago as CEO.

• 2004: JPMorgan Chase acquires Bank One, creating a rival to Weill's Citigroup. Dimon returns to New York and is made CEO the next year.

• 2008: JPMorgan weathers the financial crisis better than any US bank, and Dimon snaps up Bear Stearns and Washington Mutual.

• 2011: JPMorgan becomes the biggest US lender when Bank of America dumps assets.

• 2012: Dimon initially dismisses questions over the so-called London Whale as a "tempest in a teapot"; the trading loss eventually totals $6.2bn. The next year's regulatory probes cost JPMorgan more than $23bn in settlements.

• 2015: JPMorgan posts a record $24.4bn in profit. Dimon's compensation: $27m.

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