Does JPM Take More Risk than Rivals? Is TBTF Actually Good?

Receiving Wide Coverage ...

JPMorgan: The FT analyzes JPMorgan's regulatory filings and infers that the bank takes more risk when investing excess liquidity — that is, cash that isn't being loaned out — than its megabank counterparts. Government-guaranteed bonds make up a smaller percentage of JPM's securities portfolio than at other large banks, for example. However, one FT reader protests in the comment thread that the conclusion trumpeted in the headline — "JPMorgan Takes More Risk than Rivals" — is overstated: "If you have a bigger securities portfolio and have excess liquidity then it wouldn't be unusual to buy corporate bonds. If your competitor has instead loaned to corporate customers, rather than buying bonds, then your balance sheet isn't riskier." (If this discussion gives you déjà vu, it may be because several hours before the FT posted its story yesterday, American Banker published an analysis by our data editor Harry Terris that similarly compared JPM's bond holdings to those of its competitors, and found the latter to more vanilla.) In the Journal, the "Heard on the Street" column identifies a pitfall of the portfolio hedging involved in JPM's recent $2 billion trading loss: fluctuations in the value of the hedges (if they are hedges — that's a matter of debate) flow through to earnings even when moves in the value of the assets being hedged don't. This "asymmetric accounting" (CEO Jamie Dimon's phrase) makes the true performance of the bank more opaque, even to its managers, the column says.

Too Big to Fail: Senator Sherrod Brown of Ohio is again pushing a bill to break up the largest banks. Writing in the Times’ “DealBook,” Richard Farley, a lawyer at Paul Hastings, critiques the lawmaker’s proposal and provocatively challenges widespread assumptions about the undesirability of too-big-to-fail institutions. “If next time [a crisis occurs] there are a great many smaller banks with bad loans that no one believes will be saved, will they all fail?” Farley asks. “This seems to look more like the Great Depression model than the current ‘safety net’ model that has served us well.” For those who dislike safety nets, Peter Wallison explains in a Journal op-ed why he and other free-marketeers believe the “systemically important” designation for large financial firms under Dodd-Frank only serves to enshrine too-big-to-fail status, and to create competitive advantages for those stamped with the scarlet SIFI: “When the [Financial Stability Oversight] council has declared that a firm is ‘systemically important’ — that its failure poses a threat to U.S. financial stability — the U.S. government is effectively saying that it will do whatever it takes to prevent the firm from failing. This means that a loan to a ‘systemically important’ institution is going to be safer than a loan to a smaller competitor without that designation,” and the giants thus enjoy a lower cost of funds than smaller banks. Nearby, an editorial in the Journal complains that by designating derivatives clearinghouses as SIFIs, as the FSOC “secretly” voted to do yesterday, the government is now putting taxpayers on the hook to eventually bail out those institutions, too.

Sallie Krawcheck: The former head of wealth management at Merrill Lynch continues to weigh in on the financial industry’s current straits. In an op-ed in the FT, she uses the JPM debacle as a springboard for a broader discussion of the inevitable complexity of big banks. Regulations like the Volcker rule err by trying to “fight complexity with complexity,” Krawcheck writes. “If regulators engage with the banks and regulate topic by topic — to stop this exact scenario from repeating itself — Wall Street will innovate businesses and trades that overtake their efforts every time, in search of new pools of profitability.” Rather, regulators should focus on the total amount of risk banks are taking on and the sufficiency of their capital to stand behind it, Krawcheck argues. She also recently had a piece in the Harvard Business Review offering four ways to fix the industry. For example, she suggests that boards judge CEOs not just by the bottom line but also by the components of earnings — how much of that net income is driven by satisfied customers who keep coming back versus the luck of the yield curve?

Wall Street Journal

Freddie Mac made Bank of America repurchase $330 million of mortgages written over the past two years, even though most of them are still performing. Why? Because the homes were appraised by a computer rather than by humans, whose judgment Freddie’s guidelines required for the loans in question.

Financial Times

“Institutional investors no longer trust banks to measure the riskiness of their assets and want regulators to take a much more prescriptive approach to setting capital requirements, a new report by analysts at Barclays has found.”

 

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