Jamie Dimon, the chairman and CEO of JPMorgan Chase , is among the handful of leaders of the financial sector to emerge with his reputation enhanced. Mr Dimon told that financial markets have stabilised but recovery will still be a slow and a difficult process. Excerpts from the interview:
From your vantage point can you do a SWOT on the world economy?
If you look at recent history, the world has been through multiple crises — from the 2001 internet bubble, the 1997 emerging market crisis, the 1987 crash to the 1990 recession in the US. (If you go further back) 1982 and 1974 were the last global synchronised recessions.
This time we went into a crisis which looked like a normal crisis, which you expect (to happen) every five-to-six years, until Lehman went bankrupt. Then we had a cardiac arrest in the global capital markets. And that helped push the world into a global recession. The bond market, equity markets, equity issuances, inter-bank markets, spreads, Libor, trade finance globally are coming back (in the past few months).
(But) Behind that is a wall of support from governments. The financial affairs of the world are moving towards normalisation. Of course, the world is (going) through a deep recession — a lot more in the US and Europe than in India. No one really knows the outcome of that. It looks like in the US and Europe it could bounce back from these levels. That’s a very good thing. You can see that in consumer spends, business plans, confidence levels, purchasing indices, inventory levels. Even in parts of the market that were badly hurt like the housing market in the US, it’s still getting worse, but at a much slower pace. You actually see a bottoming out of the world economy. I don’t think anyone knows whether a recovery will be U, V or a W (shaped).
JP Morgan paid back the TARP money. But when you took the money you took it reluctantly too..
Governments all over the world, in totality, took some very dramatic, bold and aggressive responses. On October 13, Hank Paulson and Ben Bernanke called nine of us and said we want you to take these TARP funds. We want you all to take it because if some of you don’t take it, it could have the effect of causing a run on those banks that do. Over time, it morphed into something different. The American Congress started adding restrictions on it, like the H1 B visa. So we gave it back. The crisis had passed. The stress had made all the 19 banks stronger. So, the argument that you were hurting other banks by not taking it was no longer true.
I don’t think it helps the financial system of the US if people vilify banks all the time and act like even the healthy ones did something wrong, when they really didn’t.
Credit card defaults and other consumer defaults are increasing. There is a fear that this is not a genuine recovery?
There is no question that the US is in the middle of a very deep recession. The unemployment rate will continue to go up. Credit card losses and commercial loan losses are going up. Take that as an absolute given. I am telling you that it’s going to happen. None of us know for certain what the future holds. It’s possible that the recession will get worse. At JP Morgan we plan for that. We know it may be worse than what we think.
What’s your reaction to the Obama administration’s white paper on reforms?
A lot of things that they are talking about are accurate. We need to reform mortgage regulation, I do think we need to think a lot better about systemic risks, we should eliminate the (idea of) ‘too big too fail’. But I don’t think the solution is to make (banks) small. The solution is a mechanism that resolves the problem of a big company failing and doesn’t damage the world. Lehman wasn’t a bank and AIG wasn’t a bank. And, even if you take some of the big banks, only part of what they do is inside the bank. We need a separate mechanism wherein each major legal entity can be taken over and everyone who is engaged in that entity - the equity holders, the preferred holders - know exactly what is going to happen. So, if the US takes over a failed bank, the equity is wiped out (and) after it takes over all the assets and the government reimburses all the costs, then they would pay back debt holders. This is a perfectly reasonable thing to do. In this way the market would have a discipline of pricing debt.
If you are saying that you will solve the problem by capping size, you actually do a bad thing for the economy, as economics and competition drive those decisions. And, if you say you are ‘too big too fail’, you have this hazard, everyone will do business with them knowing that they would be paid off. There will not be any discipline in the market place.
Derivatives didn’t cause the problem. They helped amplify it. It’s a perfectly legitimate instrument and we are the largest derivative dealer in the world. To say let’s put most of these contracts in the clearing house, which will increase transparency, reduce counter-party credit risk and make easier to manage in a crisis. I completely support that.
You have told the shareholders that the TARP process was a painful experience.
I think they (the government) did the right thing and I don’t blame the regulator for what happened. But it became painful to have your company vilified like that. Four-five bills came out on compensation, some of which violated the US Constitution. It reminded me of school, how people act when bullies were around. How many people stood up to the bullies. Very few. It’s inappropriate to kick people when they are down. Other than regulations isn’t the problem systemic too. China parked its reserve money in US securities. Until systemic changes what can happen.
Isn't the problem that US customers are over leveraged?
I find it very peculiar when Americans point fingers at the Chinese and the Chinese point fingers ate the Americans. It was different sides of the same coin. So maybe America spend too much. But who benefited from them. China and India. But the imbalance was because of the policies of both the countries. People were hoping that these imbalances would resolve themselves over time.
That happens. Sometimes huge imbalances would resolve naturally. (But) It's a bad thing for policy makers to rely on that. The wiser thing should be for the policy makers to look at these imbalances and not allow them to become big. That would probably lead to low interest rates which most economists thing led to enormous speculation. I don’t think corporation in US are excessively leveraged. Financial institutions were, but they already reduced it dramatically. There is no question that consumers on average over-speculated. The American consumer will try and save more now. That will cause some deleveraging over time. That deleverage will probably slowd the growth of the American economy for several years.
To what level. Sub 2%?
I don’t think growth will be sub 2%. The American economy is amazingly resilient, it moves quickly, people adjust quickly. Most economists think that the economy will still grow at 3% as it slowly deleverages. In banking there were two models. In Eastern Europe, Mexico and other countries the banks were privatised and sold to foreign buyers. China and India have largely state controlled banks.
Do you think that the Indian or Chinese models proved right.
No. You are looking for too simplistic an answer. Canada had five public banks. They did fine. A lot of banks in America, Mexico did fine. Some banks in Europe did okay. China and India also did a good job. It does not mean that there should be public banks. If I was running India I would want a very strong domestic banking system. I would not want all Indian banks to be owned by foreign banks. Nor should all banks be state owned. Just as a matter of policy. That I completely agree with. I wouldn't want the big foreign banks to come and buy our banks for cheap. I don't think ultimately state owned banks is the answer. Nor do I think if you are a large country all banks should be foreign owned.
Where do you see the opportunities for JP Morgan in India?
When we go into a country, we go in permanently. If we look at what's going to happen in India over the next 30-40 years, its going to be exceptional. Therefore the goal is to build all the time. We have to do in a way that Indian people and the Indian government say that we are better off with JP Morgan beeing here. They helped us build a better country. They helped our country overseas. I think there are outstanding growth prospects in areas like private banking, asset management, custodial services. We are trying to open some more branches here to serve wholesale clients in cash management and we think all those things will have big growth opportunities....But even if the Indian government said to us today okay, go ahead and start how many branches you want. We can't go into India and compete with ICICI.
I would love to do retail in India. The retail, consumer business would be outstanding markets and growth markets for many years.
Our (US) stock exchanges are worth a $10 trillion. In India it is at around $700 million. My guess is in 30-40 years it would be $10-20 trillion. Therefore, the growth in investment banking services which would be required by Indian companies is enormous.
Do you think that India and China can carry the world's economy?
No. If you were an American it’s a great sense of comfort that India and China are doing well. Imagine what would happen if US was in a recession and so was India and China. If you were an Indian and Chinese you would want the US to recover quickly as America creates a lot of demand for the world. But it is certainly better that parts of the world is healthy while other parts are going through a recession.
Do you see more speed breakers in terms of higher capital requirements etc?
I think it will be across the spectrum change in regulation. It's not going to change the client who needs advise on equity capital market or debt capital market. Some of the products will be gone. On capital, one of the reasons JP Morgan has survived and done well was that we always believed in having a lot of capital and conservative accounting. But if you say everything requires more capital what would happen is that the cost of capital to the client will go up. The bankers will just have to pass it on and the client will pay more. So spreads would be higher.
Will it drag down economic growth?
It could. It depends on how ultimately it is done. We do want some leverage in the system as it drives growth and we all want growth. Now central banks, treasuries know that. I think they would want to have adequate capital and not excess capital.
In the last few years was there an under pricing of risk?
Risk was definitely under priced. People weren't pricing for risk at all. If you run a business you are going to have cycles. We really need to have a pricing plan for cycles. I don't think today there is a right pricing. There is still a lot of fear in that pricing. So, it’s going to come down. You have to be prepared for the good and the bad. You cant expect to be in the investment banking and expect a 20% return on equity. It’s not possible. I always said if you are good you would do an average 20% — you could do 10% in bad times and 30% in good times.
You were the heir apparent in Citi and then you had to leave. I wasn’t asked to leave. I was fired. I had to leave I guess.
You joined Bank One. How did you adjust? There must have been lot of people who went from being a superstar and starting life almost new and then you came back. What's been the journey? Where were you ever down and out?
I sat in a room like this and Sandy Weil and John Reid said that they were going to make some changes and Sandy said I want you to resign. I said okay. So they asked is that it. (I said) Obviously you have decided. The management team was just showing up. So I stood there and they all gave me a standing ovation. I shook their hands. I wished them the best and said it's a great company. I called my wife. I always make jokes. I said Judy I am going to say something, but it’s not a joke. She must have heard it in my voice and I said I just resigned and I drive home. It’s Shakespearean - the plotting, the politics.
Was the fourth quarter of 2008 most challenging period of your life?
It was the scariest. It was when Lehman collapsed. We knew we would survive. I called the board on the weekend and Lehman was still talking about doing some deals and I didn't think that it would happen. People were hoping that there would be some kind of deal. I told them that Lehman is going to declare bankruptcy on Sunday night. AIG was on its last legs. I didn't know the outcome as I didn't know whether the government would bail them out. In a quick order the attack could go to Merrill and we may see three or four bankruptcies next week. It was unprecedented. It was not even seen in the Great Depression.
Did the crisis get triggered off because Lehman was allowed to collapse?
No. I may be wrong. People are going to write books on this for ever. No one is ever going to know. There is no way of knowing what would have happened under different circumstances. I believe that the system was already on its last legs. There was too much leverage, too many hedge funds, bad Basel II, mortgage business without a control. I think the system was waiting for one bad thing. I also think there was no way an American administration would bail out an investment bank. They were paid a lot of money, the arrogance. It’s one thing for the parliament to bail out a company, it’s another thing to bail out an investment bank.
From your vantage point can you do a SWOT on the world economy?
If you look at recent history, the world has been through multiple crises — from the 2001 internet bubble, the 1997 emerging market crisis, the 1987 crash to the 1990 recession in the US. (If you go further back) 1982 and 1974 were the last global synchronised recessions.
This time we went into a crisis which looked like a normal crisis, which you expect (to happen) every five-to-six years, until Lehman went bankrupt. Then we had a cardiac arrest in the global capital markets. And that helped push the world into a global recession. The bond market, equity markets, equity issuances, inter-bank markets, spreads, Libor, trade finance globally are coming back (in the past few months).
(But) Behind that is a wall of support from governments. The financial affairs of the world are moving towards normalisation. Of course, the world is (going) through a deep recession — a lot more in the US and Europe than in India. No one really knows the outcome of that. It looks like in the US and Europe it could bounce back from these levels. That’s a very good thing. You can see that in consumer spends, business plans, confidence levels, purchasing indices, inventory levels. Even in parts of the market that were badly hurt like the housing market in the US, it’s still getting worse, but at a much slower pace. You actually see a bottoming out of the world economy. I don’t think anyone knows whether a recovery will be U, V or a W (shaped).
JP Morgan paid back the TARP money. But when you took the money you took it reluctantly too..
Governments all over the world, in totality, took some very dramatic, bold and aggressive responses. On October 13, Hank Paulson and Ben Bernanke called nine of us and said we want you to take these TARP funds. We want you all to take it because if some of you don’t take it, it could have the effect of causing a run on those banks that do. Over time, it morphed into something different. The American Congress started adding restrictions on it, like the H1 B visa. So we gave it back. The crisis had passed. The stress had made all the 19 banks stronger. So, the argument that you were hurting other banks by not taking it was no longer true.
I don’t think it helps the financial system of the US if people vilify banks all the time and act like even the healthy ones did something wrong, when they really didn’t.
Credit card defaults and other consumer defaults are increasing. There is a fear that this is not a genuine recovery?
There is no question that the US is in the middle of a very deep recession. The unemployment rate will continue to go up. Credit card losses and commercial loan losses are going up. Take that as an absolute given. I am telling you that it’s going to happen. None of us know for certain what the future holds. It’s possible that the recession will get worse. At JP Morgan we plan for that. We know it may be worse than what we think.
What’s your reaction to the Obama administration’s white paper on reforms?
A lot of things that they are talking about are accurate. We need to reform mortgage regulation, I do think we need to think a lot better about systemic risks, we should eliminate the (idea of) ‘too big too fail’. But I don’t think the solution is to make (banks) small. The solution is a mechanism that resolves the problem of a big company failing and doesn’t damage the world. Lehman wasn’t a bank and AIG wasn’t a bank. And, even if you take some of the big banks, only part of what they do is inside the bank. We need a separate mechanism wherein each major legal entity can be taken over and everyone who is engaged in that entity - the equity holders, the preferred holders - know exactly what is going to happen. So, if the US takes over a failed bank, the equity is wiped out (and) after it takes over all the assets and the government reimburses all the costs, then they would pay back debt holders. This is a perfectly reasonable thing to do. In this way the market would have a discipline of pricing debt.
If you are saying that you will solve the problem by capping size, you actually do a bad thing for the economy, as economics and competition drive those decisions. And, if you say you are ‘too big too fail’, you have this hazard, everyone will do business with them knowing that they would be paid off. There will not be any discipline in the market place.
Derivatives didn’t cause the problem. They helped amplify it. It’s a perfectly legitimate instrument and we are the largest derivative dealer in the world. To say let’s put most of these contracts in the clearing house, which will increase transparency, reduce counter-party credit risk and make easier to manage in a crisis. I completely support that.
You have told the shareholders that the TARP process was a painful experience.
I think they (the government) did the right thing and I don’t blame the regulator for what happened. But it became painful to have your company vilified like that. Four-five bills came out on compensation, some of which violated the US Constitution. It reminded me of school, how people act when bullies were around. How many people stood up to the bullies. Very few. It’s inappropriate to kick people when they are down. Other than regulations isn’t the problem systemic too. China parked its reserve money in US securities. Until systemic changes what can happen.
Isn't the problem that US customers are over leveraged?
I find it very peculiar when Americans point fingers at the Chinese and the Chinese point fingers ate the Americans. It was different sides of the same coin. So maybe America spend too much. But who benefited from them. China and India. But the imbalance was because of the policies of both the countries. People were hoping that these imbalances would resolve themselves over time.
That happens. Sometimes huge imbalances would resolve naturally. (But) It's a bad thing for policy makers to rely on that. The wiser thing should be for the policy makers to look at these imbalances and not allow them to become big. That would probably lead to low interest rates which most economists thing led to enormous speculation. I don’t think corporation in US are excessively leveraged. Financial institutions were, but they already reduced it dramatically. There is no question that consumers on average over-speculated. The American consumer will try and save more now. That will cause some deleveraging over time. That deleverage will probably slowd the growth of the American economy for several years.
To what level. Sub 2%?
I don’t think growth will be sub 2%. The American economy is amazingly resilient, it moves quickly, people adjust quickly. Most economists think that the economy will still grow at 3% as it slowly deleverages. In banking there were two models. In Eastern Europe, Mexico and other countries the banks were privatised and sold to foreign buyers. China and India have largely state controlled banks.
Do you think that the Indian or Chinese models proved right.
No. You are looking for too simplistic an answer. Canada had five public banks. They did fine. A lot of banks in America, Mexico did fine. Some banks in Europe did okay. China and India also did a good job. It does not mean that there should be public banks. If I was running India I would want a very strong domestic banking system. I would not want all Indian banks to be owned by foreign banks. Nor should all banks be state owned. Just as a matter of policy. That I completely agree with. I wouldn't want the big foreign banks to come and buy our banks for cheap. I don't think ultimately state owned banks is the answer. Nor do I think if you are a large country all banks should be foreign owned.
Where do you see the opportunities for JP Morgan in India?
When we go into a country, we go in permanently. If we look at what's going to happen in India over the next 30-40 years, its going to be exceptional. Therefore the goal is to build all the time. We have to do in a way that Indian people and the Indian government say that we are better off with JP Morgan beeing here. They helped us build a better country. They helped our country overseas. I think there are outstanding growth prospects in areas like private banking, asset management, custodial services. We are trying to open some more branches here to serve wholesale clients in cash management and we think all those things will have big growth opportunities....But even if the Indian government said to us today okay, go ahead and start how many branches you want. We can't go into India and compete with ICICI.
I would love to do retail in India. The retail, consumer business would be outstanding markets and growth markets for many years.
Our (US) stock exchanges are worth a $10 trillion. In India it is at around $700 million. My guess is in 30-40 years it would be $10-20 trillion. Therefore, the growth in investment banking services which would be required by Indian companies is enormous.
Do you think that India and China can carry the world's economy?
No. If you were an American it’s a great sense of comfort that India and China are doing well. Imagine what would happen if US was in a recession and so was India and China. If you were an Indian and Chinese you would want the US to recover quickly as America creates a lot of demand for the world. But it is certainly better that parts of the world is healthy while other parts are going through a recession.
Do you see more speed breakers in terms of higher capital requirements etc?
I think it will be across the spectrum change in regulation. It's not going to change the client who needs advise on equity capital market or debt capital market. Some of the products will be gone. On capital, one of the reasons JP Morgan has survived and done well was that we always believed in having a lot of capital and conservative accounting. But if you say everything requires more capital what would happen is that the cost of capital to the client will go up. The bankers will just have to pass it on and the client will pay more. So spreads would be higher.
Will it drag down economic growth?
It could. It depends on how ultimately it is done. We do want some leverage in the system as it drives growth and we all want growth. Now central banks, treasuries know that. I think they would want to have adequate capital and not excess capital.
In the last few years was there an under pricing of risk?
Risk was definitely under priced. People weren't pricing for risk at all. If you run a business you are going to have cycles. We really need to have a pricing plan for cycles. I don't think today there is a right pricing. There is still a lot of fear in that pricing. So, it’s going to come down. You have to be prepared for the good and the bad. You cant expect to be in the investment banking and expect a 20% return on equity. It’s not possible. I always said if you are good you would do an average 20% — you could do 10% in bad times and 30% in good times.
You were the heir apparent in Citi and then you had to leave. I wasn’t asked to leave. I was fired. I had to leave I guess.
You joined Bank One. How did you adjust? There must have been lot of people who went from being a superstar and starting life almost new and then you came back. What's been the journey? Where were you ever down and out?
I sat in a room like this and Sandy Weil and John Reid said that they were going to make some changes and Sandy said I want you to resign. I said okay. So they asked is that it. (I said) Obviously you have decided. The management team was just showing up. So I stood there and they all gave me a standing ovation. I shook their hands. I wished them the best and said it's a great company. I called my wife. I always make jokes. I said Judy I am going to say something, but it’s not a joke. She must have heard it in my voice and I said I just resigned and I drive home. It’s Shakespearean - the plotting, the politics.
Was the fourth quarter of 2008 most challenging period of your life?
It was the scariest. It was when Lehman collapsed. We knew we would survive. I called the board on the weekend and Lehman was still talking about doing some deals and I didn't think that it would happen. People were hoping that there would be some kind of deal. I told them that Lehman is going to declare bankruptcy on Sunday night. AIG was on its last legs. I didn't know the outcome as I didn't know whether the government would bail them out. In a quick order the attack could go to Merrill and we may see three or four bankruptcies next week. It was unprecedented. It was not even seen in the Great Depression.
Did the crisis get triggered off because Lehman was allowed to collapse?
No. I may be wrong. People are going to write books on this for ever. No one is ever going to know. There is no way of knowing what would have happened under different circumstances. I believe that the system was already on its last legs. There was too much leverage, too many hedge funds, bad Basel II, mortgage business without a control. I think the system was waiting for one bad thing. I also think there was no way an American administration would bail out an investment bank. They were paid a lot of money, the arrogance. It’s one thing for the parliament to bail out a company, it’s another thing to bail out an investment bank.
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