Is J.P. Morgan Chase Facing a Systematic and Forced Breakup?
Being an executive at J.P. Morgan Chase & Co. (NYSE: JPM) can be no easy job at the moment. This is one of only a few large institutions that could have survived without a government bailout, and now many missteps and outside efforts have put this banking giant inside of a serious quagmire. With all of the regulatory efforts at work simultaneously against the bank, it gets easier and easier to argue that the regulatory bodies are pressuring this banking giant into a breakup of some sort.
The London Whale debacle may go down in the books as the historical death sentence. Jamie Dimon lost his ability to speak critically and publicly against regulators and politicians after eating crow over the “tempest in a tea kettle” analogy. Despite taking a multibillion loss, the bank never really lost money in any of its quarterly reports. Still, now there are criminal charges over cover-ups by executives and staffers. And the London Whale himself is working with prosecutors. Hmm …
Any “banking lawsuits” seem to entangle J.P. Morgan, even if they seem to be larger offenses of Bank of America Corp. (NYSE: BAC). This appears to be the case, whether it is a circuit court, the Department of Justice, housing regulators, the SEC and on and on. Suits over securitizations are still happening some five and six years after the fact. Does it seem a mere coincidence that Bank of America wants to fold the Merrill Lynch entities back into the Bank of America brand, even if it is just to avoid dual filings? Maybe Bank of America’s effort is to make it far more difficult for regulators to break up the giant banks.
Can you believe that J.P. Morgan now is being targeted for nepotism over hiring the friends and family of Chinese ministers and higher-ups around winning banking and investment banking deals in China? Is that bribery, or is it a culture of “I will take care of yours if you take care of mine.” This is one of those instances that it is almost impossible to fathom how a company could be probed over who they hire. Many businesses hire friends and family of their partners. If regulators go after this, they better look at every aspect of society and business because businesses and people hire people who are friends of their business.
Most industry insiders probably would agree that Jamie Dimon is the best, or at least in the top few, banking CEOs out there, even after the London Whale issues. A recent effort from shareholders tried to split the role of chairman and CEO from Jamie Dimon. It failed as a shareholder vote, but you can be almost certain that the effort will come back up again next year. Citigroup Inc. (NYSE: C) even came out of the woodwork on the split chairman and CEO role, saying that the split role seems to work very well for Citigroup. For years Citigroup has had serious J.P. Morgan envy, but that was simply free press for Citigroup.
Many politicians and regulators (throw in much of the public too) would like to see the big banks broken up. If not a breakup, many at least want a total wall from trading and derivatives risks not putting banking deposits at risk. Sheila Bair is an opponent of the supermarket model of the largest banking giants, and her criticism and efforts actually do have some support on both sides of the political aisle.
Now the Federal Reserve has released its charges against the banks and systemically important financial institutions with more than $50 billion in total client assets. The breakdown there was not seen, but this charge certainly will be heavier on J.P. Morgan as the king of assets than it will be on those “smaller” banks with $50 billion to $100 billion in assets. That was for 2012 as well, and it is a part of the Dodd-Frank charges.
How would a breakup really work? In all likelihood it would work the same way that a Citigroup Inc. (NYSE: C) breakup would work. Trading and underwriting operations would have to be quarantined, while the pure brokerage and retail account management efforts likely would remain an in-bank effort. After all, it makes sense for Joe Public to go the bank and to be able to check in with a financial advisor too. But in contrast, Citigroup has been exiting its Smith Barney effort with Morgan Stanley (NYSE: MS) now in control. That would create a J.P. Morgan unit around the riskier side of the business, and Chase Bank offices would be a subsidiary of Chase.
If J.P. Morgan were to be formally broken apart, you would end up with two separate companies. One would look like Wells Fargo & Co. (NYSE: WFC), with no major international trading operations that can topple a bank or the financial system out of the blue. One would look like Morgan Stanley (NYSE: MS) or even Goldman Sachs Group Inc. (NYSE: GS), where trading and investment banking efforts are free to prevail.
It is getting ever harder to find anyone who really loves the big banks. Have you ever seen anyone wearing a T-shirt that says “Have you hugged your banker today?” out in public? Still, the endless pressures sure seem to be pointing toward a breakup of some sorts. Even if it is not an informal breakup conspiracy, it is almost impossible to argue that there is not a regulatory effort to keep J.P. Morgan from being any more dominant than it currently is.