JPMorgan's Dimon: A Regulatory Rant

Finance professionals strive to keep up to date with markets, trends and rules. They have a check-list of reading material, journals and documents they refer to from time to time. They scan the Wall Street Journal, Financial Times or BusinessWeek whenever they can. They peek at investment magazines and websites when they think they must.  They peruse SEC documents, accounting rulings, equity research, and analyses from ratings agencies.

Each spring, they find time to read Warren Buffet's annual letter to shareholders--often a primer in investment basics, occasionally a skillful interpretation of finance trends or opportunities.

Or if finance professionals are wedded to trends and fashions in financial services, they tune to JPMorgan Chase's Jamie Dimon and his state-of-the-industry message in the annual shareholders letter.  Since he took the helm as CEO in the mid-2000s, Dimon has used this forum to present more than an analysis of revenues and profits.  Dimon takes the podium and delivers an op-ed piece that roars for dozens of pages.

At the pulpit, aware his audience ranges from investors and hedge-fund managers to regulators, analysts, students and perhaps a politician or two, he selects the important financial issues of the season. He rattles and shakes those issues and explains them in easy-to-understand patterns and data points.  After a neat, digestible presentation of the facts (and his interpretation of them), he delivers knock-out punches:  his views of what happened or is happening, his opinions of what everybody needs to do going forward (including himself, employees, communities, investors and governments), and his promise what his institution will do in the years to come (and of course why all that will help the stock price of JPMC.)

In years past, he was brave to tackle and offer a CEO's candid view of the brewing and bubbling over of mortgage markets, the darkest days of the financial crisis, and the public's perception of bankers being over-compensated.  This year, his letter addresses what is plaguing most large financial institutions these days--new financial regulation banks must comply with over the next decade. The 2012 letter, in part, is a treatise on bank regulation. There is much about this onslaught of regulation that bothers him.

JPMorgan, Dimon writes in his letter, has 14,000 new rules to review, understand and adhere to.  They include U.S.-based Dodd-Frank regulation, the international requirements of Basel II and III, consumer-related regulation, and the Volcker rule that prohibits proprietary trading and will change the pulse, pace and perhaps earnings trends of large banks.  They also include, Dimon explains, requirements of big banks to prepare "living wills" and complex capital-adequacy stress tests. Dimon doesn't disagree with the spirit of regulation. But he fumes at the extraordinary burden of complying with arcane, nebulous rules being thrust on his bank's plate right now. There must certainly be a simpler way, he asserts.

He disagrees with the inefficiencies of dozens of regulators around the world imposing overlapping rules, often without regard to consequences. He's angry that his institution will need to prepare liquidity reports--not just one liquidity report for all regulators, but five liquidity reports for five regulators.

Dimon claims new bank regulation at JPMorgan Chase will require significant amounts of time from 3,000 designated employees and will cost about $3 billion to implement, gather data, perform calculations, monitor exposures and assets, set up new systems, prepare and submit reports. To him, that would be thousands of hours of employee-power not devoted to the business of generating banking revenues. 

As always, after his well-reasoned, often well-articulated griping session, he offers solutions, although this time he knows his solutions and recommendations come too late. Or they will land on ears of government officials not likely to be sensitive to what will appear to be big banks whining about being required to clean up the messes from the crisis.  "The frustration with and hostility toward our industry continues," he writes. "Regulation has become politicized," he says later.

He would settle for, in a dream world, for the opportunity to prepare one simple report for as few regulators as possible--and perhaps a couple thousand fewer employees dedicated to monitoring rules and preparing reports. 

New regulation is intended to minimize the recurrence of a financial crisis, eliminate possibilities of a collapse of the financial system, and reduce the probability that the downfall of one big bank will be a detriment to all institutions globally.  So all bank leaders deal with the fact that regulation--for good or bad--may reduce profit opportunities and lower returns on capital.  Dimon, in his letter, accepts this premise and shows how his institution will overcome hurdles to achieve stable, consistent returns. In fact, he spends a page or two explaining how the investment bank, no longer blessed with the ability to bolster returns from the fortunes of prop-trading, will remain relevant, profitable and at the top of league tables. "Market-making"-related trading will still generate substantial revenues.

In 2012, Dimon vented. He knew he had the stage, a wide audience of stakeholders who understand his business, and also had several uninterrupted pages in the front of the annual report.  He knew his voice wouldn't be misinterpreted in CNBC soundbites or ignored by parts of the population uninterested in the views of big-bank CEOs.

For those passionate about a bank's legal, compliance and regulatory requirements, there is a reason to cheer the decade to come. Dimon's letter suggests there will be long-term employment security for those immersed in regulatory reporting and the black boxes that used to look for prop-trading opportunities, but now must be used to prepare five liquidity reports for five regulators.

Tracy Williams

See also

CFN:  Dimon's State of the Industry, 2011