Now that Steve Jobs has retired from Apple, Jamie Dimon seems determined to assume his role as the CEO with the most effective reality distortion sphere. You can infer that from the magnitude of the whoppers he is telling and the size of the audience he is trying to bamboozle.
But while Jobs’ Svengali tendencies have gotten more than occasional mention, they weren’t a major failing. Jobs not only saved Apple, but he spearheaded the development of important new product categories. By contrast, Dimon has long been a bully, a smart and capable bully, but a bully nevertheless (I have reports going back to his first year at Harvard Business School, and it takes some doing to be memorably obnoxious by dint of the competition in that category).
Now on the surface, Dimon’s latest brazen remark isn’t quite as gross as my headline suggests. He is merely saying that US banks should not be subject to the new incoming international bank rules, known as Basel III. That might seem to be a narrower statement, but as we show, when you parse his logic, it amounts to banking uber alles.
Here is the relevant section of an interview published today in the Financial Times:
New international bank capital rules are “anti-American” and the US should consider pulling out of the Basel group of global regulators, Jamie Dimon, chief executive of JPMorgan Chase, has said….
The Basel III capital rules are designed to make the financial system safer by making banks build up risk-absorbent “core tier one” capital to at least 7 per cent of risk-weighted assets. The biggest, including JPMorgan, have to reach 9.5 per cent.
“I’m very close to thinking the United States shouldn’t be in Basel any more. I would not have agreed to rules that are blatantly anti-American,” he said. “Our regulators should go there and say: ‘If it’s not in the interests of the United States, we’re not doing it’.”
Mr Dimon also criticised global liquidity rules, arguing that regulations that viewed covered bonds – a European market feature – as highly liquid but discounted government-backed mortgage-backed securities in the US were unfair and that other details hit investment banking activity core to US banks hardest.
Regulators say all countries compromised on agreeing the rules, which put eight banks – five from outside the US – in the top level of capital. But Mr Dimon said there was a threat that Asian banks, in particular, could take US market share because of the combination of US domestic and global rules.
“I think any American president, secretary of Treasury, regulator or other leader would want strong, healthy global financial firms and not think that somehow we should give up that position in the world and that would be good for your country,” said Mr Dimon. “If they think that’s good for the country then we have a different view on how the economy operates, how the world operates.”
Let’s start with some background. Treasury secretary Geithner said repeatedly during the Dodd Frank process that the shortcomings in the legislation didn’t matter all that much, since having banks carry larger capital buffers would do the trick, and that was coming with Basel III. In other words, Geithner argued the higher capital requirements to be imposed by international rulemaking process was where the critical banking regulatory fix would happen. And this is what Dimon is now, loudly, out to undermine.
Let’s go to the Dimon argument, such as it is. What about “international” does he not understand? If you want to play outside America’s borders, you can expect to be subject to different rules. The Eurozone, much to the consternation of US and UK players, has basically told the Anglo private equity firms to go to hell. They are forbidden both from doing deals in EU countries and from raising funds there unless they register and obey local rules. The Eurozone has gotten sick of rapacious foreign players buying decent European companies, cutting jobs, saddling them with lots of debt, and shrugging their shoulders when they miscalculate (often) and the rent extraction kills the company. The EU rules, among other things, will restrict how much a PE firm could lever up a portfolio company.
There is also what I assume is a deliberate misrepresentation on the part of Dimon. The Basel III rules are not implemented verbatim by national regulators; there is a more than a bit of tweaking and adjustment going on. Given the loud support that Geithner has given to the Basel III process (and the damage it would do to the US reputation in international bodies when emerging economies are already questioning the Anglo-Saxon model and demanding a bigger role), it’s hard to imagine the US acting on Dimon’s demands and repudiating the Basel III process. But he may be using this temper tantrum to get the US implementation to cut some slack on some issues near and dear to his heart.
Dimon interestingly assumes that the US can defy the will of other regulators. That’s probably true now, given that regulators in advanced economies all seem to adhere to neoliberal dogma. The interesting and glaring exception is the UK, which is forcing its banks to ring-fence their retail operations. The new standards (“Vickers,” for the commission’s chairman) require a capital cushion of up to 20%, with the largest ringfenced banks having at least 17% of equity and bonds and a further loss-absorbing buffer of up to 3% if “the supervisor has concerns about their ability to be resolved without cost to the taxpayer”. If Basel III’s 9.5% capital requirement is “anti American”, then how “anti British”, in Dimon’s world, is Vickers?
But it isn’t at all a given. Dimon’s assumption is that he has nothing to lose by pushing for his aggressive ask. But the Eurozone implemented Basel II before the US. Its banks are likely to howl about the costs of the equity and liquidity provisions, but they happen to be preoccupied right now, and the near certainty of further state intervention on their behalf is likely to weaken their ability to press for waivers when the Eurocrisis abates.
As we have stated before, both the ECB and the Fed could implement binding requirements on major international banks. Any real bank needs access to the central bank-run settlement systems in the dollar and euro; you need to be a full scale player in those currencies, and going through correspondents to get access to those clearing systems would be very cumbersome and costly (I had a client look at it for the US and conclude it was a non-starter). There is no way for the banks to innovate around these systems.
The next bizarre bit in Dimon’s rant is his characterization of Basel III as “anti-American.” What, because it is named for a Swiss city?
If you believe the PR of the US regulators (and this is one case where bank analysts agree with their take), US banks are better capitalized that Eurobanks. Forcing everyone to adhere to new capital standards will work to the competitive advantage of US banks, since they are further along. But anyone with an operating brain cell knows that Dimon’s real beef is not on the effect on American bank’s competitive standing, but on his pay package, which is a function of its bottom line. Any effort to make banking safer will lower their profits. That is what Dimon objects to; the specifics of his argument are simply to serve as cover for his real beef.
Dimon manages to play yet another jingoistic card, acting as if Basel III singles out US banks when a majority of the financial firms subject to the most stringent rules are outside the US. And he raises the truly bizarre specter of “Asian” hordes invading the US. Huh? Does he mean HSBC? I presume not, that’s a UK bank. The only Asian bank in the top 10 is Mitsubishi UFJ, and the Japanese are not likely to be in aggressive expansion mode (they’ve never gotten the knack institutionally of hiring and managing good top level foreigners; I know of a very few Japanese executives who have figured it out and did a good job when they were posted in the US, but as soon as they were rotated back to Japan, their successors made a hash of what they had put in place).
The Chinese are even less likely to move in near term (long term is a completely different matter). First, the Chinese were apparently interested in investing in US players in the crisis and were rebuffed. But having worked repeatedly with foreign banks in the US, building a denovo operation (or using small acquisitions as a platform) is a completely different kettle of fish. And going from the Chinese market of heavy state control and limited product scope to the US is like saying a drayage company can operate a supersonic plane because both are in the transportation business. I’ve seen what a hard time foreign banks have had in the US with a vastly lesser skill gap (one they closed over a period of decades). The Chinese are too far behind skill-wise to constitute a threat in the US until they can acquire the skills via a major acquisition (and that was not the scenario Dimon was hinting at).
And it goes without saying that Dimon made clear that he believe that what is good for banks is good for the US, when that has been demonstrably false for at least the last decade.
What’s striking about Dimon’s comments is how brazen they are. He’s not making clever, narrowly accurate but substantively misleading comments. Much of what he says and implies is unadulterated bunk. The fact that he peddles this tripe shows how confident he is that his message will go unchallenged. And that in turn reveals that he is secure in his belief that the banks have won the war; all he is caviling about is the speed of the mop-up operation.