Dear Fellow Shareholders
Dear Fellow Shareholders
Your company earned a record $17 billion in 2010, up 48% from $12 billion in
2009. As points of reference: In 2008 — which, as you know, was a year filled
with unprecedented challenges — we earned $6 billion; and the year before, we
earned $15 billion, a then-record for us. The performance of our JPMorgan Chase
stock during this period of time — and over the past decade (including heritage
company Bank One) — is shown in the chart on page 4.
Our return on tangible equity for 2010 was 15%. Given your company’s earnings
power, these returns should be higher. In a more normal environment, we believe
we could earn approximately $22 billion to $24 billion. Your company’s earnings,
particularly because of the business we are in, will always be somewhat volatile.
The main reason for the difference between what we should be earning and
what we are earning is the extraordinarily high losses we still are bearing on
mortgages and mortgage-related issues. These losses have been running at a
rate of approximately $4 billion a year, after-tax, and, while they should come
down over time, they, unfortunately, will continue at elevated levels for a while.
On the brighter side, we increased our annual dividend to $1 per share and
have re-established the ability to buy back stock if and when we think it’s
appropriate to do so.
Looking at these results in the context of the last three difficult years, what
particularly pleases me is how exceptionally our company performed, not
in absolute financial terms but in human terms. No matter how tough the
circumstances or how difficult the events, we were there for our clients and
our communities — providing credit and raising capital. We provided credit
and raised capital of approximately $1.6 trillion for our clients in 2010 alone.
Those clients included hospitals, schools, local governments, municipalities,
corporations, small businesses and individuals. While helping our clients
— large and small — prepare for the future, we continued to actively support the
economic recovery. At the same time, we continued to invest in your
company’s future and to build our businesses — opening branches and offices
and adding bankers across the globe, including hiring more than 8,000 people
in the United States alone. As a result, we gained market share and became a
better competitor in almost every single business.
2
Jamie Dimon,
Chairman and
Chief Executive Officer
The outstanding efforts of our 240,000 employees around the world enabled
our firm to weather the worst economic storm in recent history and to emerge
stronger than ever. And — while we are proud of the many ways we rose to meet
the untold challenges we faced — we also are keenly aware of the ongoing
imperative to continually innovate and improve — to get smarter, better, faster —
in service to our clients. This is the only way we will be able to thrive going
forward and to overcome the challenges ahead.
I’ve asked the chief executive of each of our lines of business to write you a letter
about his or her respective business, both to review the 2010 results and to offer
an outlook for the future. I hope as you read their letters in the section follow-
ing this letter that you get the same sense that I do: Across your company, we
have talented leaders and great opportunities; we are performing well financially
against our competition; we are investing in our organic growth; and, perhaps
most important, we are focused on building quality businesses.
3
Stock and Book Value Performance
Stock Total Return Analysis if You Became a Shareholder of the Respective Firms at December 31, 2000
10-Year Performance:
Compounded Annual Gain 7.0 % 2.5 % 2.7 % 1.4 %
Overall Gain 97.4 28.1 30.1 15.1
This chart shows actual returns of the stock, with dividends included, for heritage shareholders of the company
vs. the Standard & Poor’s 500 Index (S&P 500).
Bank One/JPMorgan Chase Tangible Book Value per Share Performance vs. S&P 500 (2001-2010)
10-Year Performance:
Compounded Annual Gain 13.6 % 1.4 % 12.2 %
Overall Gain 256.5 15.1 241.4
In addition to stock performance, we looked at tangible book value performance over the past 10 years. Tangible
book value over time captures the company’s use of capital, balance sheet and profitability. In this chart, we are looking
at heritage Bank One shareholders. The chart shows the increase in tangible book value per share; it is an after-tax
number assuming all dividends were retained vs. the S&P 500 (a pretax number with dividends reinvested).
Quality business, to us, means good clients; excellent products; constant innovation;
state-of-the-art systems; and dedicated, capable, well-trained employees who care
about the customers we serve. It means building consistently, not overreacting to
short-term factors, and being trusted and respected by our clients in all the communi-
ties where we do business. In a risk-taking business, it is easy to generate increasingly
better results in the short run by taking on excessive risk or by building lower quality
business — but you will pay for that in the long run. That is not what we are after.
In this letter, I will focus my comments on issues of great impact to our business:
4
I . T he Post- Crisis E nvironment: H ow W e V iew
the S ignificant C hallenges A head
As we enter 2011, we find ourselves having • How will the mortgage and mortgage-
weathered an epic storm – not just the global related issues end up? How much will they
financial crisis itself but its effect on the cost us? And how will they be resolved?
global financial system and our industry. Charlie Scharf deals with some of these
As a nation, we may have averted disaster questions in his letter later in this Annual
thanks to a great collective effort, but many Report. These issues are extremely complex
challenges remain. A lot of work has been and will take years to resolve. There is
done – some of which has been excellent and plenty of misinformation and a number
necessary. Other aspects are less satisfactory of misconceptions around mortgages, and
and even potentially harmful, and we need your company is going to make a dedicated
to face and fix them in a thorough, balanced, effort to describe in detail what we do, how
intelligent manner. Suffice it to say that a we do it, what the right things to do are,
good deal of work remains to be done. what the mistakes we made are and how
we will rectify them. I will not go into the
In our meetings with shareholders, we often
details in this letter, but, rest assured, we
are asked the following tough questions:
are fully engaged on this issue of mort-
• What will be the fallout from the European gages, and you will be hearing more from
sovereign exposures and the geopolitical us about it in the future.
risks, particularly in the Middle East?
In thinking about the answers to the ques-
• How are we going to deal with all the tions posed, it would be naive to be blindly
litigation around mortgages, municipali- and irrationally optimistic – or to be blindly
ties, Bear Stearns, the bankruptcies of and irrationally pessimistic. We cannot predict
Lehman Brothers, Washington Mutual the future with any real certainty, but we can
(WaMu) and others? offer our shareholders some insight into how
we think about these issues, what they mean
• Will the American economy recover in the for the company and how we manage through
short run? How will abnormal monetary them. Remember, our goal is not to guess the
policies and looming fiscal deficits affect future; our goal is to be prepared to thrive
us? Does America have the capacity in under widely variable conditions.
the long run to deal effectively with other
important problems it faces, including
We Face the Future in a Strong Position
immigration, our energy policy, the
environment, our education and health Our businesses and management team are
systems, our infrastructure and our still- among the best in the industry. It is diffi-
unbalanced trade and capital flows? cult to replicate our franchises and the
intelligence embedded in our expertise, in
• Will the role of banks change in this new our systems and in the experience of our
environment? Will they be able to grow people. Our fortress balance sheet provides
profitably? Will American banks be able to us with strong and growing capital – and we
freely compete with increasingly formi- always are thinking far ahead about the best
dable foreign banks, some of which are the ways to deploy it.
beneficiaries of powerful state support?
We believe we have the foresight and
fortitude to use our capital wisely. Our first
priority was to restore a decent dividend –
this is what our shareholders wanted (if it
were up to me personally, I would reinvest
5
all the capital into our company and not pay How We View European Sovereign and
any dividend – but this is not what most Geopolitical Risk
shareholders want). We would like to be
The European Union (EU) is one of the
completely clear about how we prioritize our
great collective endeavors of all time –
use of capital. These priorities are:
where participating countries are striving to
• First and foremost, to invest in organic form a permanent union of nations for the
growth – building great, long-term profitable benefit of all their citizens.
businesses. We see significant opportunities
In the short run, i.e., in the next year or two,
for organic growth in each of our businesses.
we believe that the Euro Zone, in fits and
• Second, to make acquisitions – both small starts, will work through its problems. It
add-ons and larger ones, but only if the has the will and wherewithal to do so. The
price is right and we have a clear ability politicians of Europe seem to be completely
to manage the risks and execute properly. devoted to making this work – as their
(If we are not running our own businesses predecessors were for the past 60 years. The
well, we should not be doing acquisitions.) process will be messy, but the consequence
of giving up could be far worse: Sovereign
• And third, to buy back stock – as a disci- defaults could lead to a bank crisis with
pline, we always will buy back the stock serious economic consequences. Since it
we issue for compensation. However, we is the same money (if sovereign nations
will buy back additional stock only when, default on their debt, the EU will have to
looking forward, we see few opportunities recapitalize its banks by approximately the
to invest in organic growth and acquisi- same amount), it is better to fix the problem
tions. And we will buy back stock only without causing additional complications.
when we believe it benefits our remaining
shareholders – not the ones who are selling Once the short-term issues are addressed,
(i.e., we will be price sensitive). there likely will be some restructuring
of the fiscal and monetary agreements
We also believe that strength creates good between the nations and possibly the
opportunities in bad times. And, yes, we restructuring of some of the nations’ debt.
know we have made and will continue to We believe there are ways to do this with
make mistakes – all businesses do – but we minimal damage – particularly if the EU is
hope to catch them early, fix them quickly able to achieve economic growth.
and learn from them.
When the sovereign crisis started,
We are not complacent about renewed, JPMorgan Chase’s gross exposures to
intense competition everywhere we operate – Greece, Ireland, Portugal, Spain and Italy
in fact, it’s already here. Whatever the future totaled approximately $40 billion – but net
brings – and it will bring both good and bad of collateral and hedges, our real exposures
– we are prepared, and we expect to emerge were approximately $20 billion. We did not
among the leaders. run or panic – we stayed the course. While
we reduced some of our exposures (essen-
tially, the investment of excess cash for the
company), we did not reduce the exposures
associated with serving our clients, and we
continued to actively conduct business in
those nations. Our position was clear and
consistent: to be there for our clients, not
just in good times, but in bad times as well.
Going forward, this mission will not change.
We know the risks, and we are prepared
to take them. For example, in the unlikely
occurrence of extremely bad outcomes in all
these countries, JPMorgan Chase ultimately
6
could lose approximately $3 billion, after-tax. party to pay the winning party’s legal costs.
But we are in the business of taking risks in Large actions against big companies, whether
support of our clients and believe that this justified or not, have the potential to deliver
is a risk worth bearing since we hope to be large payoffs. This lack of balance and fair-
growing our business in these countries for ness too often results in outrageous claims.
decades to come. Why not? Plaintiffs have little to lose. Our
shareholders should know that we have set
Our broader perspective on geopolitical
aside significant reserves to handle many of
uncertainty is that it is a constant state of
these exposures.
affairs, which has been and always will be
there, whether immediately visible or not.
How We View the American Economy —
Such uncertainty is one of the main reasons
Short Term and Long Term
we control our credit exposures and main-
tain extremely strong capital and liquidity Five years ago, very few people seemed to
at all times. worry about outsized risk, black swans and
fat tails. Today, people see a black swan with
Before turning to the economic impact of the a fat tail behind every rock.
crisis in the Middle East, we hope, first and
foremost, that the outcome of these historic The U.S. economy was, is and will remain
movements will be to enhance the life and for the foreseeable future the mightiest
rights of the people in the region. economic machine on this planet. America
is home to many of the best universities and
For our company, in particular, our direct companies in the world. It still is one of the
exposures are manageable. The key economic greatest innovators. The volume and varia-
impact is if extreme turmoil leads to extraordi- tion of our inventions created in America
narily high oil prices, which then could cause are extraordinary – from bold new technolo-
a global recession. As you know, however, we gies, like the Internet, to thousands of small,
always run this company to be prepared to incremental improvements in processes and
deal with the effects of a global recession. products that, in aggregate, dramatically
improve productivity. America also has an
How We View Our Legal Exposures exceptional legal system (notwithstanding
Unfortunately, we will be dealing with legal my many reservations about the class-action
issues – the detritus of the storm – for years and tort system) and the best and deepest
to come. They range from mortgage-related capital markets. The American people have
litigation to lawsuits concerning Bear Stearns a great work ethic, from farmers and factory
and the bankruptcies of WaMu, Lehman workers to engineers and businessmen (even
Brothers and others. bankers and CEOs). And it still has the most
entrepreneurial population on earth. Amer-
Our strategy is simple: When we are right, ican ingenuity is alive and well.
we will fight mightily to ensure a just
outcome. When we are not, we will say so. I mention all this because we need to put
our current problems – and they are real
Some of the legal challenges we face stem – into proper context. Our problems may
from our acquisitions of Bear Stearns and be daunting, but they also are resolvable.
WaMu, where we inherited some of their As a nation, we have overcome far worse
exposures. Had we not acquired these challenges, from the Civil War to the Great
firms, there would be no lawsuits because Depression to World War II. Even amid our
there would be no money to pay – our deep current challenges, we have begun to see
pockets are an attractive target to plaintiffs. clear signs of stability and growth returning
While the American legal system is one of to the capital markets and the U.S. economy.
the world’s best, it also is one of the only Almost everything is better than it was a
legal systems that does not require the losing year or two ago.
It’s conceivable that we are at the begin-
ning of a self-sustaining recovery that could
power through many of the negatives we’ve
7
been focusing on recently. Consumers are Yes, America still is facing headwinds and
getting stronger, spending at levels similar to uncertainties – including abnormal monetary
those two-and-a-half years ago, but, instead of policy and looming fiscal deficits. And while
spending more than their income, they now we can’t really predict what the economy will
are saving 5% of their income. And consumer do in the next year or two (though we think
debt service costs, i.e., how much they spend it is getting stronger), we are confident that
of their income to service their debt, have the world’s greatest economy will regain its
returned to levels seen in the 1990s (due to footing and grow over the ensuing decade.
debt repayment, charge-offs and debt forgive-
ness, lower interest rates, etc.). But we must take serious action to ensure our
success in the decades ahead
Businesses, large and small, are getting While our confidence in the next decade
stronger. Large companies have plenty of is high, for America to thrive after that,
cash. Medium sized and small businesses are it soon must confront some of the serious
in better financial condition and are starting issues facing it. We need to redouble our
to borrow again. Global trade is growing – efforts to develop an immigration policy
U.S. exports were up 16% in 2010. Job growth and a real, sustainable energy policy;
seems to have begun. Financial markets are protect our environment; improve our
wide open – and banks are lending more education and health systems; rebuild
freely. U.S. businesses, large and small, are our infrastructure for the future; and find
investing more than $2 trillion a year in solutions for our still-unbalanced trade
capital expenditures and research and devel- and capital flows.
opment. They have the ability to do more,
and, at the end of the day, the growth in the The sooner we address these issues, the
economy ultimately is driven by increased better – America does not have a divine
capital investment. right to success, and it can’t rely on wishful
thinking and its great heritage alone to
The biggest negative that people point get the country where it needs to go. But
to is that home prices are continuing to I remain, perhaps naively, optimistic. As
decline, new home sales are at record lows Winston Churchill once said, “You can
and foreclosures are on the rise. Our data always count on Americans to do the right
indicates that the rate of foreclosures will thing – after they’ve tried everything else.”
start to come down later this year. Approxi-
mately 30% of the homes in America do
Will the Role of Banks Change in This New
not have mortgages – and of those that do,
Environment?
approximately 90% of mortgage-holding
homeowners are paying their loans on time. Banks serve a critical function in society,
Housing affordability is at an all-time high. but it often is difficult to describe that func-
The U.S. population is growing at over 3 tion in basic terms. When I was traveling in
million a year, and those people eventually Ghana with one of our daughters (yes, the
will need housing. Additionally, the fact same daughter who asked me what a finan-
that fewer homes are being built means that cial crisis was three years ago), she pointed
supply and demand will come into balance out all the buildings and projects that had
sooner than it otherwise would have. That been started but never finished.
said, housing prices likely will continue to All the money that went into Ghana’s
go down modestly because of the contin- unfinished buildings was needlessly wasted
uous high levels of homes for sale. The ulti- and, in fact, had damaged the citizens of
mate recovery of the housing market and the country. This sorry sight provided me
housing prices likely will follow job growth with a concrete example of how to describe
and a general recovery in the economy. what banks actually should do. I explained
to our daughter that had banks (or inves-
tors) been doing their job, they would have
made sure that before money was invested
in a project or enterprise, it had good pros-
pects of success: It would be built for good
8
reasons, it would be appropriately utilized, it What will not change: Clients still will need
would be properly constructed, it would be our services
insured and, if something went wrong, the From the point of view of the customer –
asset would be put to the best possible use always the best way to look at a business –
afterward. At the microlevel of one building the services we offer, which are not easy to
or one small business, it is easy to under- duplicate, will remain essential. Economies,
stand what banks do. They lend or invest, markets, technology and trends will change,
having done their homework, to maximize but we know companies and consumers still
the chance of success. Sometimes they are will need the financial services we provide.
wrong, and unforeseen circumstances can
derail that success, but if they do their job When consumers walk into our retail
well, this lending improves the general branches, they still will need checking and
health of an economy. savings accounts, mortgages, investments,
and credit and debit cards.
At the macrolevel, we talk about having lent,
invested or raised approximately $1.6 trillion When small business customers walk into our
for companies, not-for-profits and individuals branches, they still will need cash manage-
over the course of 2010. But at the human ment services, loans and investment advice.
level, here’s some of what we did last year: When the CEOs of middle market compa-
• We originated mortgages to over 720,000 nies are called upon by our bankers, they
people. still will need cash management, loans, trade
finance and investment advice. Some even
• We provided new credit cards to more than may require derivatives or foreign exchange
11 million people. services to help manage their exposures.
• We lent or increased credit to nearly 30,000 Finally, when large companies work with our
small businesses. bankers, they will continue to need merger
and acquisition or other financial advice
• We lent to over 1,500 not-for-profit and
and access to the global equity and debt
government entities, including states,
markets. Given the increasing complexity of
municipalities, hospitals and universities.
their business, they also will require deriva-
• We extended or increased loan limits tives to help manage various exposures, e.g.,
to approximately 6,500 middle market the changing prices of interest rates, foreign
companies. currencies and commodities.
• We lent to or raised capital for more than In fact, the opportunities are large. A growing
8,500 corporations. world still will need large-scale capital
creation and bank lending and will increas-
We take calculated risks when we do this
ingly require financial services. Several factors
lending, and sometimes we make mistakes.
underscore just how pressing these capital-
But I can assure you that this never is our
intensive needs will be in the future:
intent. We do this banking activity in all 50
states in the United States and in more than • Global credit outstanding will grow by
140 countries around the world. To ensure approximately $100 trillion over the next
that we do it right and comply with the 10 years across both emerging markets and
laws of the land, we have risk committees, developed nations, an 80% increase.
credit committees, underwriting committees,
• Analysts from McKinsey and the World
compliance and legal reviews, and more.
Economic Forum suggest that global financial
Banks play a critical role in our economic wealth could grow by approximately $160 tril-
system by properly allocating, underwriting lion over the next 10 years, a 100% increase.
and understanding risk as credit is given to
• U.S. financial wealth is expected to increase
various entities and by helping to manage,
by more than $30 trillion over the next 10
move and invest capital for clients. The
years, a 70% increase.
key question is how will all the regulatory
changes affect the banks’ ability to do this?
9
• Global gross domestic product is expected Two examples come to mind:
to grow by approximately $50 trillion in
Current Basel III rules require banks to hold
nominal terms ($25 trillion in real 2010
more capital and maintain more liquidity to
dollar-value terms) over the next 10 years,
support the revolving credit they provide to
an approximately 80% increase.
both middle market and large institutions. In
• Annual corporate investments in plant and some cases, the liquidity rules alone require
equipment (globally running at approxi- us to hold 100% of highly liquid assets to
mately $8 trillion a year) should at least support a revolver. For example, to support a
double over the next 10 years – our multi- $100 million revolver, we would be required
national clients account for approximately to own $100 million of highly liquid securi-
50% of this. ties with very short maturities. We estimate
this would increase our incremental cost on
Effectively delivering on this growing
a three-year revolver by approximately 60
demand requires strong, healthy financial
basis points a year. That leaves us with three
institutions. This bodes well for JPMorgan
options: 1) pass the cost on to the customer,
Chase – we are in exactly the right place.
2) lose money on that revolver, or 3) not
What will not change: Banks will continue to need make the loan. In the real world, the likely
to earn adequate market-demanded returns on outcome is that some borrowers will have
capital
less or no access to credit, some borrowers
will pay a lot more for credit, some would
Like all businesses, banks must continue
pay only a little bit more and some highly
to earn adequate returns on capital – inves-
rated companies might find it cheaper to
tors demand it. Some argue, however, that if
provide liquidity on their own, i.e., hold
regulation results in better capitalized banks
more excess cash on their balance sheet
and a more stable financial system, returns
as opposed to relying on banks for credit
demanded on capital would be lower to reflect
liquidity backup.
the lower risk involved. This probably is true
but not likely to be materially significant. Certain products may disappear completely
because they simply are too expensive to
What will change: New regulation will affect prod- provide. (Some, like the “CDO-squares” will
ucts and their pricing not be missed.) For example, capital charges
A likely outcome of the new regulations is on certain securitizations will be so high
that products and their pricing will change. for banks that either these transactions no
Some products will go away, some will be longer will be done or they will migrate to
redesigned and some will be repriced. other credit intermediaries (think hedge
Last year, we spoke about how we would funds) that can more cheaply invest in them.
adjust our products and services for the new I will have more to say on regulation in the
credit card pricing rules and new overdraft fourth section of this letter.
rules. So I will not repeat them here. In a What we don’t know (and we have a healthy fear
later section, I will talk about how we will of unintended consequences)
adjust to the new restrictions on the pricing
Around the world and all at once, policy-
of debit cards.
makers and regulators are making countless
Higher capital and liquidity standards that changes, from guidelines around market-
are required under Basel III likely will affect making, derivatives rules, capital and liquidity
the pricing of many products and services. standards, and more. Many of the rules have
yet to be defined in detail, and it is likely
that they will not be applied evenly around
the world. The combined impact of so much
change – so much unknown about the inter-
play among all these factors and an uneven
10
global playing field – potentially is large. We don’t expect any of these three outcomes
These unpredictable outcomes and unin- to occur – nor do we believe that it was or is
tended consequences could affect far more the intent of the lawmakers or regulators –
than products and pricing. For example, if a but it bears paying close attention.
business cannot sell certain products or if the
Although we tend to focus on the downside
cost of selling them is so high that it cannot
of unintended consequences, we should
be adequately recouped, that business risks
recognize that there may be some positive
losing all of its clients. A simple analogy: If a
consequences. For example, large changes
restaurant that sells burgers can’t sell french
in business regulations and dynamics often
fries, it risks losing all of its customers.
lead to new businesses, innovations and new
Like it or not, we will adjust to the impact products. Also, our ability to compete may
of new regulation on financial products and be hampered in some instances but actu-
pricing. But we will remain vigilant about ally helped in others. For example, the cost
the changes that could threaten or under- and complexity of all the recent regulations,
mine entire businesses. Three of our main ironically, could create greater barriers for
concerns are: new entrants and new competitors.
First, and most important, we want to ensure
that our clients are not negatively affected in
a material way and that our ability to prop-
erly serve them is not unduly compromised.
Second, we need to be cautious about the
creation of non-banks or new shadow banks.
This could happen if the cumulative effect of
all the regulations not only hampers banks
from conducting their business but restricts
them so much that the business slowly and
inevitably moves to non-banks.
And, third, we need to ensure that American
banks are not significantly disadvantaged
relative to their global counterparts. The
cumulative effect of higher capital standards,
too restrictive market-making and deriva-
tives rules, price control and arbitrary bank
taxes could significantly impede our ability
to compete over the long run.
11
I I . BIG O P P O RT UN I T I E S : H OW W E WI LL G R OW I N
U.S. A N D I N T E R N AT I O N A L M A RKETS
Each of our business heads has articulated around the world. When all our efforts are
compelling growth strategies for his or her completely integrated and are running at
respective business (see their letters on full capacity, profits of this business will
pages 34–47 of this Annual Report). Across grow even more strongly. (And this should
the firm, the opportunities to grow organi- happen in the next two to three years.)
cally are huge. And we intend to pursue
• Dramatically increasing our branch open-
them aggressively – every day, every quarter
ings: We will move from an average of 120
and every year by building new branches;
new branches a year to more than 200 in
launching new products and tools and intro-
2011 and probably more than that in subse-
ducing new technology; and relentlessly
quent years. This aggressive build-out is a
hiring and developing good people.
coordinated effort between our real estate
We know that building our businesses teams; our technology and operations
organically can be challenging to execute, teams; and our management, development
but it is critical – and the potential payoff is and training staff. New branches typically
enormous. Organic growth also will continue break even by the end of the second year,
to fuel cross line-of-business opportunities. and, when fully established, which takes
For example, when Retail Financial Services several more years, each branch ultimately
opens a branch, it provides Card Services should earn more than $1 million in
with the opportunity to offer more credit profits a year. Yes, we are concerned about
cards. And when Commercial Banking technology reducing the need for physical
develops a new client relationship, these branches, but all our research shows that
clients often require Investment Banking we still will need branches to serve our
services. These are just two examples – there customers. While use of the Internet and
are many more. ATMs has skyrocketed, branch traffic
essentially has remained steady. Over time,
In addition to “normal” growth, we want
branches may become smaller, but we still
to highlight a few specific initiatives – each
think they will remain essential.
of which could add $500 million or more
to profits over the next five to ten years. • Growing our Chase Private Client Services
These include: business: We estimate that approximately
2 million customers who use our branches
• Accelerating Commercial Banking’s and
are fairly affluent and need investment
Business Banking’s growth in the heritage
services tailored to the high-net-worth
WaMu footprint: Essentially, WaMu did
segment. We have tested this concept, and
not do this type of business. Ultimately, we
it seems to be working well. Therefore, we
will have added more than 1,500 bankers in
intend to open approximately 150 Private
states from California and Washington to
Client Services locations over the next few
Florida. We already are well on our way to
years to better support our affluent clients.
building into this branch network the same
At these offices, dedicated bankers will
kind of middle market banking and small
work with customers and provide them
business banking that we have established
with investment products that are tailored
in other markets across the country.
to their needs.
• Expanding out our Commodities franchise:
• Continuing to expand our international
In our commodities business, we now have
wholesale businesses, including our Global
a full array of physical trading and finan-
Corporate Bank (GCB): This effort is
cial products and services to support our
described in the next section.
3,000 clients who trade in these markets
12
Our Resolute Commitment to Expanding We essentially are following our customers
Our International Wholesale Businesses around the world
One of the greatest opportunities before us Our wholesale bankers around the world do
is to grow our wholesale businesses globally. business with essentially most of the global
This opportunity exists not just in developed Fortune 2000 plus some 400 of large sover-
markets but also in developing, emerging eign wealth funds and public or quasi-public
and even the so-called “frontier” markets. entities (these include governments, central
The reasons are simple: As the world grows, banks, government pension plans and
our clients generally grow even faster, as do government infrastructure entities).
trade volumes, capital, cross-border investing As these entities expand globally – adding coun-
and global wealth. tries and locations to where these organizations
A recent McKinsey study estimates that do business – we essentially grow with them.
global investment, with accompanying We already bank these companies and simply
growth in credit and capital needs, will grow need to be where they are going to need us.
by two times or some $13 trillion over the
We will grow by adding bankers, branches
next 20 years in real terms – a multiple of
and products
what we saw in the early 1980s. Global invest-
ment will amount to $24 trillion in 2030 The overwhelming majority of our worldwide
compared with $11 trillion in recent years. expansion will come through organic growth –
Developing economies are embarking on adding bankers, branches and products.
one of the biggest building booms in history. Some examples of our recent efforts include:
Rapid urbanization is increasing demand • Our GCB has hired 100 bankers since
for new roads and other public infrastruc- January 1, 2010, and, by the end of 2012,
ture. Companies are building new plants and we expect to grow to 300 bankers covering
buying machinery. The McKinsey report, more than 3,000 clients globally.
in fact, warns of potential capital and credit
shortages as this exponential growth occurs. • In Brazil, China and India, we continue
to enhance the firm’s presence by adding
Banks will play a vital role in financing these bankers and increasing our client coverage.
investments and in connecting savers and Five years ago, we covered approximately
borrowers around the world. Much of this 200 clients in those countries, and, today,
capital and investing will be cross-border and we cover approximately 700 clients in those
will be done by the very institutions that our three countries. We are expanding this kind
bank already serves, i.e., multinational corpo- of coverage in many other countries, too.
rations, large investors, sovereign wealth
funds and others. • In China, over the last two years, we added
two new branches (Guangzhou and Chengdu)
Rest assured, we are going about this effort to our existing three (Shanghai, Tianjin and
with our eyes open. We do not harbor any Beijing), and we are continuing our expan-
false notions that it is easy or risk free. And sion with more branch openings planned
you cannot have stop-and-start strategies. for 2011. Our expanded footprint enhances
Countries will want to know you are there our ability to serve both local companies
for the long run – you cannot be a fair- and foreign multinationals as they grow
weather friend! their businesses in China. In addition to the
International expansion is a long, tough domestic renminbi capabilities, J.P. Morgan is
and sometimes tedious job. Execution often at the forefront of the internationalization of
requires lengthy lead times, and differences the renminbi, a product that more and more
in cultures and laws present many chal- clients are demanding for cross-border trade.
lenges. By necessity, we end up bearing • Around the world, we opened new
additional sovereign and political risk. But branches in Australia, Bangladesh, Brazil,
the effort clearly is worth it: The opportuni- China, Great Britain, Japan, the Nether-
ties are great, and the risk can be managed. lands, Qatar, Switzerland and the United
Here’s how and why we think so. Arab Emirates, among others, and we plan
nearly 20 more to be added by 2013.
13
This build-out of our additional locations Many nations in sub-Saharan Africa are
results in a huge network effect. For adopting better and stronger governance,
example, Chinese capital is moving into and they are fortified by great natural and
Brazil – and we already are on the ground in other resources, which will benefit their
both places. When we build out our capa- future prosperity.
bilities in Africa, we also are improving our
We estimate that more than 80% of our top
service to European clients who may be
multinational clients are doing business in
looking at investing in Africa.
sub-Saharan Africa and expect their number
Alongside these expansion efforts, we are and footprint to grow steadily over the next
adding many products. For example: 20 years. While we currently do business in
21 of the 49 sub-Saharan nations, we are on
• We are building our capability to provide
the ground only in South Africa and Nigeria.
local credit – by establishing capital lines for
We anticipate that our clients will need us on
subsidiaries of multinational companies and
the ground in Angola, Kenya, Tanzania and
providing credit to large local companies.
several other African countries over the next
• We also are able to offer our clients sophis- couple of decades. The investments we make
ticated supply chain finance products over the years to enter sub-Saharan Africa
(we recently helped finance Caterpillar’s will not materially affect profits in the short
suppliers around the world). run but will produce a real payoff in decades
to come. We will start planting the field now,
Of course, we also are building the proper to be reaped by future generations.
systems, legal teams and operational capabili-
ties to support this bigger network.
While Developing Consumer and
In addition to these organic efforts, we are Commercial Banking Operations Abroad Is
on the lookout for smaller acquisitions that an Option, It Is Not a Strategic Imperative
can help us accelerate our strategy. For Over the long term, expanding our consumer
example, our acquisition of the world-class and commercial banking footprint outside
Brazilian hedge fund Gávea Investimentos, the United States is the next logical step.
as part of our Highbridge business, dramati- This aspiration is a strategic option – not
cally improves our ability to manage money a necessity. Some businesses need to be
both for local investors and for those around competitive internationally to be successful
the world seeking to invest in Brazil and – think investment banking, commercial
emerging markets. aircraft and mobile device manufacturers.
But some businesses do not need to be –
We see global growth opportunities for decades
think retail and commercial banking. We
to come
can be very successful in the United States
In the business community and across the in retail and commercial banking and never
media, we have seen a tremendous focus on take them internationally. Therefore, this
the emerging markets in advanced stages aspiration is a strategic option, not a stra-
of development; specifically, Brazil, Russia, tegic imperative, to be carried out only if and
India and China. But this opportunity also when it makes sense.
is large in countries like Turkey, Indonesia,
Malaysia and many others – in fact, some International acquisitions are riskier than
parts of the world are on the brink of mean- U.S. acquisitions: There are far fewer oppor-
ingful development. tunities for cost savings, terms for investing
vary from country to country, there is higher
A quick look at sub-Saharan Africa provides legal and cultural risk, and execution is more
a bit of perspective on the opportunities difficult. Therefore, we will acquire these
before us over the next 20 years. Economic businesses internationally only if we can do
activity in the region is expected to grow it right, which means the price needs to be
annually by approximately 4.7% over the next right, we need to have an adequate margin
20 years, from $800 billion to $2 trillion, as its for error and we have to have the ability to
population grows by 370 million to 1.2 billion. execute properly.
14
The WaMu Acquisition: A Bit Worse than Expected but Clearly Still Worth It
With more than two years’ perspective, I’d like to One-time, after-tax gains and losses are a
take a look back at how we did with the acquisition negative and still could get slightly worse
of Washington Mutual — particularly relative to how
we thought the deal would play out at the time of One-Time Items (After-Tax)
the acquisition.
• $3.2 billion higher mortgage losses
WaMu’s ongoing operating earnings were
• $1.0 billion lower credit card losses
approximately what we expected — but not in
the way we expected • $1.0 billion gain on purchase
15
III. T H E C U STO M E R E X P E R I E N C E :
H OW W E W I L L CO N T I N U E TO IMPROVE IT
We are only in business to serve our clients • Coordinating global coverage: Better
– and this is true of every aspect of our busi- information and coordination enable us to
ness. Every loan we make or service, every do a better – and, often, more cost-effective
account we maintain, every financing we – job for the client. As a global financial
do and any investing we do is to serve our institution, we may have 30 to 40 bankers
clients. Our job is to consistently strive to do from our offices globally calling on a large
a better job for all our clients – and to do it corporate client. That’s because we provide
faster, smarter and better. such a broad set of products and services in
multiple locations around the world: M&A
Doing a great job for our clients requires
and advisory services; asset management;
us to be discerning about who our clients
sales and trading or pension plans; manage-
are and clear about what doing a good job
ment of cash flows, foreign exchange and
means. In our business in particular, client
interest rate exposure; and more.
selection is critical. Unlike other busi-
nesses, we often have to turn away clients. • Building out our coverage: We are system-
Sometimes we, by necessity, are put in the atically expanding the depth and breadth
uncomfortable position of advising or even of our international coverage of the large,
requiring our clients to do things they don’t multinational companies that we cover
want to do, such as: restructuring or selling around the world. We are embarking on a
assets or making payments to avoid penal- granular, detailed review, name by name
ties. Careful client selection leads to quality and subsidiary by subsidiary, of the multi-
clients. And in conjunction with conservative national companies we support for the
accounting, it leads to a high-quality busi- purpose of developing a game plan – from
ness. J.P. Morgan, Jr., said it best when he the ground up – for how we will build out
declared the firm’s mission was to do “first- our coverage going forward.
class business in a first-class way.”
• Bringing the whole firm to bear: For all our
Below are some of the ways we will strive to clients, we want to make available the best
continue delivering on that promise. that JPMorgan Chase has to offer every-
where. We want these clients to know that
Doing a Better Job Serving Complex Global the full force and power of the company are
Corporate Clients behind them and their goals, that we will be
there in good times and bad, and that our
We do a good job advising and servicing
advice is unconflicted and trustworthy.
our complex global corporate clients. But we
want to do an even better job – a great job • Ensuring that solutions and innovations
– under all circumstances. So we are redou- are client driven: We recognize that our
bling our efforts by: business works only if it works for the
client, not just for JPMorgan Chase. Cross-
• Improving our information: We are
selling, for example, is good only when it
building robust systems to put key infor-
benefits the client.
mation about our corporate client relation-
ships at our fingertips – for example, all the
services we provide them, which markets
they are in and what their needs are.
16
Doing a Better Job Serving Consumers and disservice. To do this right, we need to
Small Business Customers educate our salespeople and constantly try
to align our incentive systems to support
All businesses claim to focus on better
doing what is right for the customer.
serving their clients. Most can show you the
service metrics by which they judge them- • Consumer advocacy: In each of our
selves – as can we. We intend to do more consumer businesses, we’ve created
than that by taking a step back and looking Consumer Practice groups, managed by
at the customer experience holistically – from very senior people. We expect these groups
every angle, including: to review all our policies, products and
procedures – ranging from pricing and fee
• Product design: In a business as complex
decisions to clear disclosure and trans-
as ours, often we find ourselves adding
parency of terms associated with each
more features and complexity without
product – and to ensure we are treating our
going back to see how it looks from the
customers fairly and are delivering great
customer’s standpoint. We strive to follow
service. These Consumer Practice teams
the example set by companies like Apple,
have the power both to right a wrong for
which always aims to make its products
any of our customers and to help change
and services as simple and intuitive as
processes going forward.
possible for the customer.
• Streamlined customer communications:
For example, at one point, our customers
We are striving to be as clear and simple as
were getting notifications from us in the
possible and not get caught up in legalese in
mail and by phone. Then we innovated
our communications. (Of course, we need to
the process by reaching out to them in
provide the proper legal disclosures, many
real time through text alerts whenever
of which are required by regulators.)
their account balance fell below a specified
amount. However, at first, our customers • Systems upgrades: All the above improve-
could not respond to these alerts. Then ments require changes to our systems, both
we developed Chase Instant Action those that are visible to our customers and
AlertsSM, our two-way text alerts that allow those that are helpful to our employees
customers to send a text back to us in order to better serve those customers. We have
to transfer money between accounts and improved customer convenience on
help avoid overdraft fees. This product has everyday needs such as completing the
been wildly successful. We currently have rollout of over 10,000 Deposit Friendly
more than 10 million mobile customers, ATMs, which take cash and check deposits
and we are adding over 500,000 new without deposit slips or envelopes. Addi-
mobile banking customers each month. tionally, the system our bankers use has
been enhanced to quickly access a custom-
• Selling and cross-selling: The goal of cross-
er’s account history, including any issues
selling is to better and more completely
reported by customers or actions taken on
serve customers’ needs and help them
the customer’s behalf by branch employees
realize their goals in ways that save them
in the last 90 days.
time, money and aggravation. Properly
done, what we sell our customers should be • Learning more from customer complaints
good for them because we are listening to and employee suggestions: We also are
them, figuring out their needs, and trying redoubling our efforts to learn from
to meet those needs in the most efficient customer complaints and employee
and effective manner possible. Getting ideas. Customer complaints often can be
customers into the right accounts, the right gifts: They frequently tell us how we can
credit cards, online bill payment and alert improve our products and services. As for
systems allows us to give our customers employees, they often have great ideas on
more and be more efficient. But selling and what can be done better but usually aren’t
cross-selling must work for the customer – asked. We will use this feedback from
improperly done, these efforts are annoy- customers and employees to improve prod-
ances and, at worst, do customers a great ucts and services across the firm.
17
Innovating for Our Customers In wholesale banking, innovation has been
equally apparent over time:
Financial services have been highly innovative
over the past 20 years. • Treasurers can accumulate global cash and
move it with the flick of a finger to where it
On the consumer side, we have seen ATMs
can be most productive.
and debit cards lead the way to online bill
paying and other Internet-enabled technolo- • Last November, we launched the J.P. Morgan
gies. We also are particularly proud of our Research iPad app, which gives clients
most recent consumer innovations, including: reports and analysis from more than 1,000
analysts on economic indicators, markets,
• Our new credit card products include
companies and asset classes around the
Chase BlueprintSM, a flexible payment tool
world. Unlike other research apps of its
that allows our card customers to better
kind, users will be able to access content
manage expenses on their own terms;
offline and receive instant alerts when new
InkSM from Chase for business card users;
content they pre-select becomes available.
and Chase SapphireSM and Palladium for
the affluent market. • Corporations now have the ability to raise
money quickly and often simultaneously in
• Our Chase QuickDepositSM iPhone banking
markets around the world.
application allows customers to deposit
checks simply by taking a picture from • Corporations have the ability to hedge,
their iPhones. This app was the winner of quickly and cost-effectively, large expo-
nine Best of 2010 smartphone awards. In sures like interest rates, foreign exchange,
2010, 336,000 customers made deposits commodity prices, credit exposures, etc.
via QuickDeposit, and 46,000 business
customers made deposits with our Classic • Stocks now can be bought and sold virtu-
QuickDeposit scanner. We also recently ally instantaneously on markets around the
have added the QuickDeposit app to world, at a cost of pennies or less a share.
Android phones.
Acknowledging and Fixing Mistakes
• Our Internet bill payment system allows
customers to make payments in a variety Unfortunately, we make mistakes. They
of ways, including Quick Pay for electronic range from innocuous errors to some egre-
person-to-person payments and traditional gious ones. They range from paperwork
online bill payments. In 2010, 16.3 million errors to systems failures to rude service.
customers made 445 million payments Sometimes we make loans we shouldn’t
using chase.com. make, and sometimes we don’t make loans
that we should. Some of these are individual
• For Private Banking and high-net-worth mistakes, and some are more systemic.
clients, we launched an iPad application
that lets customers see, in one place, their There always are reasons for these mistakes.
credit card, checking and investment Sometimes they are readily understand-
accounts. Soon these clients will be able able. Other times, they leave you shaking
to buy and sell securities online through your head. But we never should make these
this application. mistakes deliberately or with venal intent.
Some mistakes are made out of a simple
misjudgment. And, unfortunately, and very
infrequently – sometimes someone in our
company knowingly does something wrong.
Of course, such activity would never, ever be
condoned or permitted by senior manage-
ment. And when it does happen, we take
immediate and firm action.
We know that when we make mistakes, we
should hold ourselves accountable, and we
should rectify them.
18
Here are the principles we abide by in We recently have announced a new program
dealing with our mistakes: for the military and veteran community that
includes many initiatives, from recruiting
Senior management should actively be on the veterans into our firm, with our corporate
lookout for problems partners, to providing enhanced products
At all times, senior management must be and services for the military and their fami-
vigilant about errors made across the firm lies. As a company, we aim to serve members
– we ask lots of questions, read customer of our armed services with the respect and
complaints, and make sure our own people special benefits they deserve because we
are allowed to question our products and recognize the sacrifice and hardships they
services. Generally, we all know how we bear to protect our nation and our freedoms.
would want to be treated, and management
should strive to treat our customers this way. We should acknowledge our mistakes to our
customers
This particularly applies to long-standing
Customers know that any company can
practices. Just because something always has
make mistakes. What they hate is when the
been done a certain way does not mean that
company denies it. If we make a mistake
it is still right.
with a customer, we should acknowledge it
We need to acknowledge mistakes to ourselves and take the proper remedial action.
We cannot fix problems if we deny them. When we find mistakes, we should fully disclose
Acknowledging an error, however, isn’t them to those who should know
enough. We need to figure out why it
When we make mistakes, we self-report
happened. Was it isolated or embedded in
them, as appropriate, to our regulators and to
one of our systems? Was it the result of poor
our Board of Directors as appropriate.
training of our people? Or, perhaps, in our
desire to keep up with the competition, did We also take appropriate and timely action with
we start doing things with which we were those involved
uncomfortable? This can mean fixing an error-prone
There is one error, in particular, from our system, retraining our people, or modi-
recent past that I would like to highlight: the fying products or services. Unfortunately,
mistakes we made in servicing mortgages this sometimes means firing an individual
held by U.S. military families. Our firm has or replacing management, but only if such
a great history of honoring our military and action is warranted due to bad behavior or
veterans, and the errors we made on these real incompetence.
loans, including foreclosures, were a painful
aberration from that track record. We deeply
regret this, we have apologized to our mili-
tary customers and their families, and we
have tried to rectify these mistakes as best
we can. I want to reiterate that apology here
and now.
19
IV. GLO BA L F I N A N C I A L R E FO R M : HOW THE KEY ASPECTS
W I L L A F F EC T O U R B U S I N E SS ES AND OUR COUNTRY
The crisis of the last few years was to cover more senior managers at our firm.
proof enough that many aspects of our Had this clawback regime been in place
financial system needed to be fixed and before the crisis, many senior executives who
reformed to minimize the chance of such ultimately were responsible for the failure
a crisis reoccurring. of their companies would have had to return
much of their ill-gotten gains.
As I have discussed in prior letters, a multi-
tude of issues caused, or contributed to, this With regard to the Dodd-Frank Wall Street
crisis: structural issues, such as a critical lack Reform and Consumer Protection Act,
of liquidity in some of our country’s money however, we do have some concerns. The
market funds and in short-term financing extensive reforms introduced by this legisla-
markets; high leverage, which was omni- tion represent the most wide-ranging changes
present in the system; unregulated shadow to the U.S. regulatory framework for financial
banking; poor mortgage underwriting; huge services since the 1930s, and we likely will
trade imbalances; and ineffective regula- have to live with these reforms for the next 50
tion of Fannie Mae and Freddie Mac, among years. Dodd-Frank is a significant and thor-
other factors. ough rewrite of the rules that our industry
must follow. The impact of this legislation will
A great number of the regulatory changes
be significant, and the outcomes – both posi-
adopted in 2010 were essential. Foremost
tive and negative – will be a function of how
among them were higher capital and
the reforms are implemented.
liquidity standards and the establishment of
a Financial Stability Oversight Council. This It is of vital importance that Dodd-Frank
body has the critical mandate of monitoring implementation – along with the finaliza-
the financial system in its entirety, elimi- tion of Basel Committee capital standards
nating gaps and ensuring that all financial and other regulatory changes affecting our
firms are properly regulated while antici- industry – is thoughtful and proportionate
pating future problems. Resolution Authority and takes into account the cumulative effect
also was necessary in order to give regulators of the major changes that already have taken
both the legal authority and the capability place since the crisis began. This is the only
to manage and unwind large financial firms, way we can hope to avoid unintended nega-
just as the Federal Deposit Insurance Corpo- tive consequences, nurture a stable economic
ration (FDIC) has done with smaller U.S. recovery, build a strong financial system and
banks for years. We also supported stress create a fair playing field for all.
testing and well-managed clearinghouses for
standard derivatives. Our System Was on the Edge of Chaos,
and Governments and Regulators Deserve
In addition, we have been very supportive
Enormous Credit for Preventing the Collapse
of certain changes in compensation rules.
In fact, long before they were mandated, I have long been on record giving huge
JPMorgan Chase already had instituted most credit to the U.S. government and govern-
of these compensation practices. One particu- ments around the world for the drastic, bold
larly good new rule, a practice we had estab- actions they took to stop this rapidly moving
lished but only for our Operating Committee, crisis from getting considerably worse. A
was the ability to clawback compensation great number of the actions that the Treasury
from senior executives when appropriate. and the Federal Reserve took, both directly
We now have extended these clawback rules and indirectly, helped sustain numerous
institutions and probably prevented many
20
from failure and bankruptcy. These actions A Great Deal Already Has Been Done to
were done to save the economy and to Improve the System — by Regulators and
safeguard jobs. While we should try to do Governments — and by the Market Itself
everything in our power to stop a crisis
As all the rules and regulations of Dodd-
from happening again, we should recognize
Frank and Basel III are being completed, a
two critical points. Markets can be rational
tremendous amount already has been done
or irrational, and fear could freeze markets
to strengthen the financial system.
again. And when there are severe problems,
only the government, in some form, has the Capital and liquidity standards already have been
wherewithal, power and liquidity to be the strengthened
backstop of last resort. Before the crisis, we believe the thresholds for
capital and liquidity requirements were far
Effectively changing our exceedingly complex
too low. This was one of the key underlying
global economic system requires great care
causes of the crisis (and the reason JPMorgan
When this crisis began, it looked as “normal”
Chase always held far more capital than was
as any crisis can, but it quickly careened into
required). It clearly needed to be fixed.
a global catastrophe. Most observers pinpoint
the key moment as Lehman Brothers’ failure These standards already have been increased
in September 2008. But one of the things several times: When the Treasury conducted
that made Lehman’s failure so bad was that the stress test in February of 2009, it raised
it came after the failure of Bear Stearns, the minimum Tier 1 Common Capital
Fannie Mae and Freddie Mac, among others. requirement from 2% to 4%. The recent
It was the cumulative effect of the collapse stress test raised the capital requirement
of all these institutions, many of which were to 5% and imposed a more stringent test:
overleveraged, that was so damaging. Had Banks now must demonstrate that they can
Lehman’s failure occurred at another time, maintain a capital level of 5% throughout a
and been an isolated event, its failure would highly stressed environment. The new Basel
not likely have been so devastating. III requirements effectively will raise the 5%
to 10%. (I will talk more about capital stan-
Complex systems – and our global economic
dards later in this section.)
system surely is one – often oscillate within
relatively normal confines. Our complex Substantial improvements already have been
economic system regularly has produced made in the standards for residential and
“normal” recessions and booms and occa- commercial mortgages and secured financing,
sionally a devastating one like the Great among others
Depression or the recent economic crisis. The marketplace, investors, banks, regulators
The factors that occasionally and devastat- and rating agencies already have signifi-
ingly derail a system at any point in time cantly upgraded the standards by which
may have contributed only because the many products and institutions operate. For
table already had been set; at other times, example:
the same factor would have had no effect at
all. This phenomenon shows up in complex • All new mortgages are being written to
systems throughout nature. comply with standards that existed many
years ago, before the worst of the past
Scientists dealing with complex systems try decade’s excesses. These mortgages include
to isolate the impact of changing one input sensible features such as loan-to-value ratios
while holding all other elements constant. mostly below 80%, true income verification
They know that if they change everything at and more conservative home-value appraisals.
once, it may be impossible to identify cause
and effect. • Money market funds now are required to
disclose more information, hold higher-
As we try to remake our complex economic rated paper and maintain much more
system, we need to be cautious and respectful liquidity as a safeguard against potential
of what the cumulative effect will be of runs. This was a critical systemic flaw
making multiple changes at the same time. around the Lehman collapse.
21
• Financial firms now disclose a great deal Commission (CFTC), the U.S. Securities and
more information. Some of the information Exchange Commission (SEC) and various
provided is quite useful, such as disclosures other bank regulators. It also is a misconcep-
on funding, liquidity of assets and greater tion that derivatives pricing lacked trans-
detail on credit. (Unfortunately, much of parency; accurate market data on the vast
this information is of little use to anybody.) majority of all derivatives were readily avail-
able and easy to access.
• The repurchase agreement or repo markets
– in which large investors, institutions and Nonetheless, we agree it is a good thing
financial firms use short-term, collateral- that standardized derivatives are moving to
ized borrowing to finance some of their clearinghouses. This will help standardize
investments – now require more conser- contracts, simplify operational procedures,
vative “haircuts,” and no longer finance improve regulatory transparency and reduce
exotic securities. aggregate counterparty risk. I will discuss
this issue in more detail later.
Shadow banking essentially is gone
People mean very different things when they Boards, management and regulators are more
talk about the “shadow banking system.” attentive to risk
When discussing it, I divide this so-called At the corporate board and management
system into two pieces: The first piece is levels, risk management now involves much
one most observers barely knew existed. It greater attention to detail. Risk reviews are
consisted of largely off-balance sheet instru- increasingly thorough, risk disclosures are
ments like structured investment vehicles deeper and any executive responsible for risk
(SIV). The second piece is comprised of taking is the recipient of extensive oversight.
on-balance sheet instruments that were fairly
well-known, such as asset-backed commercial Collectively, these substantial changes have
paper, money market funds and repos. materially reduced risk to each individual
financial institution and to the system as a
The off-balance sheet vehicles, like SIVs, whole. While some of the improvements still
essentially are gone. The on-balance sheet need to be codified, they may go a long way
instruments like money market funds, repos in creating the very strong kind of financial
and asset-backed commercial paper are system we all want.
smaller in size, less leveraged, more conser-
vatively managed and far more transparent. We Need to Get the Rest of It Right —
Based on Facts and Analysis, Not Anger or
There are more regulators with proper Resolution
Specious Arguments
Authority and comprehensive oversight
Today, a greater number of regulatory bodies In their book, This Time Is Different: Eight
are providing an unprecedented level of Centuries of Financial Folly, economists
oversight. New resolution laws and living Carmen Reinhart and Kenneth Rogoff studied
wills will give regulators even more tools to eight large economic crises over the past 800
use in handling a future crisis. years. These crises generally emanated from
trade imbalances, foreign exchange issues
Banks’ trading businesses are far more conservative and real estate speculation. Included among
Banks in the United States have effectively their observations was the fact that when the
eliminated proprietary trading. In addition, crisis also involved the collapse of the finan-
exotic products are smaller in size and more cial system – in four of the eight crises they
transparent, and trading books require far studied – recovery took longer than expected
more capital and liquidity to support. (on average, four years instead of two years).
But we should not assume that this historic
Standardized derivatives already are moving to pattern is preordained or predictive. It also
clearinghouses seems likely that bad policy decisions made
It is a common misperception that deriva- inadvertently and without forethought –
tives were not regulated. They actually were: during and after these crises – may very well
by the U.S. Commodity Futures Trading have increased the level, length and severity of
the economic stress attributed to these crises.
22
For the implementation of Dodd-Frank to Regulators should build a system that creates
be effective, it must recognize the improve- continuous improvement
ments that already have been made and There are implicit difficulties in trying
focus on resolving what remains to be done. to create “perfect” rules. What regulators
Dodd-Frank creates several additional regula- need to do is put a system in place that
tors and sets forth more than 400 rules and can respond in real time to changes in the
regulations that need to be implemented marketplace, create a culture that promotes
by various regulatory bodies. In addition to continuous improvement, and design effec-
these rules, there will be rules from European tive tools that operate as both gas pedals and
governments and new capital and liquidity brakes. This is what will enable them to do a
requirements emanating from Basel. better job managing the economy.
We all have a huge interest in both the Here are just a few examples of effective
stability and growth of the system. And we tools and uses: The ability of regulators to
know that our chances for a strong global change mortgage loan-to-value ratios up or
recovery are maximized if we get the rest down if they thought the housing market
of the regulatory reform effort right. We’re was becoming too frothy; change capital
getting close – let’s not blow it. Moving requirements immediately on specific loans,
forward, here are some important issues investments or securities when specific asset
that need to be handled carefully. classes showed signs of becoming problem-
atic; and dial up or down certain liquidity
The new oversight board — the Financial Stability
requirements and repo haircuts when
Oversight Council — needs to require coordination
excesses were taking place.
among all the regulators, both domestic and global
Ideally, America should have streamlined The Volcker Rule needs to leave ample room
its regulatory system. Instead, our legisla- for market-making — the lifeblood of our capital
tors have created several additional regula- markets
tors. This makes domestic and international The Volcker Rule has various components.
coordination both more complex and even We have no issue with two of these: the
more critical. In fact, many of the regulators component eliminating pure proprietary
are setting up departments to deal with the trading; and the component limiting banks
other regulatory departments (if that is not from investing substantial amounts of their
the very definition of bureaucracy, I don’t own capital into hedge funds.
know what is).
Our concern largely is with a third aspect
It makes it all the more important that the regarding capital and market-making. It’s
new oversight board, the Financial Stability critical that the rules regarding market-
Oversight Council (FSOC), fosters true making allow properly priced risk to be
coordination among the regulators’ activi- taken so we can serve clients and maintain
ties. Unfortunately, there already is some liquidity. The recently proposed higher
evidence that the CFTC and the SEC are capital and liquidity standards for market-
moving in different directions in their regu- making operations – the new Basel II and
lation of like products. The FSOC should nip Basel III capital rules – approximately triple
this problem in the bud. the amount of regulatory capital for trading
portfolios inclusive of market-making and
In addition to domestic coordination, the
hedging activities. For the most part, these
FSOC must ensure that the rules and regu-
capital rules protect against excessive risk
lations coming from Basel and the G20 are
taking. We don’t believe any additional rules
implemented in a consistent and coordinated
are needed, under the Volcker Rule or other-
fashion. The FSOC also must be vigilant in
wise. However, if there must be more rules,
identifying imbalances within the system that
these rules need to be carefully constructed
generate excessive risk – and be ready to take
(e.g., they should distinguish between liquid
rapid action to fix such imbalances. Finally, it
and illiquid securities, allow for hedging
needs to be aware of the development of new
either on a specific-name or portfolio basis,
shadow banks and be prepared to intervene
when they pose potential risks to the system.
23
etc.). When market-makers are able to aggres- Finally, there is a truly misguided element
sively buy and sell securities in size, inves- of Dodd-Frank regarding derivatives. This
tors are able to get the best possible prices so-called “spin-out provision” requires
for their securities. firms like ours to move credit, equity and
commodity derivatives outside the bank.
Derivatives regulation must allow for true end- This requirement necessitates our creating
user exemptions and for transparency rules that a separately capitalized subsidiary and
don’t restrict liquidity requiring our clients to establish new legal
As I already stated, we completely agree with contracts with this new subsidiary. This is
the creation of clearinghouses for standard an operational nightmare (which we can
derivatives. That said, clearinghouses do not handle) but makes it harder to service clients.
eliminate risk; they standardize and concen- It runs completely counter to recent efforts
trate it. Therefore, it is essential that these by regulators to reduce banks’ exposure to
clearinghouses be strong, operate under counterparty default. This provision creates a
sound rules and have well-capitalized member lot of costs and no benefits. We believe that it
institutions. We do not want weak clearing- makes our system riskier – not safer.
houses to become the next systemic problem.
We need to create a Consumer Financial Protec-
It’s also important to maintain a category tion Bureau that is effective for both consumers
of non-standardized derivatives contracts. and banks
These contracts are not fit for a clearing-
It has been widely reported that we were
house because the clearinghouse cannot
against the creation of a Consumer Financial
adequately value, margin or settle them.
Protection Bureau (CFPB). We were not – we
However, these custom, over-the-counter
were against the creation of a standalone
contracts are important to very sophisticated
CFPB, operating separately and apart from
institutions (of course, such contracts should
whatever regulatory agency already had
be fully disclosed to the regulators and prop-
oversight authority over banks. We thought
erly regulated).
that a CFPB should have been housed within
Additionally, client margin requirements the banking regulators and with proper
need to be clarified. If clients are required authority within that regulator. This would
to post margin, either their liquidity will be have avoided the overlap, confusion and
reduced or these clients will migrate their bureaucracy created by competing agencies.
derivatives trades to overseas markets that
However, we fully acknowledge that there
do not have such posting requirements.
were many good reasons that led to the
Regulators also must seek to strike the right creation of the CFPB and believe that if
balance between the need for transparency the CFPB does its job well, the agency will
and the need to protect investors’ interests. benefit American consumers and the system.
To the extent that transparency rules reduce Strong regulatory standards, adequate
liquidity and widen spreads, they actually review of new products and transparency to
can damage the very investors the regula- consumers all are good things. Indeed, had
tors are trying to help. If market-makers there been stronger standards in the mort-
are required to quickly disclose the price at gage markets, one huge cause of the recent
which they are buying a large amount of crisis might have been avoided. Other coun-
securities or a small amount of very illiquid tries with stricter limits on mortgages, such
securities, they will necessarily be more as higher loan-to-value ratios, didn’t experi-
conservative about the amount of risk they ence a mortgage crisis comparable with ours.
take. As a result, they will bid for less and As recently as five years ago, most Americans
price the risk higher since the whole world would have called the U.S. mortgage market
will know their position. one of the best in the world – boy, was that
wrong! What happened to our system did
not work well for any market participant –
lender or borrower – and a careful rewriting
of the rules would benefit all.
24
The Durbin Amendment was passed with consumers. Some analysts estimate that as
no fact-finding, analysis or debate, had many as 5% of U.S. families currently in
nothing to do with the crisis and potentially the mainstream banking system will leave
will harm consumers and become unbanked. The Durbin Amend-
The Durbin Amendment, which regulates ment undoes a generation of hard work to
debit interchange fees, was added belatedly decrease the cost and increase the efficiencies
to the Dodd-Frank Act. It is an example of a of banking for ordinary Americans and to
policy that has little basis in fact or analysis. reduce the ranks of the unbanked.
When policymakers undertake such a signifi- Finally, it’s a terrible mistake and also bad
cant rewrite of the rules, there often is a policy for the government to get involved
tendency to adopt ideas with surface appeal. in price fixing and regulating business-to-
In this case, some potentially significant, business contracts. The Durbin Amendment
unintended consequences exist, particularly is price fixing at its worst. It is arbitrary and
for consumers. discriminatory – it stipulates that only large
Most analysis of the costs and benefits banks (those with assets of $10 billion or
of debit cards shows that the debit card more) will be affected by its price fixing. But
provides more total value (after fairly while the law purports to exempt smaller
looking at all the costs and benefits) to banks, credit unions and prepaid govern-
retailers than cash, checks or many other ment benefit cards, the reality is that not one
forms of payment. In addition, merchants of these groups will be immune to the nega-
negotiate fees (if they agree to accept tive implications of this rule.
debit cards at all – 20% don’t), and some The debit card has been a tremendous
pay as low as 35 basis points while other boon to both merchants and consumers.
merchants pay considerably more. Before policymakers undertake these types
The law that passed, and has been inter- of actions that pose such profound effects,
preted by the Fed in its proposed rule, they need to fully understand the conse-
permits a bank to charge only its “incre- quences of their actions. The Durbin Amend-
mental” interchange cost. This cost does not ment was passed in the middle of the night
include the direct costs of issuing debit cards, with limited fact-finding, little analysis and
such as the printing and mailing of the cards, minimal debate, and I think it appropriate
operational and call center support to service that we return to fact-finding and analysis in
the cards, and the cost of fraud. Also absent the full light of day.
from the analysis are the costs of ATMs and
Resolution Authority needs to be properly
branches, which are part of the fixed costs of
designed
servicing checking accounts and debit cards.
Any business that is allowed to charge only Simply put, Resolution Authority essentially
enough to recover its products’ variable costs provides a bankruptcy process for big banks
would soon be in bankruptcy. that is controlled and minimizes damage
to the economy. We made a mistake when
The harm will fall largely on consumers; we called this aspect of financial reform
banks will be forced to lose money on debit “Resolution Authority,” which sounds to
interchange transactions and likely will the general public very much like a bailout.
compensate by increasing fees in some way Perhaps a better name for it would have
for deposit customers. While the primary been “Minimally Damaging Bankruptcy
effect on consumers will be higher prices for For Big Dumb Banks” (MDBFBDB). Banks
banking services, there also will be secondary entering this process should do so with
effects. Some customers may opt out of the the understanding and certainty that the
banking system (even though the cost of equity will be wiped out, the clawbacks on
being unbanked is much higher).* The law compensation will be fully invoked, and the
* There is an interesting
will disproportionately affect lower income company will be dismembered and eventu-
Associated Press article
written on the cost of ally sold or liquidated.
being unbanked.
25
When the FDIC takes over a bank, it has full Banks should pay for the failure of banks (as the
authority to fire the management and Board FDIC is structured today), which is far better than
of Directors and wipe out equity and unse- arbitrary, punitive or excessive taxes
cured debt – in a way that does not damage Systemically important financial institutions
the economy. Controlled failure of large (SIFI), not the taxpayers, should pay the cost
financial institutions should work the same of resolving their fellow large institutions’ fail-
way. It is complex because these companies ures. This is not a new idea – banks already
are big and global and require international bear this responsibility (through the cost of
coordination. However, if the process is care- FDIC deposit insurance). Contrary to what
fully constructed (and completely apolitical), some folks may believe, the FDIC is a govern-
controlled failure can be achieved. ment program, but the U.S. government does
In the process, the role of preferred equity not pay for it – 100% of the cost for the FDIC
and unsecured debt needs to be clarified. is paid for by U.S. banks. (JPMorgan Chase’s
This may require corresponding accounting share alone of the FDIC’s costs relating to the
changes. My preference would be, at the crisis will exceed $6 billion.)
point of failure, to convert preferred equity Charging banks additional costs – propor-
and unsecured debt to pure, new common tionally and fairly allocated – for main-
equity. For example: When Lehman went taining the banking system seems to be both
bankrupt, it had $26 billion of equity and proper and just. In our opinion, this is far
$128 billion of unsecured debt. If, on the day more preferable than trying to create addi-
of bankruptcy, the regulators had converted tional taxes to SIFIs, as some countries are
that unsecured debt to equity, Lehman would discussing. Banks should pay for the failure
have been massively overcapitalized and of banks but not through arbitrary, punitive
possibly able to secure funding to continue or excessive taxes.
its operations and meet its obligations. The
process to sell or liquidate the company Critical accounting and capital rules need to be
would have been far more orderly. And the redesigned to ensure better transparency and
effect on the global economy would have less pro-cyclicality
been less damaging. If properly designed, countercyclical
accounting and capital rules can serve as stabi-
Payouts received on liquidation of the assets
lizers in a turbulent economy. I will mention
of the company would have been paid first
two issues that underscore the need for this
to the “new” equity holders before payment
approach, although there are many more.
was made to the “old” common equity
holders – this essentially is what happens First, loan loss reserving currently is highly
in bankruptcy (and would eliminate the pro-cyclical: When losses are at their lowest
need for contingent convertible securities). point, so are loan loss reserves and vice versa.
It is unlikely that this orderly liquidation There are many ways to fix this intelligently
would have resulted in losses exceeding the while adhering to rational accounting rules.
$150 billion of “new” equity. Therefore, it
would not have cost the FDIC any money. Second, capital rules even under Basel III
However, even in the unlikely event of a loss require less capital in benign markets than in
to the FDIC, we believe that the loss should turbulent times. So at precisely the time when
be charged back to the banks, not to the things can only get worse, we require the least
taxpayers, just as the FDIC does today. amount of capital. This also is easy to fix.
And one additional observation from outside
our industry: Federal, state and local govern-
ments need to change their accounting stan-
dards (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.
26
We need to beware of backward-looking models The key is for policymakers and market
and “group think” participants to get all elements right. If
We need to be highly conscious of the they succeed, then mortgage products will
limitations of backward-looking models. be much improved for both consumers
And we need to be even more conscious and investors. Also, if the roles of the GSEs
and suspect of what will happen when all were to be better clarified and more limited,
market participants essentially are using the there would be lower risk of damage to the
same models. While we want a level, global economy, and the taxpayers would not be left
playing field – and fair application of rules footing the bill for failure.
to all participants, including common and
consistent ways of calculating risk-weighted Getting to the Right Capital and Liquidity
assets – we need to guard against the risk of Levels
“group think.” If all participants use the same Of all the changes being made in the finan-
models and capital-allocation standards, this cial system, we believe it is most impor-
potentially plants the seeds of the next crisis. tant to have higher, but proper, capital and
That is essentially what happened with mort- liquidity requirements for banks. But these
gages in this last crisis. levels cannot be arbitrary or political – they
The mortgage business needs to be radically
must be rooted in logic and designed for
the fundamental purpose of best preparing
overhauled
banks to be able to handle extremely stressed
We need to rethink the mortgage industry
environments – a purpose that always has
from the ground up. I’ve already spoken
been central to JPMorgan Chase’s capital
about why we need stronger standards,
and liquidity positions. We also believe that
including loan-to-value ratios and income
if the levels of capital are set too high, they
verification, but we also need servicing
can both impede economic growth and push
contracts that are more consistent from both
more of what we refer to as banking into the
the consumer and investor standpoints.
hands of non-banks.
In addition, it would be beneficial to have
foreclosure processes and standards that are JPMorgan Chase had adequate capital both to deal
common and consistent across all 50 states. with the government’s new stress test, and, more
Most critically, it is incumbent upon us important, to deal with the real stress test of the
to resolve the status of the government- past few years — we don’t see the need for more
sponsored entities, Fannie Mae and Freddie Stress tests – both forward- and backward-
Mac, and the “skin in the game” rules with looking ones – show that 7% Basel I Tier 1
regard to securitizations. We generally Common Capital provided plenty of capital.
believe in these rules regarding securitiza- When the government did its first stress test
tions (requiring mortgage originators to hold in February of 2009, it required banks to have
5% of the risk of the loans they make). That 4% Tier 1 Common Capital. As shown in
said, the devil will be in the details, but we the chart on the next page, JPMorgan Chase
generally are supportive. Additionally, the went into the crisis with 7%. With that level
government recently rolled out three models of equity, we were able to acquire both Bear
of how government-sponsored enterprises Stearns and WaMu while simultaneously
(GSE) might be reformed over time. Any of powering through the crisis. Throughout the
these models could be designed to work for entire period, our capital ratio barely dropped.
consumers and investors and effectively could
The Basel III rules effectively would require
create a strong and stable mortgage finance
JPMorgan Chase to hold approximately 50%
system. Alternatively, any one could be
more capital than the already high level of
designed in a way that could lead to disaster.
capital held during the crisis. The call under
Basel III for a standard 7% of Tier 1 Common
Capital essentially is equivalent to the 10%
standard or more under Basel I. This is
27
As shown in the chart below, JPMorgan Chase maintained plenty of capital throughout the financial crisis.
JPMorgan Chase Quarterly Capital Levels
JPMorgan Chase Quarterly Capital Levels
March 16, Sept. 15, 2008: Feb. 10, Nov. 17, 2010:
2008: Lehman Failure 2009: Second
Bear Stearns First Stress Stress Test
Acquisition Sept. 25, 2008: Test Announced
WaMu Announced
Acquisition
10.0%
2.0
1.0
1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q
2008 2008 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010
because the regulators tightened up the defini- capital generation, even under stress. A great
tions for all types of capital – rightly so – and deal of detailed analysis goes into these tests,
increased standards for the calculation of including the assumptions that home prices
risk-weighted assets (mostly for trading assets, would drop another 15% from peak levels
counterparty exposures and securitizations). and unemployment would go to 12%. This
stress test is a more severe case than in the
Basel III’s higher capital requirements
Federal Reserve’s stress test.
provide more than enough capacity to with-
stand extreme stress. We do not believe that So in the “real” stress test of the past few
we should be required to hold even more years – one of the worst environments of all
capital. The chart below presents a forward- time – JPMorgan Chase did fine. In forward-
looking stress test on JPMorgan Chase’s looking stress tests, we are in excellent shape.
capital. Using analysts’ estimates, we show
The whole purpose of capital is to be able to
what our Basel I and Basel III Tier 1 Capital
protect the firm under conditions of extreme
ratios would be. These are estimates, but
stress. We understand why, after this crisis,
they give you a sense of the strength of our
the capital standards should be increased.
Analyst Projections “Stressed” Analyst Projections Analyst Projections “Stressed” Analyst Projections
12.2% ~12%
11.4% ~11% ~11%
10.7% ~10% ~10%
9.8% 2019 ~10%
Basel III ~9%
Tier 1
Tier 1
Common 7% ~8% ~8%
Common
Guideline:
Fed
7%
Guideline:
5%
2010 2011 2012 2013 2011 2012 2013 2010 2011 2012 2013 2011 2012 2013
28
We now will have 50% more capital than While it is true that some banks could have
we clearly needed during the crisis. And failed during this crisis, that is not true for
multiple other improvements have been all banks. Many banks around the world,
made to protect our system. We simply do including JPMorgan Chase, were ports of
not see the need for even more capital, and stability in the storm and proved to be great
we believe the facts prove it. stabilizers at the height of the crisis in late
2008 and early 2009. Remember, also, that
Banks did not benefit from any kind of implicit some of the banks identified as too big to fail,
guarantee in reality, were too big to fail at the time after
The argument that systemically important so much cumulative damage. At that time, the
financial institutions should hold more too-big-to-fail moniker was extended to large
capital than small banks is predicated on industrial companies, money market funds,
two false notions: first, that SIFIs borrow just about any company that issued commer-
money more cheaply because of an implicit cial paper, insurance companies and others.
guarantee (and that the cost of higher capital
requirements will offset this “benefit”); and, We should be very thoughtful about demanding
second, that all SIFIs needed to be bailed out that global SIFIs hold more capital
because they were too big to fail. Presumably, risk-weighted assets reflect the
riskiness of the company. If there are to be
The notion that SIFIs had an implied
extra capital charges for SIFIs and global
guarantee is completely disproved by the
SIFIs, such decisions should be based upon
chart below. It shows the borrowing costs
logic and proof that SIFIs and global SIFIs
of Fannie Mae and Freddie Mac – compa-
pose a greater risk to the system. Some SIFIs
nies with a true implied guarantee from the
posed a great risk while other SIFIs did not.
federal government – vs. the borrowing costs
And these variations in “riskiness” were not
of AA-rated banks and industrial companies.
strictly a function of size. Also, if Resolution
As you see, the borrowing costs of these
Authority is meant to take care of the too-
banks were similar to those of AA-rated
big-to-fail problem, then what purpose does
industrials, neither of which benefited from
further raising capital levels serve other than
an implicit government guarantee of any
to fix a problem that already has been fixed?
kind. Surprisingly, even after the govern-
ment said that it was not going to allow any
additional banks to fail, the high borrowing
costs for banks continued.
400
300
200
100
0
7/2/07 7/2/08 7/2/09 7/2/10
29
Even the identification of SIFIs or global For some of our wholesale clients, we are
SIFIs creates issues: Does this status make asked to make bridge loans or underwrite
you a better credit? Won’t it cause distor- securities of $10 billion or more. We buy and
tions in the future as some people decide sell trillions of dollars of securities a day and
that it will be safer to bank with SIFIs? Are move some $10 trillion of cash around the
the regulators going to make it clear what world every day. When we provide credit to
a company could do to give up the SIFI or a client, it may include revolving credit, trade
global SIFI status and reduce your capital finance, trading lines, intraday lines and
requirements? Are there going to be specific derivatives lines – often in multiple locations
ways for specific SIFIs to reduce their capital globally – and often in the billions.
requirements? Will the identification of
In our retail business, buying WaMu
global SIFIs be done fairly across countries?
enabled us to improve branches in many
Will there be bright-line tests or will it be
ways: adding salespeople; retrofitting and
up to the judgment of various bureaucra-
upgrading each location; adding improved
cies? Won’t the identification of SIFIs simply
products, services and systems; and saving
become a political process as you travel to
some $1 million at each branch. Ultimately,
Washington, D.C., to argue why you should
this allowed us to offer our clients better
not be a SIFI?
products and services.
In short, we at JPMorgan Chase see the value
In a free market economy, companies
of higher capital and liquidity and the wisdom
grow over time because they are winning
of resolution plans and living wills that make
customers. These companies win customers
it easier to let big banks fail. We even believe
and grow market share because they – rela-
that banks should continue to pay for bank
tive to the competition – are doing a better
failures. We just don’t believe in arbitrary and
and faster (and at times less expensive) job
increasingly higher capital ratios.
of providing customers with what they want.
The Need for Large Global Banks and Consolidation does not cause crises, and the U.S.
America’s Competitive Position banking system is far less consolidated than most
Companies come in various sizes, shapes other countries
and forms. There are many reasons for The U.S. banking system has gone from
this. At JPMorgan Chase, we benefit from approximately 20,000 banks 30 years ago to
huge economies of scale in our businesses. approximately 7,000 today. That trend likely
The same goes for most large enterprises. will continue as banks seek out economies
Economies of scale in our industry gener- of scale and competitive advantage. That
ally come from technology, including data does not mean there won’t be start-ups and
centers, networks and software; the benefits successful community banks. It just means
of global branding; the ability to make huge that, in general, consolidation will continue,
investments; and the true diversification of as it has in many industries.
risks. The beneficiaries of these economies of
The U.S. system is still far less consolidated
scale ultimately are the consumers who these
than most other countries (see chart on next
companies serve.
page on top).
Moreover, in many ways, the size of our
In any case, the degree of industry consolida-
company is directly related to the size of the
tion has not, in and of itself, been a driving
clients we serve globally. Our size supports
force behind the financial crisis. In fact, some
the level of resources needed to service these
countries that were far more consolidated
large, multinational clients – and enables us to
(Canada, Australia, Brazil, China and Japan,
take on the necessary risk to support them.
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.
30
ago, U.S. investment banks dominated U.S.
Top 20 Countries by Gross Domestic Product
investment banking – occupying all of the
Deposit Market Share for Top 10 Banks top 10 positions. A decade ago, they held
in Each Respective Country % Share
nine of the top 10. Last year, U.S. investment
Canada 97 % banks held only five – half – of the top 10 slots
Mexico 93 (see chart below).
Turkey 92
South Korea 91 U.S. banks also have lost significant position.
Australia 90 In 1989, U.S. banks represented 44 of the
Notes: Deposit market share data France1 88
are related to the operations/ Brazil 85
50 largest financial firms in the world (by
transactions conducted by banks Spain 84 market capitalization). More than 20 years
domiciled in each respective later, American banks now number only six
Sweden1 84
country, including branches and
Argentina 76 of the top 50. While much of this change
subsidiaries of foreign banks
The Netherlands1 76 has to do with the growth of the rest of the
1 Deposit market share is based China 67
on the top eight banks in France, world, it is striking both how fast and how
Japan 62
top seven banks in Sweden, top
India 61
dramatic the change has been.
four banks in the Netherlands, top
three banks in Germany and top Russia 61
Italy 53 It’s important that we make sure that American
two banks in Switzerland
United Kingdom 48 banks stay competitive
Sources: J.P. Morgan and J.P. Morgan
Cazenove research estimates; com- United States 41 We believe that it is good for America – the
pany filings and reports; and Central Switzerland1 35 world’s leading global economy – to have
Bank and trade association data Germany1 26
leading global banks. Being involved in
the capital flows between corporations and
We should be concerned about American banks investors across the globe is a critical func-
losing global market share – because they are tion. Large, sophisticated institutions will be
Two facts support this contention: required to manage these flows and to inter-
mediate or invest directly if necessary. Global
U.S. investment banking services are increas- markets will require sophisticated analysis,
ingly being provided by foreign banks. While tools and execution.
it is gratifying to see J.P. Morgan go from
nowhere to become #1 in U.S. investment The impact of ceding this role to banks
banking, it is notable how much U.S. invest- based outside the United States could be
ment banking has changed. Twenty years detrimental to the U.S. economy and to U.S.
Source: Thomson Reuters. Data as of 12/31/10. Rankings based on dollar volume run on March 14, 2011
Note: Light gray font designates firms that no longer exist; orange font indicates non-U.S.-based firms
31
companies. For a long time, the United States • There are proposed bank taxes or other
has had the deepest and best capital markets arbitrary taxes that could disadvantage
on the planet. These markets match investors large banks – even the FDIC has skewed its
with companies, large and small, who inno- deposit insurance to increase the charge to
vate, invest and grow around the world. They bigger banks.
have helped build some of the best compa-
• Many of the leading economies of the
nies in the world and the best economy on
world may not have their large banks
the planet. America’s financial institutions
maintain additional capital requirements in
have been a critical part of this success.
excess of the 7% called for in Basel III.
While mistakes were made and change was
• It is clear that some countries’ regulation
clearly required, we should not throw out the
allows for a much less conservative calcula-
baby with the bath water.
tion on risk-weighted assets.
Some of the laws that were written and some
We do not believe that the Federal Reserve or
of the possible interpretations of rules to
the Treasury would want to leave American
come could create competitive disadvantages
banks at a disadvantage. We need American
for American banks. They are adding up, and
leadership to be forceful and engaged to
they bear watching. They are:
ensure a fair outcome.
• American banks no longer have the ability
to use tax-deductible preferred stock as We all have a vested interest in getting this right
capital (overseas banks do). The government took great action to stop the
crisis from getting worse. Lawmakers and
• Most other countries have made it clear regulators have and will take much action
that they will not accept the Volcker Rule to fix what clearly was a broken system. As
(despite Paul Volcker’s testimony that inter- quickly as we reasonably can, we should
national regulators would adopt it once finish the remaining rules and requirements
they understood it). and create the certainty that will help the
• Many of the rules regarding derivatives system to heal faster. Nothing is more impor-
being adopted in the United States are tant than getting our economy growing and
unlikely to be adopted universally. Certain getting Americans back to work. And the
countries are licking their chops at the regulators should remember that they always
prospect of U.S. banks being unable to have the right to change things again – if and
compete in derivatives. Remember, the when appropriate.
clients will go to the place that is the
cheapest and most effective for them.
• There are concentration limits, old and
new, that constrain American banks’ ability
from making acquisitions both here and
abroad. Some of these constraints will not
apply to foreign banks.
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V. Conclusion
You can rest assured that your management In every way we can, we continue to
team and Board of Directors are completely actively support the economic recovery.
focused on all the opportunities, issues and We know that communities are built when
risks that we have ahead of us. everyone does his or her part. And we
intend to do ours by being a responsible
Regarding the regulatory changes, we have
corporate citizen and helping our commu-
some 70 projects and work teams – fully
nities across the globe. You can read
staffed with lawyers; accountants; credit
more about our extensive efforts on
officers; compliance, systems and opera-
jpmorganchase.com/forward.
tions specialists; and bankers and traders –
analyzing and preparing for each of the new Our people have done an extraordinary job,
regulatory requirements. All in all, thousands often under difficult circumstances. I hope
of our people around the world are partially you are as proud of them as I am.
or fully engaged in these endeavors.
We will ensure that we meet all the new
rules and requirements, both in letter and
spirit, and we will make sure that everything
we do, wherever we can, is done with the
customer foremost in mind. While we expect Jamie Dimon
to make numerous changes in our products, Chairman and Chief Executive Officer
services and prices, we will strive to do so in April 4, 2011
the most customer-friendly way possible.
As we look toward the future, we see incred-
ible opportunities for your company, and our
teams around the world are fully engaged in
pursuing them.
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