Apr 12 2014, 9:47am CDT | by Forbes
The latest must-read in financial circles is JPM boss Jamie Dimon’s 32 page letter to JP Morgan Chase shareholders made public last week. It is is a mixture of gritty optimism going forward with rueful musings on the costly nature of regulation in the wake of the 2008 economic and financial meltdown. Informed Wall Street followers will want to muse over the warning that “we need to be prepared for even the unlikely and unpredictable bad outcomes” from “risk to the system.”
1. You will be happy to know “The banking system is almost fully recovered and banks are better capitalized than they have been in 60 years.” Dimon claims the average equity to assets ratio is 11.1%, the highest it’s been since 1950, thanks to the absolute need to raise capital resources dramatically since 2008.
2. Corporations are in extremely good financial shape with cash balances equal to 11.4% of assets, more than double what they were in 2000 when the tech bubble burst. This could be termed preparing for the next financial- economic crisis.
3. These conservative financial postures are crucial in light of the “most discussed area of uncertainty”… what effect the reversal of the Fed’s QE policy will have on the economy, markets and the level of interest rates.
4. Dimon bemoans the way ” almost everyone has become a risk expert and sees risk behind every rock. They don’t want t o miss it-like they did in 2008.” Therefore, warns Dimon, these Cassandras “ identify everything as risky.” I can’t say I blame them. It’s better to run scared than be overlain with superficial arrogance.
5. Yes, Obamacare does create uncertainties for many businesses. Yes, entitlement spending on Social Security and Medicare is now 60% of the federal budget and crowding out much-needed infrastructure spending. Yes, U.S. corporate tax policy is “hugely inefficient.” Yes; capital formation as a % of GDP has been at the lowest levels in 40 years. The wall of worry mounts.
6. Making the financial system safe from derivatives, those notorious weapons of mass destruction, will cost JPM larger amounts charged on capital, liquidity and margin requirements. Good for the world’s safety say I. Dimon worry warts on “how all this will sort out.” Less dangerously I certainly hope, because derivatives are here to stay as a huge portion of JPM’s balance sheet.
7. Another unpleasant result of 2008 is to make mortgages more costly for lower and middle income consumers, warns Dimon, concluding it will be harder for the less wealthy Americans to obtain mortgages in the future. This is the price to pay for having given out too many mortgages to unworthy borrowers in the run-up to 2008.
8. Dimon properly lends weight to increased competition from the so-called “shadow banking system,” which is made up of money market mutual funbds, huge assset managers like PIMCO and BlackRock, from the growing hedge fund industry, even innovations like the burgeoning Pay Pal, and the comeback of asset backed financial products. Banks vs. Nonbanks, he seems to say, is changing financial landscape more than ever before.
All these items add up to the “new financial architecture” which makes navigating a fast changing landscape the Number One challenge for the future to JPM management and its shareholders. It’s very much too early to see what JPM must do to maintain its strategic importance in the finance industry and the Wall Street pecking order.
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