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JPM fortress towers above all as banking crisis rumbles on


Natale Labia writes on the economy and finance. Partner and chief economist of a global investment firm, he writes in his personal capacity. MBA from Università Bocconi. Supports Juventus.

An interest rate-induced economic slowdown or minor recession paired with collapsing commercial property valuations will seriously constrain the ability of the US financial system to function.

Being such unwieldy and unfathomable institutions, when describing banks the commentariat is prone to elaborate metaphors. In 2009, journalist Matt Taibbi famously described Goldman Sachs as a “great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”.

In hindsight, Taibbi called the peak of Goldmans. Since the deluge of post-financial crisis regulation, it has battled to find its place in the financial system – becoming something of a lost squid. Following his tirade in Rolling Stone, it traded sideways for around a decade.

More recently, Jonathan Guthrie wrote in the Financial Times that the entire US banking system is starting to resemble the ouroboros, a mythical, scaly, aardvark-like animal that swallows itself, starting with the tail, in the process epitomising paradox.

Given the inherent unsustainability of a system already in negative equity, yet comforted with the security blanket which is the Federal Deposit Insurance Corporation’s (FDIC) $250,000 underwriting of deposits, the whole beast seems prone to autocannibalism. Here we assume the tail is the most risk-prone regional lenders such as First Republic, and the voracious head is one very specific player: JPMorgan Chase.

Last week’s rescue of First Republic was a case in point.

Rates went up a bit and reports circulated on social media pointing out the frailties in First Republic, particularly as they pertain to underwater government bond portfolios and illiquid commercial property holdings. 

Depositors got nervous, and the FDIC stepped in and took over the bank. Rapidly, it became clear that the only institution with the wherewithal to take on the entirety of the wounded lender was the one headed by Jamie Dimon: JPMorgan Chase.

As he has done so many times during his storied career, Dimon extracted superlative terms from regulators to enact a rescue by JPMorgan, with costs of the bailout being socialised via a levy on FDIC-backed institutions that they pass on to customers. 

Shareholders in JPMorgan will accrue some of the benefit, but far more will go to Dimon and his cohort of executives.

The next most vulnerable

The attention of markets now moves on to the next most vulnerable. 

PacWest Bancorp and a few others faced the abyss with tumbling share prices in early May, until last week ended with a happy little rally in regional bank stocks. We seem to be in the midst of a mini banking crisis that neither blazes out of control, nor burns out. It just smoulders on. So where to from here?

Charlie Munger, the long-time business partner and consigliere of Warren Buffett, is worried. In a recent interview with the Financial Times he said that his big worry is commercial real estate, with American banks “full of” what he said were “bad loans” as property prices fall.

“It’s not nearly as bad as it was in 2008,” the Berkshire Hathaway vice-chair ruminated.

“But trouble happens to banking just like trouble happens everywhere else. In the good times you get into bad habits… When bad times come, they lose too much.” 

While it is far from certain there will be an imminent crisis, an interest rate-induced economic slowdown or minor recession paired with collapsing commercial property valuations will seriously constrain the ability of the US financial system to function. That could trigger a sudden sell-off in equities and even an ensuing credit crunch.

One player will continue to be utterly critical to how this whole process plays out, and that is JPMorgan CEO and Chair, Dimon. JPM is simply so much bigger than anyone else. With the state-orchestrated takeover of the failing First Republic, JPMorgan has swelled to three times its size before the 2008 financial crisis and now commands an asset base of nearly $4-trillion – around one-fifth larger than its nearest rival, Bank of America. 

In yet another stretched metaphor, Dimon likes to say that the bank has a fortress balance sheet, which Brown University political economist Mark Blyth expounds on:

“If the only game in town is a mediaeval fortress, I want to be inside. Don’t you want to be in the castle? It’s dangerous out there.”

To corroborate this point, in the first three months of the year, other banks saw savers depart and deposits at JPMorgan rise as capital rushed to the haven of a bank that truly is too big to fail.

But there is a problem if everyone wants to be in the castle.

“What happens if the castle walls get breached?” Blyth asks. “Then we’re all screwed.” BM/DM


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