(James Saft is a Reuters columnist. The opinions expressed are his own.)
By James Saft
(Reuters) – In case you were wondering, Jamie Dimon has thoughtfully explained why he’s richer than you and all the analysts covering J.P Morgan.
It isn’t, as I thought, our inability to pick lottery numbers.
Hint: it is because he is chairman and CEO of a bank.
Actually, that’s not entirely fair. Dimon is richer than we because he runs a bank and understands the relationships between capital levels, regulation, profits and human nature.
At a J.P. Morgan investor event this week Mike Mayo, an analyst at CLSA, who has been a critic of large banks and, at times, Dimon, asked if J.P. Morgan wasn’t at a competitive disadvantage compared to more highly capitalized peers. (Here is a playback via Business Insider: link.reuters.com/fys36t)
Mayo: I think what I hear UBS saying in the presentation is that if I’m an affluent customer I’ll feel a lot better going to UBS if they have 13.5 (percent) capital ratio than another big bank with a 10 percent ratio. Do you agree with that?
Dimon: You would go to UBS and not JPMorgan?
Mayo: I didn’t say that. That’s their argument.
Dimon: That’s why I’m richer than you.
Laughter, perhaps embarrassed, perhaps of the schoolyard variety, ensues.
That, indeed, is why Dimon is richer than most of us. He’s not gotten rich running a bank on 19th-century lines, conservative with high capital to make its tony clients comfortable. He’s gotten rich, and he’s not alone, running banks with high leverage under comparatively loose regulatory regimes.
J.P. Morgan shareholders, it should be noted, have done a lot less well. Since Dimon became president and COO in July 2004, the bank’s stock is up about 30 percent. Since he became both chairman and CEO in 2006 it is up barely at all.
To understand Dimon’s comment it is first important to understand what UBS is doing and why. UBS is scaling back its investment banking operation, raising capital levels and trying to concentrate on wealthy individuals under massive pressure from Swiss authorities. Switzerland, whose banking assets dwarf its economy, has been in the vanguard in requiring higher capital levels from its banks.
And while UBS has gone beyond what is currently required in terms of capital, it is taking its regulatory lemons and making lemonade, accepting that profits with lower leverage will be lower but seeking to market to its strengths. I cannot imagine that UBS would be behaving like it is if it were under U.S. regulatory control, and the best evidence for this is the extent to which its transformation exceeds that of its U.S. peers.
Dimon, then, is explaining that given the opportunities and constraints he is under it would be foolish to voluntarily operate with higher capital. That is not the kind of move which, at least during Dimon’s career, gets you rich.
He is, of course, both right and wrong. The good people at UBS are deluding themselves if they think, as Mayo characterizes, that they are going to attract a lot more money by being staid and reliable. In the 19th century that worked because banks could fail, so depositors were very careful. A rich Russian choosing between JP Morgan and UBS most likely thinks that even with UBS carrying higher capital their money will be safer with a U.S. bank backed by the U.S. government, and anyway the probability of either failing is vanishingly small.
Clients, even the richest with the most to lose, choose banks because they hope, often wrongly, that those banks can make their money grow faster. High net worth depositors, like Dimon, like taking on risk for reward, though they, like shareholders, do demonstrably less well than he out of the arrangement.
The real issue isn’t who is rich, but rather whose interests are being fairly served and whose aren’t. Dimon’s approach gives short shrift to both shareholders and taxpayers. Taxpayers still carry substantial risks for which they are not being compensated, a state that will only change when regulations are tightened, and hopefully vastly simplified.
Shareholders do badly because the kind of bank Dimon runs is prone to loss and volatility, leading markets to set a low value on the bank’s earnings.
UBS may lose the battle for depositors but, if its lower earnings are less volatile, ultimately win a higher valuation and better reward its owners.
(At the time of publication, Reuters columnist James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by James Saft, click on)