JPMorgan CEO Dimon sees US economic boom through 2023

NEW YORK - JPMorgan Chase & Co Chief Executive Officer Jamie Dimon said on Wednesday the United States could be in store for an economic boom through 2023 if more adults get vaccinated and federal spending continues.

"I have little doubt that with excess savings, new stimulus savings, huge deficit spending, more QE (quantitative easing), a new potential infrastructure bill, a successful vaccine and euphoria around the end of the pandemic, the U.S. economy will likely boom," Dimon wrote in his annual letter to shareholders published on the bank's website.

"This boom could easily run into 2023 because all the spending could extend well into 2023."

As head of the biggest US bank, Dimon is widely seen as the face of America's banking sector, and he used the letter to share his views on the country's economic health and to press for policies to help address inequality and improve the criminal justice system.

The average US consumer's finances are in "excellent shape," Dimon said, and the stock market's high valuations are justified. The price of US treasuries, however, are not, he wrote.

The economic growth Dimon projects the United States could see in the next two years will create opportunities to "deal with issues stemming from inequality," Dimon wrote.

He called for raising the federal minimum wage, improving training for jobs at high schools and colleges and making it easier for people with criminal records to get jobs.

Dimon, who has called for higher taxes to pay for federal stimulus, said corporations could support many of these initiatives if the government adopted rigorous budgeting, transparency and discipline when it comes to its spending.

"We must remember that the concepts of free enterprise, rugged individualism and entrepreneurship are not incompatible with meaningful safety nets and the desire to lift up our disadvantaged citizens," Dimon wrote. (Reporting By Elizabeth Dilts Marshall; Editing by Muralikumar Anantharaman)

-reuters-

Banks slammed by a host of ills get ready to report earnings

JPMorgan's trading blunder, slowing economies in the U.S. and overseas, and the LIBOR-fixing scandal are some of the problems that could hurt financial institutions' profits.

NEW YORK — Chief Executive Jamie Dimon is set to defend his bank and his reputation after JPMorgan Chase & Co.'s big trading blunder.

Early Friday morning, Dimon will host a two-hour face-to-face meeting with analysts to talk about the bank's progress in unwinding big derivatives bets by a trader Wall Street dubbed the London Whale.

Since JPMorgan revealed more than $2 billion in trading losses in May, estimates of how deep the losses could get have varied — including one estimate that it has surged to $9 billion. The trades cost the bank not just money but also its credibility as one of Wall Street's best risk managers.

The massive trading loss isn't all investors will focus on. JPMorgan is the first big bank to report second-quarter results, and investors will be listening for anything that Dimon — long seen as one of the shrewdest bankers in the business — will say about a host of ills that has slammed the financial industry.

"The challenges are pretty formidable for the sector, at least over the next several quarters, if not for a longer period of time," said Todd Hagerman, managing director of equity research at Sterne Agee & Leach Inc. in New York.

Hagerman and other analysts said they are paying close attention to what bank CEOs say about the state of their business. Wells Fargo & Co. also reports results Friday, with industry heavyweights includingGoldman Sachs Group Inc.,Citigroup Inc.,Bank of America Corp.and others coming in the next few weeks.

Big banks have had a tough year. First came regulators' stress tests, then a $25-billion mortgage settlement and credit downgrades — all while the U.S., European and Asian economies slowed, further squeezing profits.

And just as JPMorgan appears to have assuaged some investor anxieties, another firestorm has started: manipulation of key interest rates by British banking giant Barclays and potentially other global banks.

"There's investor fatigue over the new uncertainty" because of the rate-fixing scandal, said David Konrad, a banking analyst at Keefe, Bruyette & Woods in New York.

"We've had a laundry list of things that we've worked through and checked off," he added. "And then a new item comes. It really hurts investor sentiment."

Barclays, the British investment bank, recently agreed to pay $450 million to settle charges that it tried to manipulate the London interbank offered rate, or LIBOR, a key interest rate that helps determine costs of consumer and corporate borrowing rates and financial products across the financial world. The scandal has already claimed three top Barclays officials, including its chairman and chief executive.

About 20 other major banks, including U.S. institutions, are under investigation in the LIBOR-fixing probe. They could face not only hefty fines but also civil lawsuits from institutional investors.

The California Public Employees' Retirement System, for example, said it's examining whether it was stung by any LIBOR-fixing before it assesses its options. "We are looking at the impacts," CalPERS spokesman Brad Pacheco said in an email.

LIBOR-fixing fallout could hurt Citigroup, JPMorgan and Bank of America, which help set the interest rate, Mike Mayo, a managing director at Credit Agricole Securities USA, said in a recent research note.

"We believe the industry is one more shoe to drop away from major regulatory aggressiveness against the banks," Mayo said, citing JPMorgan's losses and low public approval for banks.

After JPMorgan's trading losses, some lawmakers have been beating the drum for strengthening rules put in place by the Dodd-Frank financial overhaul of 2010.

A focus has been the so-called Volcker Rule, which would sharply limit banks' ability to trade with their own funds. So-called proprietary trading has been cited as a contributing factor of the financial crisis. JPMorgan has characterized its problematic trades as bungled attempts at hedging its portfolio.

Regulators could also tighten restrictions on how banks use their capital, limiting stock buybacks that investors may be hoping for — particularly shareholders of JPMorgan, which called off a planned buyback after its disclosure in May.

Slowing growth in Europe, China and the U.S. makes for a rough time for banking too. Trading, loan volume, and mergers and acquisitions have all slowed amid tepid global growth.

Lower interest rates in the U.S. — with 10-year Treasury yields at 1.5% — can also tighten banks' revenue streams.

"With an economy that's growing at a very lackluster, pedestrian rate," Sterne Agee's Hagerman said, "you simply can't grow your business in that kind of environment."

source: latimes.com

We're not too big to fail - top banks

Nine of the largest global banks on Tuesday expressed confidence they can be salvaged or dismantled without taxpayer bailouts if they became insolvent, as U.S. regulators released public portions of these banks' "living wills".

The documents, required by the 2010 Dodd-Frank financial reform law, aim to end too-big-to-fail bailouts by mapping out ways that, in theory, mortally-wounded banks could go out of business without wrecking the financial system.

If regulators find that the resolution plans are not credible, they could force the banks to sell off business lines and restructure to become less complex.

But some experts doubt how hard regulators will push the banks for changes or how useful hypothetical resolution plans will be in major financial crisis.

The public portions released on Tuesday and are a few dozen pages per bank summarizing thousands of pages submitted confidentially to regulators.

The banks argued in the public documents that their resolution plans will work, with no cost to taxpayers or great consequence to the financial system. They used technical generalities in their conclusions without specifically addressing the unpredictable and vicious nature of a credit crisis.

Bank of America Corp, for example, said in its plan that "certain assets and liabilities would be transferred to a bridge bank that would, subject to certain assumptions, emerge from resolution as a viable going concern."

JPMorgan Chase & Co concluded that its plan "would not require extraordinary government support, and would not result in losses being borne by the US government." And, Goldman Sachs Group Inc said it would find a broad range of potential buyers for its assets, including global financial institutions, private equity funds, insurance companies or sovereign wealth funds.

The other banks which submitted wills were Barclays , Citigroup, Credit Suisse, Deutsche Bank, Morgan Stanley and UBS.

The Federal Reserve and Federal Deposit Insurance Corp released the plans without commenting on them.

Other large banks will have until July and December of next year to hand in their plans, according to the FDIC. Eventually about 125 banks are expected to submit plans.

The first plans come almost four years after the financial crisis unleashed a panic in which no institution seemed safe from a bank run and markets withdrew credit in what appeared to be inexplicable fashion. The U.S. government, in quick order, arranged a fire sale of investment bank Bear Stearns to JPMorgan and then allowed Lehman Brothers to fail, touching off a global market meltdown. Blanket government guarantees for the financial system and a $700 billion taxpayer bailout followed to ease the panic.

The disclosures on Tuesday give a glimpse of the kind of the kind of interconnections and complicated corporate structures that could still make governments fear letting big banks fail.

JPMorgan named 25 "material" legal entities and 30 "core business lines," as required by Dodd-Frank and listed 18 clearing or financial settlement systems in which it is a member or participant, half of which are outside of the United States.

The full-length plans are believed to include the most comprehensive maps of the insides of bank holding companies ever created. They are intended to give regulators confidence that they understand enough of the consequences of bank failures to allow more to happen.

WOULD PLANS WORK?

Bert Ely, a banking consultant in Alexandria, Virginia, said he is skeptical that the overall process could work because there would likely be a lot of turmoil in the markets when the plans were needed, raising doubt about who might buy any assets.

"The presumption of a one-off event is not realistically valid," he said. "You can have one company blow itself up, but more often than not there are systemic problems."

Banks emphasized that they did not believe the resolution plans would ever have to be used. Morgan Stanley said that its "hypothetical failure" would have to be caused by "an idiosyncratic stress" that might occur while the economy and financial markets are under severe stress.

Guggenheim Partners financial policy analyst Jaret Seiberg said he doubts regulators will use their reviews of the plans to force big changes on the institutions.

"Our initial review suggests there is little real risk that regulators could reject one of these plans," Seiberg said in a note. "That is important because regulators could break up a financial firm that fails to submit a credible plan."

The regulators plan to give feedback to the banks on the initial plans by September.

Congress called for the plans in Dodd-Frank to ease concerns that some banks are so big and interconnected that taxpayers will inevitably bail them out to avoid a threat to global markets.

The FDIC gained new powers in Dodd-Frank to use the plans to dismantle failing financial giants if the bankruptcy process would not work.

Citigroup found a special reason to argue that its resolution planning would work: its wrenching experience in the 2007-2009 financial crisis.

To recover from the crisis, Citigroup separated businesses to be sold or gradually liquidated from those it is keeping as its "core" pursuits. The company said that process meant its "personnel would be well equipped to assist regulators" if the company had to be divided up into pieces to be sold or closed.

"Citi is today a fundamentally different institution than it was before the crisis: smaller, leaner, safer, sounder, and completely focused on our core mission," it said in the summary of its resolution plan.

Bank of America, used its 42-page public document to emphasize steps it has taken in recent years to streamline the company, build capital and improve risk management.

"Bank of America has strengthened its risk culture as evidenced by improvements in consumer and commercial credit quality and decreases in market and counterparty risk," it said.

Bank of America has lagged its rivals in recovering from the financial crisis, largely due to mortgage losses tied to its 2008 Countrywide Financial purchase.

INTERNATIONAL FRAMEWORK

Some of the foreign banks outlined resolution strategies for both home and U.S.-based regulators.

Deutsche Bank imagined high levels of international cooperation, noting it could be dismantled "in an orderly manner with minimal systemic disruptions, and that any cross-border issues arising from financial, operational or other interconnections could be adequately addressed without significant difficulties," it said.

Barclays said effective resolution plans are "an integral component of eradicating 'too big to fail' for the largest global financial institutions."

It also noted how critical cooperation will be among international regulators.

Barclays submission, dated July 2012, was already out of date. It listed Marcus Agius as chairman and Robert Diamond as CEO. Both have resigned in response to a Libor interest rate rigging scandal.

Mitchell Glassman, a director at Deloitte Consulting who has worked with big banks on the living will issue, said he was impressed how much senior executives and directors were involved in preparing the plans. Still, he said, the question remains whether the plans on paper would work effectively in real-life.

"Will this help Main Street? Will we be better off with this approach than we were in the last crisis?" Glassman said.

source: abs-cbnnews.com

Bank regulators trying to reduce risk in JPMorgan portfolio

WASHINGTON -- Federal banking regulators have been meeting daily with JPMorgan Chase & Co. executives to reduce the risks in the trading portfolio that led to the loss of more than $2 billion and are conducting a broader inquiry into risk management at the nation's largest bank.

"We are not limiting our inquiry to the particular transactions at issue. We are assessing the adequacy of risk management throughout the bank," Thomas J. Curry, head of the Office of the Comptroller of the Currency, told the Senate Banking Committee on Wednesday. "If corrective action is warranted, we will pursue appropriate informal or formal remedial measures."

Among those measures could be forcing bank executives to return some of their compensation, a process known as clawback, Curry said.

The OCC is the chief regulator of JPMorgan's banking activities and has 65 examiners in the bank's offices. In response to questioning from senators about whether the agency should have caught the risky trades before they resulted in such huge losses, Curry said that was under review.

"We are looking at whether there were gaps in our assessment or risk controls," Curry said.

Although JPMorgan's London-based chief investment office created the complex trading portfolio in 2007, the OCC did not begin focusing on the potential problems until April -- just weeks before Chief Executive Jamie Dimon announced the huge losses.

"Our interest and concern intensified during the month as losses increased within the portfolio, up to the point that the institution itself announced the significance of the losses that occurred," Curry said.

The Federal Reserve, which regulates JPMorgan's larger bank holding company, has been working with the OCC to remove the risk from the portfolio. Curry said the goal was a "soft-landing" for those investments.

Curry said it still was unclear exactly what happened with the portfolio, which was supposed to reduce the credit risks of the bank, not increase them.

"It’s a very complicated investment strategy, both in terms of its size and complexity," Curry said. "We are looking to determine what the actual strategy behind that investment scheme was and also if there were any other factors driving that strategy other than attempting to mitigate known risks in that portfolio."

Sen. Bob Corker (R-Tenn.) said it was not realistic to think banking regulators could prevent complex trades like the ones that caused JPMorgan's loss.

"I think it’s a fool’s errand to think regulators are going to be ahead of bankers," he said.

Curry and other banking regulators said the more than $2-billion loss at no point threatened the solvency of JPMorgan or posed a threat to the financial system. Part of the reason for that was the increased amount of capital held by the bank to offset losses.

Federal Reserve Governor Daniel Tarullo said the most recent stress test of JPMorgan showed that it could withstand a trading loss of at least $28 billion combined with another $56 billion in credit losses.

Committee Chairman Tim Johnson (D-S.D.) said the trading loss showed the need for tough implementation of the Dodd-Frank financial reform law enacted in 2010, and said Wall Street needs stronger regulatory oversight.

"When a bank with JPMorgan’s solid reputation announces that it lost billions of dollars on a large trade reportedly designed to reduce the firm’s risks, it reminds us that no financial institution is immune from bad judgment," Johnson said. "While the JPMorgan trading loss does not appear to have caused systemic problems, it is a clear reminder that Wall Street continues to need better risk management, vigorous oversight and, if the rules are broken, unyielding enforcement."

Dimon will testify about the trading loss before the Senate Banking Committee on June 13, and again the following week before the House Financial Services Committee.

source: latimes.com

JPMorgan Chase's huge loss exposes the risky side of banks

With Depression-era rules abolished, banks are making risky bets with federally insured deposits. Even Wall Street pros wonder whether that should be allowed.

The nation's biggest banks like to tout their low-cost checking accounts, extensive ATM networks and loans to home buyers and Main Street merchants.

"Investing in the places we all call home," a recent JPMorgan Chase television ad intoned. "This is the way forward."

Somehow those folksy messages never seem to get around to mentioning another part of the banking business: high-pressure trading rooms where a company's best and brightest bet hundreds of millions of dollars on arcane financial instruments such as over-the-counter synthetic derivatives and credit default swaps.

These activities aren't showcased in ads and news releases, but they are as central to modern banking as certificates of deposit and debit cards. The risks are considerable, however, a fact underscored by JPMorgan Chase & Co.'s recent trading loss of at least $2 billion on such trades.

Coming just four years after the financial collapse of 2008, JPMorgan's humbling admission has spurred lawmakers, regulators and even many seasoned Wall Street hands to question whether banks — shepherds of trillions in consumer deposits — should be allowed to make such investments at all.

Speculative trading can turbocharge profit in a way a revolving credit card loan portfolio cannot, but it comes at the risk of losses that, at the extreme, could threaten the bank itself or force yet another taxpayer bailout.

"We have to understand that these losses are not rare," said Christopher Whalen, senior managing director of Tangent Capital Partners in New York. "These are recurring events that have to do with the fact that banks don't want to lend money. They want to trade opaque, illiquid securities that are not well understood, and I'm not sure banks should be doing that."

For decades, banks were prohibited from such trading by the Glass-Steagall Act, a Depression-era law separating retail and commercial banking from investment banking and trading. But both the spirit and the letter of that law were progressively weakened over time and abolished in 1999, clearing the way for a huge expansion of activities that had little relationship to conventional lending and borrowing.

Now an increasingly large share of bank profit comes from closely guarded trading operations with limited outside oversight, run by people chasing seven-figure bonuses who treat FDIC-insured deposits like so many chips at the Wall Street casino.

JPMorgan's chief investment office, which made the infamous trade, has a few hundred traders, only a small portion of the company's 260,000 employees worldwide, but those traders manage about $360 billion, more than 15% of the assets of the nation's largest bank.

And because bigger bets can spell richer rewards, the most aggressive speculation is concentrated at the top. Just four banks — JPMorgan, Citibank, Bank of America and Goldman Sachs — control almost 95% of the marketplace for derivatives.

Derivatives are specialized investments usually tied to the value of an underlying asset. A simple example is a future contract for oil, in which investors bet on what they think the price of oil will be in months ahead.

These investments potentially offer something conventional lending doesn't: big returns. With interest rates near record lows, banks find it increasingly hard to make money on auto loans and lines of credit.

"Traditional banking just isn't that profitable," said Frank Partnoy, a professor of law and finance at the University of San Diego. "Bankers like to make lots of money, and they are finding other ways to do it."

At JPMorgan, the chief investment office makes many conservative investments in stable securities like treasuries, but it also relies on high-end financial analysis performed by math experts known as quantitative analysts, or quants, who devise strategies to guide traders on more exotic positions.

Jamie Dimon, chairman and chief executive of JPMorgan, has contended that the chief investment office's trades were intended to be hedges, essentially performing as insurance against the potential for losses in its overall loan portfolio. By the bank's own admission, those trades turned into a position that was no longer a hedge at all.

That's an important distinction to make as Washington finalizes the so-called Volcker rule, which bars banks from speculating with federally insured deposits, but has a loophole: Investments designed specifically as hedges would be permitted.

Some counter that hedges, if properly executed, aren't supposed to be a profit center, and depositor cash isn't supposed to be used to make arcane bets that require a doctorate in math to comprehend. They suggest that the chief motivations on such trades are pure profit.

In the case of the bad trade, it appears JPMorgan got into trouble, in part, with a bullish bet on credit default swaps tied to an index of corporate debt. When investor confidence on economic recovery in the U.S. and Europe fell early this year, the position very quickly deteriorated, forcing the bank to scramble to cover its position.

But because the bank's position was so large — some estimates put it over $100 billion — it had drawn the attention of rival traders who exploited the situation to raise prices on the securities JPMorgan needed to buy. In just a few weeks, the bank had racked up at least $2 billion in losses, and Dimon has said additional losses on the trade could amount to an additional $1 billion in the second quarter.

"If you want to gamble with money, fine," said Janet Tavakoli, an expert in derivatives and structured financial instruments in Chicago. "But you shouldn't be doing that with the full support and protection of the U.S. taxpayer."

On Capitol Hill, lawmakers including Sen. Carl Levin (D-Mich.) have begun advocating changes to the Volcker rule that could prohibit the kinds of trades JPMorgan executed. The presidents of the Dallas and St. Louis Federal Reserve Banks, meanwhile, have advocated a breakup of big banks like JPMorgan.

Still others say the trading of securities that aren't directly linked to real-world assets, the so-called synthetic derivatives that were at the heart of the mortgage collapse, should be banned altogether.

Opponents can be expected to fight any such regulation furiously and will point to the fact that despite the loss, analysts still expect JPMorgan to book a $4-billion profit for the quarter. Dimon himself has said he would embrace rules that prevent such bad trades from happening, but does not endorse a full-scale retrenching of the banking business.

"This loss was bad, but there was no threat to the financial system," said Matt Levine, a former Goldman Sachs derivatives trader who now writes about finance. "If a plane crashes, it doesn't mean we should go back to horses."

source: latimes.com