YOU CAN’T HAVE SUNNY DAYS ALWAYS: DIMON -JP Morgan Chase

George Smith Alexander, Bodhisatva Ganguli & Shaji Vikraman MUMBAI

 HE IS the new king of Wall Street. This year, as the credit crisis spread, JPMorgan Chase executed two acquisitions, picking up two storied institutions, Bear Stearns and Washington Mutual, at bargain prices. While most financial institutions, even heavyweights like Goldman Sachs, have seen their market capitalisation erode in the financial crisis, the bank's stock has remained steady. Jamie Dimon, chairman and CEO, JPMorgan Chase, was in India on a low-profile visit, meeting regulators and clients. Mr Dimon, who is a Democrat, has been mentioned in the US media as a possible treasury secretary in an Obama administration. The President-elect had sought his advice at the height of the US credit crisis in September. Mr Dimon, who has been the JPMorgan Chase chairman since December 2006, was the chairman and CEO of Bank One, which was merged with JPMorgan Chase in 2004.
What caused the current crisis?
We'll be writing and learning about this crisis for a long time. So, it is a bit early to talk in detail about this now. But mortgages were badly underwritten in the United States. We were giving more and more leverage to mortgages, from 80 to 85 to 90 to 95 to 100%. There was a housing bubble, and part of the reason that mortgage leverage kept going up was because we never had losses and this masked the underlying capitalisation. 'JPMorgan didn't need the treasury money'
    THEcausal factors were bad mortgages, the bursting housing bubble, excess leverage in the system, and the longer-term build up of huge trade deficits in the United States. These deficits caused additional problems in terms of companies being able to borrow cheap, creating a false sense of security. So, I hope it's a wake-up call that maybe, we should be a little bit more careful on our trade and fiscal deficits. In addition to these, several contributors such as SIVs, securitisation, derivatives, mark-to-market accounting aggravated the crisis.
What are the lessons?
One of the lessons from this crisis is that there are normal cycles, and if you run a business, you are going to have to deal with them. You cannot run any business thinking that it's going to be sunny every day. You just have to be prepared for the monsoon. Some of what you see now is that people were not prepared for normal cyclical trends in their businesses and the economy. There will be a big rewriting of financial regulations around the world. This will focus on creating good and effective regulation with global competition in mind. Basel II was a contributory factor because it was flawed. An important lesson is that you need to have capital requirements that are always adjusting. You cannot do it every 15 years and think you can keep up with the real world. Some of the steps that the central banks of the world have initiated now could have been done proactively. Trying to implement a policy on the run is very hard.
Is there a danger of overregulation?
Absolutely. However, there is a greater risk from bad regulation than overregulation. Hedge funds and private equity should be more regulated. The whole mortgage market in the US should have been properly regulated. If it had been, the situation would have been far better today.
Will the US government play a more direct role in the day-to-day lending decisions of JPMorgan following the recent injection of capital?
If governments start getting involved in mortgages and making loans, then it is time to watch out. It would be a major problem. One of the things that we have learnt over the years is that if you start to use financial institutions for political purposes, it is an unmitigated disaster. If the issue is that banks have made mistakes, and the solution is that we make the political system act to correct them, then that is a mistake. In terms of regulations, the government should have policies that help encourage home ownership or make mortgages cheaper. They should act in a way that has a positive societal impact.
Will American banks start focusing more on their domestic markets rather than their international operations?
JPMorgan will be focussed on our operations around the world. As far as JPMorgan is concerned, we did not need the money from the $25-billion Treasury injection. We did not ask for the money. We did it because we thought that the government was taking action to improve the entire system. It has the least benefit for us, because obviously it was designed to help the weakest banks the most. If we took the $25 billion, which is a tiny part of our capital base, and had to do things that are not aligned with our overall strategy, then we would not have accepted it.
    The first thing that you want are safe and sound institutions. We got into this mess because of weak institutions that were undertaking bad lending, including Fannie Mae and Freddie Mac. We want to create strong institutions which are doing prudent lending, in the best interest of our societies.
Did Hank Paulson make an offer that you could not refuse?
Mr Paulson made his case at a meeting attended by nine banks about why capitalising the banks would be better than some of the other alternatives; that you could use that money to do positive things for the financial system, and that he wanted all the institutions to be in it. Mr Paulson was of the view that all the nine banks in the room had to do it because if one did not participate others would follow, either because of the stigma of accepting assistance, or because they did not think they needed it. The Treasury also made the capital cheap enough to make the programme more palatable. If I felt that it was a terrible thing for the country or the shareholders, I would have been free to walk away. The JPMorgan board decided that we would participate in this exercise. We can use the funds more offensively to expand and grow our business. We have just started a whole new United States Home Mortgage programme, in addition to a few other programmes that we may think will be beneficial to the whole system.
How did you avoid the worst of the financial crisis? Did you foresee the problem?
I did not foresee all the problems. We try to run a fairly conservative operation and make sure we understand all our risks. We sit at a table and go through risk all the time. We cut our exposure to sub-prime way back in October 2006. A basic tenet of good risk management is a great deal of reporting, at a very detailed level. We are constantly analysing risk. We share it with the right people, so someone else can ask more questions. It is imperative to me that the people you have, are smart, intellectual, analytical, modest and above all, honest. You want them to tell you what the issue is and where the problem is. Problems do not age well. I think it is outrageous to run a business and not have a conversation about your problems. JPMorgan has succeeded because of its deep integrity.
What explains the supremacy of the dollar even in these turbulent times? Is there no other currency the world can turn to?
I think there are other currencies that the world can look up to, in particular the euro and the yen. In terms of fundamental valuations, the dollar is here to stay. In terms of the crisis which originated in America, it is still an enormously strong country with $14 trillion of GDP and great technology. It will do fine. It has got a rule of law, and if you have invested your money in the US, you will be OK.
The way interest rates have come down and the way new liquidity is being created may encourage different types of carry trades. Would this result in new bubbles in the next 2-3 years?
I do not know about the next two-three years, but as sure as we are sitting here – there will be new bubbles. Early on, even before the crisis unfolded, we told our risk management team to create a "bubble watch". There always will be bubbles. That is human nature. I think you can catch them early and protect yourself from them. The next bubble may be caused by something that we are not thinking about right now.
How long will the pain last? What is your assessment on the real economy?
I have never seen anyone ever pick up the true inflection point of an economic cycle. That's because the answers to these questions are beyond the understanding of mankind. They are just too complex. One of the very positive things that we have seen, is the action taken by the central banks and major governments of the world. These actions are very powerful and will have a huge impact that is just starting to be felt. You will see an impact on markets but you will also see it in the real economy. Companies are still strong, despite the crisis, with a lot of capability, knowledge and good people. Many of these companies are in India and China, and will still see growth amidst the slowdown.
What are the immediate changes in regulations which should be made?
Financial consumer products will always be regulated and so they should be. Some products should not exist. They just stimulate unhealthy speculation – especially when you sell them in the mass market. I think there will be new institutions to monitor how business is conducted and I'm hopeful that there will be globally co-ordinated regulation. It is not about having too much or too little regulation, it is about having good regulation. By this I mean we need regulation that helps the markets, and the people who use the markets.
How does it feel to know that JPMorgan is now bigger than Citi and the world's biggest bank?
Basically, JPMorgan's market capitalisation has stayed roughly steady during the crisis and that of 10 other financial institutions has come down. I do not rejoice over other people's failures. I want to beat them as a competitor and I want to do the best possible for the firm. I still have a lot of friends at Citi and feel terrible for some of them. They lost a lot of money and some of them have even lost their life savings. But I know that there will always be great competitors out there. The fact that one of the competitors tumbles does not mean that there isn't someone else climbing on our backs. We know that we have tough competition after this crisis. Some of these firms which have stumbled will be back. I do not rely on them being down for a long time.
What is your view on the outlook for Asia?
Asia will not avoid the problems created by this financial crisis and it'll be worse hit than some people think. In investment banking in the region, we have done a very good job in organically building and servicing the business. The same could be said with transaction banking
and asset management. One of the reasons that I am here is to do country and budget reviews right across the region, in each of the 15 countries that we operate in. We look at the weak spots and we fix them and look at how we can expand on our successes.
    We always look at retail opportunities, and one day we will have a retail business in the region. Retail is a tougher game because it is very hard to grow organically and so you have to do it by acquisition. We cannot buy a bank in India or China right now. But over time, myself or my successor will have done some things in retail in Asia. If we have to grow by ourselves, country by country, rather than one regional move, we will figure that out too.
What are your plans for India?
We are very ambitious and optimistic about India. We do not worry as a company about short-term fluctuations. You can't go into countries and then pull out and then get back in, depending on market conditions. We want to be a great corporate citizen; we want the Indian people and regulators to say that this country is better off with JPMorgan Chase there. We are going to build relentlessly. I want to build out the operation here with people, systems, products, and services. Specifically, we already are a very large investment bank here. During the past three years, we have gone from covering 30 to 150 Indian companies. To do that we need more bankers, more research, more support, more systems, more space and obviously, we have built up our equities and debt capabilities. In transaction banking, we have a branch, where we do trade finance and cash management. We want to extend this and grow it over time. We will build this as fast as we can. We have retail aspirations, but we are patient about this. In asset management, we have a relatively small base.
The crisis started with the housing market. There is a feeling that as recession sets in, the problem will now move to the credit card market.
As the financial crisis hopefully eases, I am not predicting but I hope (that the crisis eases), we will be left with a recession. A traditional recession. Consumer and wholesale credit would get worse. That would cause other financial problems like loan losses, cut back on credit and others. But we expect to see higher loan losses.
So traditional recession is a best case scenario?
Yes.
So what is the worst case scenario?
A real bad recession. I don't think a depression is a possibility.
What are the probabilities of a real bad recession?
I don't really know. I think its got a 10% chance. I am not predicting it.
A real bad recession would be a GDP decline of one and a half to two percent?
I look at employment more as a driver. Unemployment reaching 10% is a real bad recession.
You have completed two acquisitions in the US in the past few months; will you make further acquisitions in the near term?
Acquisitions are very tough. You have to look at each of them like little wars. You cannot start them lightly. There are three things about an acquisition — price, business fit and strategy, and you have to have a strong reason for doing it. It should make sense for the company. The most important thing by far, is to have the people to execute the deal. By that, I mean the management team to co-ordinate the products, consolidate the systems and operations, and retain the best people. We now have that capability. One of the finest achievements of JPMorgan was the firm's ability to take over Bear Stearns. The Washington Mutual acquisition highlighted the same ability. But if you see the right opportunity and if you can handle it, sometimes you have to just go for it!
    george.smith@timesgroup.com