Jamie Dimon on Monday released his annual reminder of why he might make a decent president despite himself.
“The world is confronting one of the greatest health threats of a generation, one that profoundly impacts the global economy and all of its citizens”, he begins, in his letter to shareholders.
After detailing the extent to which the “fortress” over which he presides is strong and well-positioned to weather any storm that comes rolling in, pandemics inclusive, Dimon acknowledges that perhaps more than any other company on the planet, JPMorgan is crucial when it comes to “keeping the global financial system fully functioning”. (For now, we’ll just forget about that lapse in September when the bank, by Dimon’s own admission, refrained from stepping in to tamp down stress in short-term funding markets due to ostensible regulatory “constraints”.)
Here’s Dimon reminding you just how critical JPMorgan really is:
It is absolutely essential that we be up and functioning for all of our customers each and every day. How else would we process $6 trillion in payments or buy and sell approximately $2 trillion in securities and foreign exchange transactions for our clients on a daily basis? And how else would we raise more than $2 trillion of credit and capital for our clients each year?
Those are rhetorical questions, in case you didn’t catch that.
Dimon notes that the bank is providing a 90-day grace period for mortgage and auto loan/lease payments and waiving any associated late fees, removing minimum payment requirements on credit cards and waiving associated late fees, not reporting payment deferrals such as late payments to credit bureaus for up-to-date clients, continuing to responsibly lend to qualified consumers and waiving or refunding some fees, including early withdrawal fees on certificates of deposit, among other things.
JPMorgan, he says, has kept three-quarters of its Chase branches open (and safe) despite the epidemic. “In addition, the vast majority of our 16,850 ATMs are well-stocked and still functioning to provide needed cash to our customers”, he adds, in a somewhat disconcerting bit that raises more questions than it answers, but let’s just assume it’s a perfunctory remark.
On the way to detailing what JPMorgan is doing to support small businesses, Dimon delivers a stark reminder:
JPMorgan Chase Institute research reveals that 50% of small businesses have less than 15 cash buffer days, reinforcing why small businesses are being heavily disrupted by the current crisis and will feel the effects for a significant period of time – even as more capital from the recent federal stimulus program reaches them.
That, you should note with some alarm, means America’s small businesses are arguably in worse shape than SMEs in China were in when lockdown protocols were implemented earlier this year.
Recall that according to a February poll by Tsinghua University and Peking University, 85% of Chinese SMEs were set to run out of cash within three months. Dimon is saying that in the US, half of small businesses would run out of cash within two weeks. This is probably an apples to oranges comparison in many respects, but it bears mentioning nevertheless. Below is the chart from the Peking study for anyone who missed it.
Dimon doesn’t mince words when it comes to the risk to the bank from the myriad measures he says JPMorgan is taking to help ameliorate the strain on firms.
“Recognizing the extraordinary extension of new credit, and knowing there will be a major recession mean that we are exposing ourselves to billions of dollars of additional credit losses as we help both consumer and business customers through these difficult times”, he says. “Of course, we are in continual contact with our regulators about our actions and efforts”.
He goes on to detail more steps the bank is taking to support the vulnerable (whether individuals or businesses) before detailing the economic reality of the current predicament facing both the US and the world. To wit, from Dimon:
Of course, we do not know how this crisis will ultimately end, including how long it will last, how much economic damage it will do, or how fast or slow the recovery will be. We have always been serious about stress testing and run an enormous number of tests per week so that we are prepared for most crises. But as is often the case, this “actual new crisis” – while it shares attributes with what is being stress tested – is dramatically different from the expected.
We stopped buying back our stock: We have always held the position that the highest and best use of our equity is to reinvest it in our own business and, of course, to be able to withstand tough times. Halting buybacks was simply a very prudent action – we don’t know exactly what the future will hold – but at a minimum, we assume that it will include a bad recession combined with some kind of financial stress similar to the global financial crisis of 2008. Our bank cannot be immune to the effects of this kind of stress.
So, JPMorgan is not immune, in case you were wondering. The bank may be more immune than any other financial institution, but as with everything else related to the current global health crisis, “immune” is a relative term.
Dimon’s worst-case scenario would lead JPMorgan to consider suspending the dividend. Here’s how that would play out (and, again, it’s important to note that he doesn’t see this as likely):
Additionally, we have run an extremely adverse scenario that assumes an even deeper contraction of gross domestic product, down as much as 35% in the second quarter and lasting through the end of the year, and with U.S. unemployment continuing to increase, peaking at 14% in the fourth quarter. Even under this scenario, the company would still end the year with strong liquidity and a CET1 ratio of approximately 9.5% (common equity Tier 1 capital would still total $170 billion). This scenario is quite severe and, we hope, unlikely. If it were to play out, the Board would likely consider suspending the dividend even though it is a rather small claim on our equity capital base. If the Board suspended the dividend, it would be out of extreme prudence and based upon continued uncertainty over what the next few years will bring.
For what it’s worth, below is an updated version of the chart showing where various banks stand in terms of the likely hit to GDP in Q2:
Dimon takes the opportunity to speak directly to Congress. “I would like to point out that, as we get closer to the extremely adverse scenario, current regulatory constraints will limit additional actions we can take to help clients – in spite of the extraordinary amount of capital and liquidity we could deploy”, he says, slipping in a little nudge to regulators.
And he goes further on that point. After applauding the Fed for the steps Jerome Powell has already taken (and Jay has run faster lately than he probably thought he could run), Dimon says this:
I have written in detail in past letters that the regulatory system is in need of both reform and recalibration – not because we want it to happen but because it would be good for a deepening and widening of the financial system – something that would benefit all Americans. While a lot of the rules were constructive and made the financial system stronger, we are now seeing the impact of poorly coordinated, poorly calibrated and poorly organized rulemaking. After the crisis subsides (and it will), our country should thoroughly review all aspects of our preparedness and response. And we should use the opportunity to closely review the economic response and determine whether any additional regulatory changes are warranted to improve our financial and economic system. There will be a time and place for that – but not now.
On restarting the economy, Dimon floats a version of the widely discussed “certification” system which, admittedly, is a bit dystopian depending on how it’s implemented. Jamie takes a straightforward approach to explaining it that comes across as relatively uncontroversial:
In addition, this “return to work” process could be accelerated if federal, state and local governments make tests widely available that allow people to certify that they have contracted and recovered from the disease, have the necessary antibodies to prevent them from getting sick again and are not infectious to anyone. Initially, we need a buffer period of days or weeks for people to be tested, and then for those who test negative for the virus, we need to discover whether virus antibodies appear through serology testing.
Ultimately, Dimon chides America for a familiar list of problems which he’s repeatedly identified as some of the more vexing issues that need to be addressed sooner rather than later, if America hopes to recapture what many believe is lost glory on multiple fronts.
He ties those points in to the pandemic discussion and closes with a Kennedy quote because… well, because you can’t go wrong with that, right?
Of course, America has always had its flaws. The current pandemic is only one example of the bad planning and management that have hurt our country: Our inner city schools don’t graduate half of their students and don’t give our children an education that leads to a livelihood; our healthcare system is increasingly costly with many of our citizens lacking any access; and nutrition and personal health aren’t even being taught at many schools. Obesity has become a national scourge. We have a litigation and regulatory system that cripples small businesses with red tape and bureaucracy; ineffective infrastructure planning and investment; and huge waste and inefficiency at both the state and federal levels. We have failed to put proper immigration policies in place; our social safety nets are poorly designed; and the share of wages for the bottom 30% of Americans has effectively been going down. We need to acknowledge these problems and the damage they have done if we are ever going to fix them.
There should have been a pandemic playbook. Likewise, every problem I noted above should have detailed and nonpartisan solutions. As we have seen in past crises of this magnitude, there will come a time when we will look back and it will be clear how we – at all levels of society, government, business, healthcare systems, and civic and humanitarian organizations – could have been and will be better prepared to face emergencies of this scale. While the inclination of some will be to finger-point and look for blame, I hope we can avoid that. I also hope we can avoid people using times of crisis to argue for what they already believe. We need to demand more of ourselves and our leaders if we want to prevent or mitigate these disasters. This can be a moment when we all come together and recognize our shared responsibility, acting in a way that reflects the best of all of us. As President Kennedy historically said, “Ask not what your country can do for you – ask what you can do for your country.”