Jamie Dimon Delivers Annual World Review

Jamie Dimon and the modest bank he runs have a new corporate purpose.

JPMorgan will “Make dreams possible for everyone, everywhere, every day.”

That’s according to Dimon’s latest annual letter, published Tuesday. The bank’s vision is the same. JPMorgan wants to be “the most respected financial services firm in the world.” The corporate purpose statement, Dimon explained, is an effort to “knit together” the bank’s values and the way it operates on a daily basis.

So, for everyone who’s ever walked out of a Chase branch and exclaimed, “By golly, my dreams are possible after all!” just know your jubilant outcry echoed all the way up in the clouds, where Dimon heard and adopted it.

The bank has five values or “mindsets” that unite it. They are: Service, heart, curiosity, courage and excellence. There are a number of “principles” and “promises” too. Among the latter: JPMorgan is a “great place to work.” The bank offers “an unmatched combination of humanity and excellence” and “at scale.”

Dimon should consult on startup pitch decks. “Scalable humanity” would surely prompt every VC in a virtual Zoom room to end the call early: “Shut up and take our money!” Or at least prior to March 10. Things are a little more complicated now.

About that. Dimon blamed, in part anyway, regulators and what admittedly looks, in hindsight, like a laughably poor stress test design, for Silicon Valley Bank’s failure. “Most of the risks were hiding in plain sight,” he wrote, adding that,

Interest rate exposure, the fair value of held-to-maturity (HTM) portfolios and the amount of SVB’s uninsured deposits were always known — both to regulators and the marketplace. The unknown risk was that SVB’s over 35,000 corporate clients — and activity within them — were controlled by a small number of venture capital companies and moved their deposits in lockstep. It is unlikely that any recent change in regulatory requirements would have made a difference in what followed. Instead, the recent rapid rise of interest rates placed heightened focus on the potential for rapid deterioration of the fair value of HTM portfolios and, in this case, the lack of stickiness of certain uninsured deposits. Ironically, banks were incented to own very safe government securities because they were considered highly liquid by regulators and carried very low capital requirements. Even worse, the stress testing based on the scenario devised by the the Fed never incorporated interest rates at higher levels.

Dimon is famously irritable when it comes to some aspects of the post-GFC regulatory regime. He makes that clear at regular intervals. On Tuesday, he was quick to emphasize that his point about SVB wasn’t to “absolve” management. Rather, he wanted to “make clear that this wasn’t the finest hour for many players.”

If I wanted to, I could conjure charts of unrealized HTM losses for other US banks and pretend the entire system is going to implode tomorrow. Relatedly, I could include a screenshot of the Fed’s stress test parameters and mock them. That’d be entertaining, I guess. But it’d also be unoriginal, and totally pointless. Those unrealized losses aren’t going to be an issue for the broader banking system and if they are, the Fed will let banks borrow against the assets at par — so, they’re as good as cash now.

And what’s the point in bewailing the stress tests? It’s not as if the Fed thought, “You know what? Let’s screw this up.” The problem isn’t intent, it’s ineptitude. You can’t “fix” that, although Dimon had a whole host of recommendations for how to improve the regulatory regime and the banking system more generally.

As usual, he chided regulators for inadvertently disincentivizing large banks (like his) from market making activities in times of stress. Relatedly, he derided shadow banking conduits as “fair-weather friends” who aren’t likely to provide liquidity “in tough times.” He said some regulations are now pro-cyclical, by which he meant they can exacerbate economic stress by making banks less willing to extend credit during during crises.

Dimon was especially hard on the stress tests, which I think it’s fair to say he hates, or at least as they’re currently conceived. “It has become an enormous, mind-numbingly complex task about crossing t’s and dotting i’s,” Dimon wrote. “The Fed’s stress test focuses on only one scenario, which is unlikely to happen [and] may lull risk committee members at any institution into a false sense of security that the risks they are taking are properly vetted and can be easily handled.”

I have some potentially distressing news: We don’t generally learn from crises as a species, and particularly not from financial busts. Instead, we repeat our mistakes, make new ones along the way to repeating the old ones, refuse to acknowledge (let alone own) our failures and such will be the case until we inevitably destroy ourselves. Maybe AI can intervene.

About that. “Artificial intelligence is an extraordinary and groundbreaking technology,” Dimon said Tuesday. If you were wondering whether JPMorgan intends to leverage it, the answer is they already are, and plan to do so “at scale” in the future.

“We already have more than 300 AI use cases in production today,” Dimon said, adding that,

We currently have over 1,000 people involved in data management, more than 900 data scientists (AI and machine learning (ML) experts who create new models) and 600 ML engineers (who write the code to put models in production). This group is focused on AI and ML across natural language processing, time series analysis and reinforcement learning to name a few. We’re imagining new ways to augment and empower employees with AI through human-centered collaborative tools and workflow, leveraging tools like large language models, including ChatGPT. We also have a 200-person, top-notch AI research group looking at the hardest problems and new frontiers in finance.

He does take seriously the existential questions that go along with widespread AI adoption, and rest assured, JPMorgan employs “an interdisciplinary team of ethicists” to help the bank “prevent unintended misuse, anticipate regulation and promote trust.”

Consistent with tradition, Dimon’s missive was a sweeping affair commensurate both with his penchant for weighing in not just on current events affecting JPMorgan, but on all current events.

There’s little point in trying to paraphrase or summarize Dimon. Whatever Warren Buffett intentionally avoids discussing in his letters, Dimon takes on with a gusto typically reserved for politicians. Below, find some additional excerpts which are perhaps worth skimming if you have a few minutes.

• When it comes to political debate about banking regulations, there is little truth to the notion that regulations have been “loosened,” at least in the context of large banks. (To the contrary, our capital requirements have been increasing for years.) The debate should not always be about more or less regulation but about what mix of regulations will keep America’s banking system the best in the world. Because of the recent problems, we can add to [the] mix the review of concentrated customers, uninsured deposits and potential limitations on the use of HTM portfolios.
• Any crisis that damages Americans’ trust in their banks damages all banks – a fact that was known even before this crisis. While it is true that this bank crisis “benefited” larger banks due to the inflow of deposits they received from smaller institutions, the notion that this meltdown was good for them in any way is absurd.
• Unfortunately, it is becoming increasingly difficult for banks to stay in the mortgage business, which ultimately hurts everyday Americans. The high costs of origination and servicing along with the complexity of regulations create a costly business with significant legal, reputational and operational challenges. In addition, given capital requirements and the lack of a healthy securitization market, it barely makes sense for banks to hold mortgages or mortgage-servicing rights.
• To varying degrees, banks will compete for money, not only among one another but also with money market funds, other investments and the Fed itself. Money market fund total assets under management have increased by $650 billion since April 2022, with a significant portion migrating into the Fed’s reverse repo facility, thereby draining deposits from the banking system. So while the Fed’s balance sheet has come down by approximately $550 billion, deposits at the banks have come down by $1 trillion, largely uninsured deposits. Unfortunately, some banks invested much of these excess deposits in “safe” Treasurys, which, of course, went down in value as rates rose faster than most people expected.
• The tensions of [the war in Ukraine] are leading to the rethinking of many economic alliances, as well as trade and national security. [T]hese factors create more risk and potentially higher inflation, and their confluence (along with inflation and QT) creates a somewhat unpredictable and dangerous outcome. Less-predictable geopolitics, in general, and a complex adjustment to relationships with China are probably leading to higher military spending and a realignment of global economic and military alliances. Higher fiscal spending, higher debt to GDP, higher investment spend in general (including climate spending), higher energy costs and the inflationary effect of trade adjustments all lead me to believe that we may have gone from a savings glut to scarce capital and may be headed to higher inflation and higher interest rates than in the immediate past.