Nugget: Jamie Dimon´s (JP Morgan) Letter to Shareholders

The whole letter is well worth reading, but here are a few interesting excerpts from Jamie Dimon´s – Chairman and Chief Executive Officer of JP Morgan Chase – 2010 Letter to Shareholders:

Complex systems – and our global economic system surely is one – often oscillate within relatively normal confines. Our complex economic system regularly has produced “normal” recessions and booms and occasionally a devastating one like the Great Depression or the recent economic crisis.

The factors that occasionally and devastatingly derail a system at any point in time may have contributed only because the table already had been set; at other times, the same factor would have had no effect at all. This phenomenon shows up in complex systems throughout nature.

Scientists dealing with complex systems try to isolate the impact of changing one input while holding all other elements constant. They know that if they change everything at once, it may be impossible to identify cause and effect.

As we try to remake our complex economic system, we need to be cautious and respectful of what the cumulative effect will be of making multiple changes at the same time.


Systemically important financial institutions (SIFI), not the taxpayers, should pay the cost of resolving their fellow large institutions’ failures. This is not a new idea – banks already bear this responsibility (through the cost of FDIC deposit insurance). Contrary to what some folks may believe, the FDIC is a government program, but the U.S. government does not pay for it – 100% of the cost for the FDIC is paid for by U.S. banks. (JPMorgan Chase’s share alone of the FDIC’s costs relating to the crisis will exceed $6 billion.)

Charging banks additional costs – proportionally and fairly allocated – for maintaining the banking system seems to be both proper and just. In our opinion, this is far more preferable than trying to create additional taxes to SIFIs, as some countries are discussing. Banks should pay for the failure of banks but not through arbitrary, punitive or excessive taxes.


If properly designed, countercyclical accounting and capital rules can serve as stabilizers in a turbulent economy. I will mention two issues that underscore the need for this approach, although there are many more.

First, loan loss reserving currently is highly pro-cyclical: When losses are at their lowest point, so are loan loss reserves and vice versa. There are many ways to fix this intelligently while adhering to rational accounting rules.

Second, capital rules even under Basel III require less capital in benign markets than in turbulent times. So at precisely the time when things can only get worse, we require the least amount of capital. This also is easy to fix.

And one additional observation from outside our industry: Federal, state and local governments need to change their accounting standards (as corporations did decades ago) to reflect obligations made today that don’t come due for many years. This one accounting issue allows governments to take on commitments today but not recognize them on financial statements as obligations or liabilities.


The argument that systemically important financial institutions should hold more capital than small banks is predicated on two false notions: first, that SIFIs borrow money more cheaply because of an implicit guarantee (and that the cost of higher capital requirements will offset this “benefit”); and, second, that all SIFIs needed to be bailed out because they were too big to fail.

While it is true that some banks could have failed during this crisis, that is not true for all banks. Many banks around the world, including JPMorgan Chase, were ports of stability in the storm and proved to be great stabilizers at the height of the crisis in late 2008 and early 2009. Remember, also, that some of the banks identified as too big to fail, in reality, were too big to fail at the time after so much cumulative damage. At that time, the too-big-to-fail oniker was extended to large industrial companies, money market funds, just about any company that issued commercial paper, insurance companies and others.

Presumably, risk-weighted assets reflect the riskiness of the company. If there are to be extra capital charges for SIFIs and global SIFIs, such decisions should be based upon logic and proof that SIFIs and global SIFIs pose a greater risk to the system. Some SIFIs posed a great risk while other SIFIs did not. And these variations in “riskiness” were not strictly a function of size. Also, if Resolution Authority is meant to take care of the too-big-to-fail problem, then what purpose does further raising capital levels serve other than to fix a problem that already has been fixed?


The U.S. banking system has gone from approximately 20,000 banks 30 years ago to approximately 7,000 today. That trend likely will continue as banks seek out economies of scale and competitive advantage. That does not mean there won’t be start-ups and successful community banks. It just means that, in general, consolidation will continue, as it has in many industries.

The U.S. system is still far less consolidated than most other countries. In any case, the degree of industry consolidation has not, in and of itself, been a driving force behind the financial crisis. In fact, some countries that were far more consolidated (Canada, Australia, Brazil, China and Japan, to name a few) had no problems during this crisis so there is not compelling evidence to back up the notion that consolidation was a major cause of the problem.

Source: JP Morgan

Also interesting: The cost of being without a bank

2 thoughts on “Nugget: Jamie Dimon´s (JP Morgan) Letter to Shareholders

Leave a Reply