If there’s anything banks have learned from the financial crisis, it’s the fact that if you’re too big to fail, you can do whatever you want. This seems now to be the strategy of Jamie Dimond and JPMorgan. who is currently seeking to be more global, expand into the emerging markets and become more like Citigroup.
“In effect, Mr. Dimon is constructing a “poison pill” against takeover by the government. This is so simple, so brilliant, and so dangerous that it should take your breath away.”
The Baseline Scenario
While the financial reform negotiation process grinds to its meaningless conclusion, the real action lies elsewhere – in Jamie Dimon’s executive suite, Simon Johnson at The Baseline Scenario writes.
Dimon, the head of JP Morgan Chase, is apparently seeking to (a) become more global, (b) move further into emerging markets, and (c) become more like Citigroup.
This is terrific corporate strategy – and very dangerous for the rest of us.
Jamie Dimon clearly wants to become too big to fail, too interconnected to fail, and – above all – too global to fail.
He knows that the reform package will, among other (very small) things, create a resolution authority that will give the government more power – in principle – vis-à-vis failing financial institutions in the future. This is a central part of Tim Geithner’s vision for financial stability.
But Mr. Dimon also knows – as a board member of the NY Fed and sometime White House/Treasury confidante – that a US resolution authority will do precisely nothing to make it easier to handle the failure of a large global bank, e.g., Citigroup, doing business in over 100 countries.
The reason global megabanks will get bailouts in the future is simple – policymakers will fear the chaos that would ensue when competing bankruptcy claims swarm over a defaulted institution, much as happened for Lehman (e.g., in London) in September 2008.
Mr. Dimon and his colleagues – who include some top former global regulators – are also well aware that the G20 (and everyone else) will not make any serious push towards creating a cross-border resolution mechanism.
The best way to signal to creditors that they will be protected in all potential future crises is to make JP Morgan bigger and more global. This will lower the funding costs for the organization and in turn make this global expansion more profitable when times are good – and when times are bad, there will be government support.
In effect, Mr. Dimon is constructing a “poison pill” against takeover by the government. This is so simple, so brilliant, and so dangerous that it should take your breath away.
If you press serious administration officials, in private, on how they will use the new resolution authority for Citigroup or (now) JP Morgan Chase, they are quite candid: they would create a conservatorship, as with AIG or Fannie/Freddie. But there is a huge difference between conservatorship and resolution. Resolution is about winding down the company, typically involves firing, and should imply losses for unsecured creditors. Conservatorship is about managing the company as a going concern – and would almost certainly in this context involve full creditor protection.
It is perhaps ironic that Jamie Dimon argued strongly, early in the reform process, for a heavy weight to be placed on a resolution authority as a way to prevent future bailouts. His actions now to undermine the effectiveness of such an authority further suggest that this administration was unwise and naïve to rely on his advise in the early formative phases of reform.
The White House may now be waking up to the profound dangers that Mr. Dimon and his successors will pose, but they are still unwilling to do anything meaningful about it.
By Simon Johnson
Related by the Econotwist:
Webster Tarpley: The Financial Reform Is A Failure
Bank Protest Sponsored By Banks
Civil And Criminal Probes Against JP Morgan For Silver Manipulation
6 U.S. Banks Collects 93% Of Industry’s Trading Revenue
Wall Street Collapse: Did Somebody See It Coming?
Italy Charge Foreign Banks With Fraud
Banks Face Multi-Hundred-Million Dollar Settlements
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EconoTwist's 
“Storm the Banks”
I was just walking to Foyles bookstore, and on my way I met a bank with smashed windows, and the bank was marked with “Storm the Banks”…
Espen Gaarder Haug
People are getting angry, big banks got bailed out, and there is little moderation in the bank bonuses for the bailed out banks, and young people are not finding jobs.
I would also say take a close look at the monetary system, and the monetary policy!
Too bad my camera is out of battery.
Conservative banks that keep plenty of reserves are not able to expand that much in the credit boom and are loosing market shares to banks with no risk aversion.
The risky banks are more likely to expand enough to get too big to fail, and are therefore also more likely to get bail out money…
Well the Gresham law can also go in reverse, but that is typically first when things get really ugly.
From The Collector’s Blog.
Regular contributor of the EconoTwist’s
(www.wilmott.com)
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