Exam question: Savers begin to withdraw deposits from some banks. There is fear of contagion. Stocks fall on Wall Street. Panic spreads. A banker decides to step up and convinces other colleagues to chip in and avoid a more serious financial crisis. What do these facts correspond to? a) It is the Panic of 1907 and the banker is John Pierpont Morgan, founder of JP Morgan. b) It is the regional banking crisis in the United States in 2023 and the banker is Jamie Dimon, president of JP Morgan. c) Both previous answers are correct.
When John Pierpont Morgan decided to step up in 1907, the Federal Reserve didn’t even exist. The central bank was created as a result of that crisis. The banker orchestrated a private solution aligning the public good and his own benefit. When on March 16, Jamie Dimon convinced 10 other banks to lend 30,000 million together with the intention of saving First Republic Bank, the parallelism became inevitable.
The goal was to stem the contagion from the fall of Silicon Valley Bank and Signature Bank, which threatened to unleash a full-blown financial crisis. Treasury Secretary Janet Yellen and the Federal Reserve Chairman supported the plan. Yellen spoke repeatedly with the chairman of JP Morgan Chase. “I was just the first call,” the banker later told analysts. Dimon’s phone always rings when there’s trouble.
The injection of funds was not enough. The spiral of stock market crashes and deposit flights eventually brought down First Republic, especially after confessing to a brutal flight from clients and not even admitting questions in the conference with analysts. In the end, what JPMorgan has done is keep the bank after being intervened by the authorities. History repeats itself, but in this case it is not necessary to go back more than a century, but only to 2008, when JP Morgan took over Bearn Stearns, first, and Washington Mutual (WaMu), later, in the midst of a financial crisis.
Dimon had been at the helm of JPMorgan for two years when another Treasury secretary, Hank Paulson, asked him for help in dealing with the financial crisis unleashed by subprime mortgages and the credit bubble. Years later, in his annual letter to shareholders in April 2015, the banker expressed regret for those operations, especially due to the inherited litigation: “In case you were wondering: no, we would not do something like Bear again Stearns; in fact, I don’t think our council would let me. The WaMu operation could still make sense, but at a much lower price to compensate for legal uncertainty (…) These are expensive lessons that I will not forget, ”he wrote.
The rescuer DNA of the bank and the banker have been able more than that repentance. Of course, Dimon, 67, has shown that he has not forgotten those lessons and has signed much more advantageous conditions. “Our government invited us and others to take a step forward, and we have done so,” said the banker after an operation that closed in the early hours of May 1. Some 800 bank employees worked around the clock preparing the offer and reviewing First Republic data.
JPMorgan agreed to pay $10.6bn to keep the bank, but only after a thorough balance sheet cleanup, $50bn funding from the deposit guarantee fund and an asset protection scheme that not only protects against losses, rather, it minimizes the capital consumption of the operation, according to the presentation to analysts made by the entity.
Asked by an analyst about the risks of a repeat of the WaMu and Bearn Stearns problems, Dimon said JP Morgan is staying “a very clean bank in the cleanest way possible.” “That does not mean there is no risk. We feel pretty good, but that doesn’t mean something ugly won’t rear its head down the road,” he added. JPMorgan points to 2,600 million of net entry profit and believes that it will achieve a return of more than 20% with the operation. The purchase will contribute 500 million dollars annually to its benefits with conservative calculations, according to the entity.
In the case of Bear Stearns and WaMu, although ugly things did show up, JPMorgan Chase was able to digest them and become one of the clear winners of the financial crisis. Bank of America and Wells Fargo also made purchases but ran into problems later. The only Wall Street banker who has been in charge of his entity since that crisis is Dimon.
Washington Mutual is the largest bank ever intervened in the United States and First Republic, the second. Both entities have ended up in the hands of the largest bank in the country, despite the proclamations of the Joe Biden government and some prominent politicians from his party against banking concentration.
Dimon has pulled Yellen’s chestnuts out of the fire by staying with the San Francisco entity, but that has not freed him from criticism such as that of the Democratic senator Elizabeth Warren: “The failure of First Republic Bank shows how deregulation has further exacerbated the problem of being too big to fail. A poorly supervised bank has been taken over by an even bigger one, and in the end it will be the taxpayers who pay the price. Congress needs to make major reforms to fix a broken banking system.” he tweeted after the award was announced.
JPMorgan Chase was already coming out of the crisis triumphantly. Its profits soared 52% in the first quarter and the bank added $37 billion in deposits by attracting clients from smaller competitors. Some ironically argue that in a financial crisis there are two ways to increase concentration: one, by allowing large banks to buy smaller banks; another, not allowing it.
Dimon has warned against acting on the spur of the moment, both on issues of bank concentration and regulation and supervision. He asks to take a deep breath and be reflective: “It is extremely important that we avoid instinctive responses, suddenly or politically motivated, which often end up achieving the opposite of what was intended,” he wrote in his annual letter on the occasion of the meeting of shareholders that has been held this week. “You can do things that create a lot of security without creating unnecessary additional burdens,” he told analysts.
And with the background of 17 years at the helm of the largest bank in the United States, he has sent a message to the Federal Reserve: “I think regulators should be humble. they should analyze [lo que ha pasado] and say, ‘Okay, we’ve been a bit of a part of the problem,’ instead of just pointing fingers,” he said in a recent interview with Bloomberg. “If you go overboard with certain rules, requirements and regulations, some of these community banks that tell me they have more staff for compliance than for lending,” she added.
In the telephone press conference he gave after the purchase of the First Republic, he made it clear that he is not going to apologize for its size: “We need big and prosperous banks in the largest and most prosperous economy in the world. We have the capacity to help our clients, which are cities, schools, states, hospitals and governments. We are bankers of countries, of the IMF, of the World Bank. You need big, thriving banks, and anyone who thinks it would be good for America not to have them, call me directly.” This Monday, JPMorgan celebrates its Investor Day in which it will give an account of its strategy.
Meanwhile, the financial giant builds a giant of steel, concrete and glass in the noblest area of New York. The future headquarters of JPMorgan Chase is already beginning to make its way onto the Manhattan skyline, for which it will become a reference. The skyscraper that will be the new headquarters of the bank from 2025 is a symbol of the power of the most valuable bank in the world.
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