I heard Bloomberg report this morning that Chase's CEO, Jamie Dimon, was excoriating Congress for taking the national debt limit seriously.
In a commencement speech in Colorado, Dimon castigated Congress for risking default and all that he believes will follow.
But, as I noted in this recent post discussing Stanley Druckenmiller's interview in the Wall Street Journal last weekend, real bond traders have a different view.
Last I looked, Dimon's formative years were spent carrying Sandy Weill's bags for a living. I don't believe Dimon was ever celebrated for running a successful government bond trading operation.
Druckenmiller, on the other hand, is known for successfully trading government debt. And he disagrees completely with Dimon's opinions, dispensed, such as they are, from 20,000 feet.
Ever since I worked closely with the CEO and Chairman at Chase Manhattan Bank, thanks to my mentor, Gerry Weiss, and with his helpful explanations, I learned how often such executives become pompous and self-important, pronouncing on topics about which they actually know little, or nothing, simply because of the title behind their names.
So, who would you believe? Druckenmiller, who's made a career in investing in governments, or Dimon, who's made a career as a financial services apparatchik and bureaucrat?
Showing posts with label Jamie Dimon. Show all posts
Showing posts with label Jamie Dimon. Show all posts
Friday, May 20, 2011
Thursday, April 14, 2011
Jamie Dimon's Chase's Revenue Challenges
Today's Wall Street Journal's Heard On The Street column took Chase CEO Jamie Dimon to task for talking up a one-time loan loss reserve reduction while presiding over anemic revenue growth.
Specifically regarding revenues, the article states,
"Finally, a big portion of the outperformance came from stronger-than-expected fixed-income revenue in the investment bank, but these can be lumpy. Shareholders want recurring revenue growth. And on this point, J.P.Morgan remains a show-me story."
So true. This has been a subject on which I've written before. Chase gets credit by pundits for performance it doesn't actually exhibit.
Just to be sure, I went to my Compustat data and looked at the annual total revenues as of March, from 2005-2011. They rose from $64B to $115B, for a 10% annualized growth rate. But the annual revenue growth rates, at March of each year, were actually:
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
30.9% 26.3% 7.3% -8.2% 12.0% -1.2%
Several things become clear from this data.
First, the pre-recession revenue growth rates of healthy double-digits is gone. For the last two years, the best the bank could manage was 12% in 2010. Revenue actually declined at Dimon's Chase in the past twelve months.
Second, as is typical with commercial banks, revenue growth has been volatile.
Third, if Dimon has any special skills, it sure isn't in revenue growth management. More likely, as I've always contended, what he learned from his mentor, Sandy Weill, is how to slash expenses.
Thus, we don't see long term, consistent revenue growth which would underpin consistently superior total returns. And the nearby chart of Chase's and the S&P500 Index's price series for the past five years so indicates.
Chase has barely outpaced the index. Certainly not to an extent necessary to offset the risk of a single equity in comparison to the S&P.
Once again, Dimon's so-called leadership comes up short when you actually examine the data.
Specifically regarding revenues, the article states,
"Finally, a big portion of the outperformance came from stronger-than-expected fixed-income revenue in the investment bank, but these can be lumpy. Shareholders want recurring revenue growth. And on this point, J.P.Morgan remains a show-me story."
So true. This has been a subject on which I've written before. Chase gets credit by pundits for performance it doesn't actually exhibit.
Just to be sure, I went to my Compustat data and looked at the annual total revenues as of March, from 2005-2011. They rose from $64B to $115B, for a 10% annualized growth rate. But the annual revenue growth rates, at March of each year, were actually:
Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
30.9% 26.3% 7.3% -8.2% 12.0% -1.2%
Several things become clear from this data.
First, the pre-recession revenue growth rates of healthy double-digits is gone. For the last two years, the best the bank could manage was 12% in 2010. Revenue actually declined at Dimon's Chase in the past twelve months.
Second, as is typical with commercial banks, revenue growth has been volatile.
Third, if Dimon has any special skills, it sure isn't in revenue growth management. More likely, as I've always contended, what he learned from his mentor, Sandy Weill, is how to slash expenses.
Chase has barely outpaced the index. Certainly not to an extent necessary to offset the risk of a single equity in comparison to the S&P.
Once again, Dimon's so-called leadership comes up short when you actually examine the data.
Tuesday, September 28, 2010
Jamie Dimon's "Halo" Effect
It never fails to amaze me how many people ascribe unique managerial powers and skill to Jamie Dimon, despite any significant evidence that he's ever been anything but a cost-cutter trained at Sandy Weill's knee.
In yesterday's Wall Street Journal's book review, Philip Delves Broughton reviewed Paul Sullivan's new book, Clutch. Here's the passage from the review that I found to be amazingly ill-informed and wrong-headed.
"At one point he contrasts the performances of Jamie Dimon, chief executive of JPMorgan Chase, and Kenneth Lewis, the former head of Bank of America, during the financial crisis of 2008. Both men went into the crisis with their firms in good health. By the end of it, Mr. Dimon had acquired Bear Stearns and Washington Mutual and handsomely increased his company's share price. Mr. Lewis had acquired the teetering Merrill Lynch and seen Bank of America lose $90 billion in shareholder value.
Why the difference? Mr. Lewis made the errors typical of chokers. He over-thought the situation, and he was over-confident. When the Merrill deal was criticized, he tried to avoid the blame. He acted, according to Mr. Sullivan, as an "imperial chief executive," refusing to believe that the worst might happen. Mr. Dimon, by contrast, immersed himself in every detail of his acquisitions, fought to get prices that made hard financial sense and never shirked from the consequences. It was as if all his experience as a financier and manager had found its perfect expression in that moment."
Really?
Well, here's an alternative view. Substantiated by facts. The accompanying chart displays stock price series for Chase, Goldman Sachs, Wells Fargo and the S&P500 Index from 2006 to the present. Dimon became CEO of Chase at the beginning of 2006.
In yesterday's Wall Street Journal's book review, Philip Delves Broughton reviewed Paul Sullivan's new book, Clutch. Here's the passage from the review that I found to be amazingly ill-informed and wrong-headed.
"At one point he contrasts the performances of Jamie Dimon, chief executive of JPMorgan Chase, and Kenneth Lewis, the former head of Bank of America, during the financial crisis of 2008. Both men went into the crisis with their firms in good health. By the end of it, Mr. Dimon had acquired Bear Stearns and Washington Mutual and handsomely increased his company's share price. Mr. Lewis had acquired the teetering Merrill Lynch and seen Bank of America lose $90 billion in shareholder value.
Why the difference? Mr. Lewis made the errors typical of chokers. He over-thought the situation, and he was over-confident. When the Merrill deal was criticized, he tried to avoid the blame. He acted, according to Mr. Sullivan, as an "imperial chief executive," refusing to believe that the worst might happen. Mr. Dimon, by contrast, immersed himself in every detail of his acquisitions, fought to get prices that made hard financial sense and never shirked from the consequences. It was as if all his experience as a financier and manager had found its perfect expression in that moment."
Really?
Well, here's an alternative view. Substantiated by facts. The accompanying chart displays stock price series for Chase, Goldman Sachs, Wells Fargo and the S&P500 Index from 2006 to the present. Dimon became CEO of Chase at the beginning of 2006.
That BofA and Citi are the worst two performers is no particular surprise, is it? While it's not crystal clear from the chart, one can deduce that Goldman and Chase performed roughly the same, while Wells Fargo and the S&P500 did a little worse.
Much of Chase's milder value loss during the recent financial crisis stemmed, as I've written in prior posts, from it's simply being slower and less agile in getting into the mortgage-backed game in the first place. Thus, the bank's traditional stodginess and slow execution accidentally saved it from becoming another Citigroup or BofA. It was an error of omission, not commission.
Regarding the acquisition of various wrecked investment and commercial banks, I think Broughton wrongly gives Sullivan a pass on incomplete understanding of the situations.
Bear Stearns was the smallest of the publicly-traded investment banks, and Chase only rescued it with assurances of loss guarantees from the government. Maybe that counts as Dimon's skill, maybe not. At that point, with mortgage-backed instruments having caused tens of billions of write-offs on bank balance sheets beginning in late 2007, only an idiot would not have required such guarantees when agreeing to purchase a bushel full of them by way of taking over the failed Bear Stearns. It surely wasn't rocket science.
By the way, Lewis did the same thing with Merrill Lynch, even to the point of trying to walk away from the deal, only to be basically blackmailed by the Treasury and Fed.
Regarding Chase's WaMu takeover, it is positioned as more brilliant than it actually was. As a commercial bank, WaMu's dissolution was a relatively straightforward event. The FDIC handles these routinely, albeit on a smaller scale. But a bank like WaMu was, in comparison with Bear Stearns, a fairly simple 'acquisition.' Chase simply took over the deposits and branches, negotiating with the FDIC on various aspects of the assets. But it was a known business.
I see the difference between Lewis and Dimon as more a matter of different types of flaws. Dimon has never been a big-picture guy. Yes, he is probably very astute on details, because that's what his mentor, Sandy Weill, focused on as he acquired his string of brokerages to build Shearson Lehman. But every large-scale concept Weill pursued exploded in loss. Particularly....Citigroup. Nobody would ever accuse Dimon of having new, innovative strategic concepts, or implementing any successfully.
Lewis, on the other hand, evidently thought strategic acquisitions came with the executive suite he inherited from Hugh McColl. The missing acquisition mistake in the review, and perhaps the book, is BofA's purchase of the wreckages of Countrywide. As a mortgage bank, Countrywide's demise didn't really threaten the financial system, so Lewis' overpayment for it was a self-inflicted wound. There was no pressure for any bank to 'rescue' the troubled mortgage lender. It wasn't seen as a key financial institution in the fabric of the US economy.
The Merrill Lynch acquisition was more complex than Chase's of Bear Stearns. I see Lewis' mistake, again, as one of scope, rather than detail. And, frankly, both Lewis and Dimon, already heading firms that were among the largest five commercial banks in the US, did not really need any of these acquisitions to remain so. Consolidation is the dominant trend in the sector, but these two firms were already pretty much impervious, absent tremendous operating losses, to losing their positions as financial utilities, whether they bought any of the failed investment and commercial banks, or not.
Wells' successful digestion of Wachovia remains uncertain. Wachovia had unwisely overpaid for Golden West, which helped destroy the North Carolina bank.
To me, viewing the last five years of performances of these institutions, the lesson is that only the most and least aggressive two firms came out on top. Goldman maneuvered through the crisis, while Chase more or less hunkered down, with a few distressed asset purchases relying on government guarantees.
Perhaps the better lesson from Lewis' and Dimon's behaviors is that it's better not to operate beyond your capabilities in the first place. That doesn't mean Dimon is a better overall manager, but, in this case, that his particular skills in micro-management and small-picture thinking happened to dovetail with the brief era. The sort of skills, come to think of it, which are all one probably needs to oversee a lumbering, slow-growth, unexciting financial utility.
Thursday, April 15, 2010
Jamie Dimon As Heir To JP Morgan?
This morning's Wall Street Journal's Money & Investing section featured heavy doses of Chase bank CEO Jamie Dimon.
I didn't know whether to laugh or become sick to my stomach at the graphic, on an internal page of the section, depicting Dimon 'high fiving' the legendary American financier from the turn of the last century.
To compare Dimon, essentially a large-corporate bureaucratic hack, Sandy Weill's one-time bag man, to a truly titanic figure from America's past, is ludicrous.
Yes, thanks to the merger of many mediocre commercial banks, Dimon heads a firm which contains, as part of its name, that of Morgan's commercial bank element. Mind you, that part was added in an almost-trivial merger, so moribund had the once-proud JP Morgan (commercial) & Co. become.
The front page of the section presented Dimon as newly-anointed chief economist of the financial sector. Do tell.
I guess it slipped my mind that Dimon had been trained and practiced as a generally-acknowledged economic seer. His forecast is that maybe we've turned a corner on the recession. He sure hopes so.
Wow, is that impressive.
Actually, I had the occasion to talk recently with someone who has met Dimon and many of his colleagues. This person's overall take on Dimon is that he's intelligent and detail-focused. However, unlike the original J Pierpont Morgan, "vision" is not a quality she said she would attribute to Dimon. Her description of the Chase CEO was pretty much what you'd expect of a guy who cut his teeth in business carrying water for the rag merchant of the old Wall Street, Sandy Weill. Weill's greatest and, arguably, only real financial success was merging a succession of old wire houses, via back-office consolidations, into the precursor of the now-failed Shearson Lehman.
Vision wasn't exactly Sandy's strong suit, either. Once he got hold of IDS and Primerica, then went after Citigroup, things got out of hand.
What elements of that tale would have served as the font of Dimon's newly-found strategic and visioning skills? Nothing.
No, Jamie is generally credited with being an obsessive detail guy. Cost-cutting and operational in the extreme. Just like his old mentor and long-time boss.
The woman also didn't disagree with my, and my fellow, former-Chase colleagues, that the main reason Dimon is viewed so positively now is that the Chase he found when he became CEO was so late to mimic the excesses of Merrill Lynch, Morgan Stanley and Citigroup that Dimon didn't have time to get the bank into as much trouble. Typically late to any really good, profitable party, Chase was luckily absent from the scene when the mortgage sector meltdown struck. It wasn't wisdom, but ineptitude and lack of speed that saved Chase and Dimon two years ago.
The most interesting Chase- and Dimon-related piece, however, was the back page article. It noted the potential decrease in the high loan loss reserves of recent quarters at the bank. However, noting potential changes in capital requirements for derivatives, and Chase's rather high capital levels, the piece cautioned that producing prior peak levels of returns on capital will be a challenge for Chase going forward.
This dovetails with something I wrote some months ago regarding capital allocation in banking. Often, businesses don't wish to accept the internal allocation which completely spreads regulatory capital bank-wide. I've seen this myself during my days at Chase.
The situation becomes one of regulatory capital levels exceeding the needs of the business, depressing returns on that capital. This would be a natural and expected consequence of the hand-wringing over capital adequacy, and the continuing witch hunt for guilty bankers, in the wake of the 2007-08 financial sector meltdown.
Let's just say that today's Chase is hardly, by any measure, your grandfather's integrated JP Morgan & Co. And it's CEO is similarly not a modern-day J. Pierpont Morgan, either.
I didn't know whether to laugh or become sick to my stomach at the graphic, on an internal page of the section, depicting Dimon 'high fiving' the legendary American financier from the turn of the last century.
To compare Dimon, essentially a large-corporate bureaucratic hack, Sandy Weill's one-time bag man, to a truly titanic figure from America's past, is ludicrous.
Yes, thanks to the merger of many mediocre commercial banks, Dimon heads a firm which contains, as part of its name, that of Morgan's commercial bank element. Mind you, that part was added in an almost-trivial merger, so moribund had the once-proud JP Morgan (commercial) & Co. become.
The front page of the section presented Dimon as newly-anointed chief economist of the financial sector. Do tell.
I guess it slipped my mind that Dimon had been trained and practiced as a generally-acknowledged economic seer. His forecast is that maybe we've turned a corner on the recession. He sure hopes so.
Wow, is that impressive.
Actually, I had the occasion to talk recently with someone who has met Dimon and many of his colleagues. This person's overall take on Dimon is that he's intelligent and detail-focused. However, unlike the original J Pierpont Morgan, "vision" is not a quality she said she would attribute to Dimon. Her description of the Chase CEO was pretty much what you'd expect of a guy who cut his teeth in business carrying water for the rag merchant of the old Wall Street, Sandy Weill. Weill's greatest and, arguably, only real financial success was merging a succession of old wire houses, via back-office consolidations, into the precursor of the now-failed Shearson Lehman.
Vision wasn't exactly Sandy's strong suit, either. Once he got hold of IDS and Primerica, then went after Citigroup, things got out of hand.
What elements of that tale would have served as the font of Dimon's newly-found strategic and visioning skills? Nothing.
No, Jamie is generally credited with being an obsessive detail guy. Cost-cutting and operational in the extreme. Just like his old mentor and long-time boss.
The woman also didn't disagree with my, and my fellow, former-Chase colleagues, that the main reason Dimon is viewed so positively now is that the Chase he found when he became CEO was so late to mimic the excesses of Merrill Lynch, Morgan Stanley and Citigroup that Dimon didn't have time to get the bank into as much trouble. Typically late to any really good, profitable party, Chase was luckily absent from the scene when the mortgage sector meltdown struck. It wasn't wisdom, but ineptitude and lack of speed that saved Chase and Dimon two years ago.
The most interesting Chase- and Dimon-related piece, however, was the back page article. It noted the potential decrease in the high loan loss reserves of recent quarters at the bank. However, noting potential changes in capital requirements for derivatives, and Chase's rather high capital levels, the piece cautioned that producing prior peak levels of returns on capital will be a challenge for Chase going forward.
This dovetails with something I wrote some months ago regarding capital allocation in banking. Often, businesses don't wish to accept the internal allocation which completely spreads regulatory capital bank-wide. I've seen this myself during my days at Chase.
The situation becomes one of regulatory capital levels exceeding the needs of the business, depressing returns on that capital. This would be a natural and expected consequence of the hand-wringing over capital adequacy, and the continuing witch hunt for guilty bankers, in the wake of the 2007-08 financial sector meltdown.
Let's just say that today's Chase is hardly, by any measure, your grandfather's integrated JP Morgan & Co. And it's CEO is similarly not a modern-day J. Pierpont Morgan, either.
Sunday, October 18, 2009
Jamie Dimon's Chase Increases Risk To Generate Earnings
After the celebrations over JPMorgan Chase's recent revenue and earnings announcements which exceeded "expectations," more sober analysts are noting the increased risks the bank took to generate those results.
On Thursday, the Wall Street Journal's Heard On The Street column called it "J.P. Morgan's Chilling Win."
The article detailed the decline in profitability of the bank's core businesses. Loan volume was down, while loan loss provisions went up, and credit card past-due volumes were up, as well.
According to the Journal, the bank's VAR measure rose as it relied on bond trading for its juiced-up profits.
But, wait!
Isn't excessive risk-taking in trading and non-core banking business precisely what Congress, the administration, regulators and the banks themselves all swore was what caused the recent financial meltdown? That such short-term, excessive risk was to be sworn off by our "too big to fail" financial titans?
Gee, that didn't last long, did it?
Here's a memo- short term fixed income trading isn't a core retail or wholesale commercial bank business. It's what investment banks and brokerages use to boost earnings, but not without accompanying increased risk.
Of course, this country no longer has any large investment banks. They either failed, or begged for commercial bank holding company licenses last year, the better to get access to the Fed borrowing window.
So Chase is basically following Goldman Sachs' lead in relying on risky trading to generate revenue and earnings surprises. Guess how long that's going to last?
So much for anyone having learned from last year's debacle. So much for regulators being serious about oversight and risk management.
Nothing essential has changed about the US financial services sector in the past year, other than a few badly-managed firms were left to fail, while a few others were kept on government-supplied life support.
Nor has anything changed about Jamie Dimon's lack of management skill. Those surprising earnings came courtesy of some fixed income traders and the risk they were allowed to take, not from core lending businesses.
But the Journal is correct. Chase isn't making its money on conventional commercial banking. It's taking extra risks by wagering its proprietary capital at the tables in that little casino we like to call the US fixed income markets.
On Thursday, the Wall Street Journal's Heard On The Street column called it "J.P. Morgan's Chilling Win."
The article detailed the decline in profitability of the bank's core businesses. Loan volume was down, while loan loss provisions went up, and credit card past-due volumes were up, as well.
According to the Journal, the bank's VAR measure rose as it relied on bond trading for its juiced-up profits.
But, wait!
Isn't excessive risk-taking in trading and non-core banking business precisely what Congress, the administration, regulators and the banks themselves all swore was what caused the recent financial meltdown? That such short-term, excessive risk was to be sworn off by our "too big to fail" financial titans?
Gee, that didn't last long, did it?
Here's a memo- short term fixed income trading isn't a core retail or wholesale commercial bank business. It's what investment banks and brokerages use to boost earnings, but not without accompanying increased risk.
Of course, this country no longer has any large investment banks. They either failed, or begged for commercial bank holding company licenses last year, the better to get access to the Fed borrowing window.
So Chase is basically following Goldman Sachs' lead in relying on risky trading to generate revenue and earnings surprises. Guess how long that's going to last?
So much for anyone having learned from last year's debacle. So much for regulators being serious about oversight and risk management.
Nothing essential has changed about the US financial services sector in the past year, other than a few badly-managed firms were left to fail, while a few others were kept on government-supplied life support.
Nor has anything changed about Jamie Dimon's lack of management skill. Those surprising earnings came courtesy of some fixed income traders and the risk they were allowed to take, not from core lending businesses.
But the Journal is correct. Chase isn't making its money on conventional commercial banking. It's taking extra risks by wagering its proprietary capital at the tables in that little casino we like to call the US fixed income markets.
Friday, October 02, 2009
Finally- A Realistic Review of Jamie Dimon's Tenure At Chase
About two years ago, I wrote this post, amidst a business media groundswell of adoration over Jamie Dimon's first three years at Chase. I ended the post with this passage,
"Personally, I doubt that Dimon knows much that he did not learn from Weill. His signal achievement since being tossed out of Citigroup consisted of giving BancOne the "Weill treatment." It is not yet clear he's done anything more at Chase, nor that he is capable of more, either.
It would take at least four years of consistently strong revenue growth at Chase, with corresponding NIAT growth, before I would believe that Dimon is capable of leading a financial services conglomerate to consistently superior performance, either fundamentally or technically."
Of course, at that time, nobody foresaw a shrinking 2008. As a matter of fact, Chase's revenues and profits did shrink that year. But these things are relative, so I won't be unfair and criticize Dimon for not achieving the impossible last year.
However, a quick look at the nearby price chart for Chase and the S&P500 Index for the past five years shows that the bank has not been significantly better than the index. And to the extent it's marginally outperformed after five years, which is now Dimon's tenure as CEO, it clearly underperformed for 2007 & 2008.
So, simply by looking at equity prices, you can see Dimon hardly merited all the accolades.
Now, we have a "Heard On the Street" column in yesterday's Wall Street Journal calling attention to the reality of Chase's performance. It read,
"Much has happened over the past two years that will benefit J.P. Morgan's earnings. However, going into the crash, the bank showed lackluster returns in several areas.
Once rivals reassert themselves, J.P. Morgan mightn't look so impressive.
Even so, investors need to track closely how the once-mediocre investment bank and once-patchy retail-banking franchise are doing."
I could not agree more.
As the nearby price chart, with BofA, Wells Fargo, Citigroup and Goldman added, shows, Chase still operates in the shadow of the newly-baptised commercial bank, Goldman Sachs.
Leaving aside the hapless Citi and BofA, Chase's one-time international, US-based money center bank competitors, only Wells and Goldman remain as viable, healthy rivals.
Wells Fargo's performance actually apes that of Chase. But the real class act in a badly-hit sector is still Goldman Sachs. Over the five-year period, Goldman rose further and fell less-far than any of the other commercial banks. Granted, Goldman hasn't even been a commercial bank for more than a year.
Never the less, the former investment bank remains poised to outperform as the sector is revived by somewhat healthier credit markets. Meanwhile, Chase and Wells Fargo will continue to grapple with the typical large commercial bank woes of credit card and mortgage delinquencies and defaults.
It's no surprise to me, and other friends who were once Chase executives, that the bank fared well in bad times. Simply put, it's been a laggard ever since David Rockefeller's attempts to diversify the bank in the 1970s and '80s were rebuffed. Few now remember David's attempt to buy Dial, a consumer loan business.
Since then, Chase has been late to every lending party, and sustained a few self-inflicted wounds, as well. It's very ineptness at financial innovation is what kept Dimon from racing into the mortgage-backed securities party like Citigroup.
As the Journal column astutely notes, Chase has never been a banking sector performance leader in healthy, growth-oriented times. At best, it's been hurt less badly in downturns.
I don't think Dimon's slash-and-burn style has changed that. Sure, he scooped up a few other banks which the markets and FDIC obligingly set before him. Having not blown out a huge hole in Chase's own balance sheet with ill-advised SIVs and such, Dimon had some powder left to take on the branches and deposits of WaMu. Bear Stearns was basically a gift from the federal government.
It remains to be seen, once more, whether Dimon is capable of besting the sector's other competitors, and the S&P, over a longish term in healthy markets.
Saturday, October 11, 2008
Jamie Dimon's Stupid Remarks on "Mark to Market"
I worked for the Chase Manhattan Bank in the late 1980s. During that time, while reporting to the company's chief planning officer, I was fortunate to be exposed to all the Vice-Chairmen, COOs, CEOs and Chairmen of the firm.
Thus, I had close contact with then-Chairman Bill Butcher and President Tom Labrecque. Particularly the latter, as a long-running project necessitated periodic contact with him over several years.
Between my personal interactions with the senior managers of the bank, and its performance during the period, I would say that these were not particularly effective managers. Nor, outside of their original respective areas of competence, did they give any evidence of being smart about managing a large company, let alone a bank.
Butcher had been a corporate lending officer. A salesman. He had no particular expertise in management.
Labrecque had been an accountant at the bank. Apparently judged unsuitable for credit training, he was never a line lending officer, but, rather, a bean counter in a then-obscure funding unit engaged in trading Treasuries. His rise had much to do with some accidents which left positions above him unexpectedly open. And the rise of importance of his unit, as Fed Chairman Paul Volcker took the lid off of interest rates during the Carter era.
My point is, just because a person is the CEO or Chairman of Chase (Manhattan) Bank, or its successor banks, is absolutely no reason, alone, to accord him credibility beyond his actual, original area of business training or practice. Neither Butcher, nor Labrecque were, in the event, smart men when it came to operating one of the nation's largest money center banks.
Thus, I had close contact with then-Chairman Bill Butcher and President Tom Labrecque. Particularly the latter, as a long-running project necessitated periodic contact with him over several years.
Between my personal interactions with the senior managers of the bank, and its performance during the period, I would say that these were not particularly effective managers. Nor, outside of their original respective areas of competence, did they give any evidence of being smart about managing a large company, let alone a bank.
Butcher had been a corporate lending officer. A salesman. He had no particular expertise in management.
Labrecque had been an accountant at the bank. Apparently judged unsuitable for credit training, he was never a line lending officer, but, rather, a bean counter in a then-obscure funding unit engaged in trading Treasuries. His rise had much to do with some accidents which left positions above him unexpectedly open. And the rise of importance of his unit, as Fed Chairman Paul Volcker took the lid off of interest rates during the Carter era.
My point is, just because a person is the CEO or Chairman of Chase (Manhattan) Bank, or its successor banks, is absolutely no reason, alone, to accord him credibility beyond his actual, original area of business training or practice. Neither Butcher, nor Labrecque were, in the event, smart men when it came to operating one of the nation's largest money center banks.
The nearby chart shows the equity prices of Chase, Citigroup, from where Dimon and his mentor, Sandy Weill, hailed, and the S&P500 Index since 1977.
In that time, neither bank has managed to outperform the index. So much for vaunted wisdom from the CEOs of these two financial giants. Why would you expect brilliance from CEOs of companies that can't manage to outperform the broad index over 30 years?
Especially Chase, which has never outperformed the index?
After many mergers and acquisitions involving more than half of the major banks which existed on the island of Manhattan in 1990, and several in the Midwest, we come to Chase's current CEO, Jamie Dimon. The latest in a line of undistinguished CEOs of the large US money center bank.
There's nothing to indicate he's any smarter than his predecessors, Butcher and Labrecque, or even the undistinguished, though workmanlike head of the Chemical Bank which took over Chase, Walter Shipley.
On Friday, I heard a news story on CNBC alleging that Jamie had come out explicitly in favor of 'mark to market' as a valuation methodology.
Many have claimed this approach, mandated, in its simplest sense, by the Sarbanes-Oxley bill, in a fit of post-Enron pique, is largely responsible for the rapid evaporation of value from the balance sheets of US financial institutions in the past 15 months. In various posts on this blog, I have argued as much, too.
Let's recall from whence Jamie hails, professionally. As I wrote in this post, nearly a year ago,
"If you are familiar with Dimon's mentor, Sandy Weill's origins, then none of this should surprise you. Weill was the original low-cost consolidator of the brokerage industry wire houses in the 1970s and '80s. He was never an investment banker. Rather, his specialty was combining commodity-like retail brokers, combining back offices, sometimes improving technology, and reaping the improved margins. Eventually, he ran out of wire houses to buy and consolidate, so he sold out to American Express.
By the time he was ousted from Citigroup, Weill had demonstrated that he had learned no new tricks since he lost control of ShearsonLehmanBrothers to Amex. Citi's topsy-turvy growth and increased complexity resulted in serious lapses in risk management and attention to business details. Significant growth was not something Citi achieved, sans acquisition, under Weill.
Personally, I doubt that Dimon knows much that he did not learn from Weill. His signal achievement since being tossed out of Citigroup consisted of giving BancOne the "Weill treatment." It is not yet clear he's done anything more at Chase, nor that he is capable of more, either."
Lofty current title notwithstanding, Dimon is, in reality, little more than a fixer's fixer. Sandy Weill's erstwhile young bagman/apprentice.
I believe no credibility whatsoever should be accorded Dimon's pronouncements about anything beyond Chase's next quarter's performance, if that.
He's no leading light of finance, much less business in general. There is absolutely nothing in Dimon's background to suggest or give evidence that he is capable of uttering any sensible words on the concept of valuation and 'mark to market' rules thereof.
On Friday, I heard a news story on CNBC alleging that Jamie had come out explicitly in favor of 'mark to market' as a valuation methodology.
Many have claimed this approach, mandated, in its simplest sense, by the Sarbanes-Oxley bill, in a fit of post-Enron pique, is largely responsible for the rapid evaporation of value from the balance sheets of US financial institutions in the past 15 months. In various posts on this blog, I have argued as much, too.
Let's recall from whence Jamie hails, professionally. As I wrote in this post, nearly a year ago,
"If you are familiar with Dimon's mentor, Sandy Weill's origins, then none of this should surprise you. Weill was the original low-cost consolidator of the brokerage industry wire houses in the 1970s and '80s. He was never an investment banker. Rather, his specialty was combining commodity-like retail brokers, combining back offices, sometimes improving technology, and reaping the improved margins. Eventually, he ran out of wire houses to buy and consolidate, so he sold out to American Express.
By the time he was ousted from Citigroup, Weill had demonstrated that he had learned no new tricks since he lost control of ShearsonLehmanBrothers to Amex. Citi's topsy-turvy growth and increased complexity resulted in serious lapses in risk management and attention to business details. Significant growth was not something Citi achieved, sans acquisition, under Weill.
Personally, I doubt that Dimon knows much that he did not learn from Weill. His signal achievement since being tossed out of Citigroup consisted of giving BancOne the "Weill treatment." It is not yet clear he's done anything more at Chase, nor that he is capable of more, either."
Lofty current title notwithstanding, Dimon is, in reality, little more than a fixer's fixer. Sandy Weill's erstwhile young bagman/apprentice.
I believe no credibility whatsoever should be accorded Dimon's pronouncements about anything beyond Chase's next quarter's performance, if that.
He's no leading light of finance, much less business in general. There is absolutely nothing in Dimon's background to suggest or give evidence that he is capable of uttering any sensible words on the concept of valuation and 'mark to market' rules thereof.
Monday, March 17, 2008
On Bear Stearns' Demise & Its Purchase By Chase- Part One
Just two weeks ago today, I wrote this post on commercial banking concentration. Little did I know that I would be so close to the truth, and by such a short amount of time.
Rather than the collapse of a commercial bank, it is an investment bank/brokerage- Bear Stearns- that has failed. But the thrust is the same, as has become clear from comments of many pundits in the last 24 hours. And from an analysis of the current condition of financial markets.
As I most recently wrote on the 'mark to market' issue here, a few days after the other linked post,
"As I began to suggest in my earlier post, businesses and companies in the business of trading and investing with the constant expectation of selling and buying securities should probably mark their assets to market daily. If that causes them to use less leverage or avoid exotic structured finance instruments, so be it.
Financial service businesses intending to hold assets, whether they be whole loans, exotics, or what have you, beyond a pre-determined duration, should probably be able to value those assets on the basis of performance, rather than immediate market value."
In essence, Bear Stearns got caught in the former situation, holding large amounts of exotic securities, for which there is no current 'market,' with borrowed money. Between increased demands for collateral and worries over its liquidity, its counterparty risk made it an unsustainable trading entity.
Goodbye Bear Stearns.
Because of the genesis of this current financial turmoil, exotic, somewhat opaque structured finance instruments, I wrote this post last September. In it, I opined,
"Now, with this latest credit market debacle, the first since really heavily asset securitization of mortgages and corporate loans have kicked in, we are learning that there are market conditions under which non-banks may not be viable for very long, if they originate and/or hold volatile fixed income assets.
It's an interesting phenomenon. Who would have guessed that there was life in the old commercial bank model, yet?
Back in my days at Chase Manhattan, our group's boss, Corporate Planning & Development SVP Gerry Weiss, attempted a number of efforts calculated to move Chase into some sort of arrangement with a US investment bank, in order to, as he put it, so to speak,
'get their management in charge of our assets, with the advantages of our regulatory structure.'
Therefore, it's ironic to me that something like this might happen. Sure, Sandy Weill agglomerated a bunch of different piece parts to form the now-unwieldy Citi bank. But Salomon and Smith Barney are now almost lost inside of it. And the bankers remained in power, as the investment banks they took over had been weakened by various events.
Now, it would be possible to see a Chase or BofA take Bear Stearns, for example.
An interesting development in the quest for a viable, efficient, profitable organizational structure with which to transact fixed income businesses."
So I guess I did sort of foresee this development. But, being no particular fan of Jamie Dimon, I wouldn't give him too much credit just yet.
For one, Chase is the only true money center bank left standing which can absorb Bear Stearns right now. Citigroup and BofA both damaged themselves with unwise capital markets activities last year.
Second, it's not clear that Chase has really bought much of value. At $2/share, it would seem that the bank doesn't put more than notional value on the 'assets' it has purchased. Mostly, it seems this is a favor to the Fed and the US banking system, as a sort of quid pro quo for the status Chase enjoys as one of the largest US commercial and money center banks.
Now there are some who allege that Bear's CDO book will eventually become quite valuable, yielding a profit windfall to Chase, and, thus, making Dimon look like a prescient hero in a few years.
If that's true, though, again, it's not through any particular wisdom of Dimon's that this has occurred. If Citigroup had been healthier, there would have been a bidding war. And what is the fairness of making Bear Stearns mark such a book to a non-existent, zero-value market, force it to sell itself to Chase for a song, only to allow Chase to hold zero-value instruments in case they do, and, probably will rebound in value over time?
According to CNBC this morning, the Fed preferred Chase to J.C. Flowers as the rescuer of Bear Stearns.
Why? Perhaps Flowers correctly understood the longer-term value of Bear's exotics, and was willing to pay a bit more than $2/share to own them. In fact, it was reported that Chase had bid up to $15/share when competing with Flowers to buy Bear.
I'll add some more thoughts shortly in part two of this post topic.
Rather than the collapse of a commercial bank, it is an investment bank/brokerage- Bear Stearns- that has failed. But the thrust is the same, as has become clear from comments of many pundits in the last 24 hours. And from an analysis of the current condition of financial markets.
As I most recently wrote on the 'mark to market' issue here, a few days after the other linked post,
"As I began to suggest in my earlier post, businesses and companies in the business of trading and investing with the constant expectation of selling and buying securities should probably mark their assets to market daily. If that causes them to use less leverage or avoid exotic structured finance instruments, so be it.
Financial service businesses intending to hold assets, whether they be whole loans, exotics, or what have you, beyond a pre-determined duration, should probably be able to value those assets on the basis of performance, rather than immediate market value."
In essence, Bear Stearns got caught in the former situation, holding large amounts of exotic securities, for which there is no current 'market,' with borrowed money. Between increased demands for collateral and worries over its liquidity, its counterparty risk made it an unsustainable trading entity.
Goodbye Bear Stearns.
Because of the genesis of this current financial turmoil, exotic, somewhat opaque structured finance instruments, I wrote this post last September. In it, I opined,
"Now, with this latest credit market debacle, the first since really heavily asset securitization of mortgages and corporate loans have kicked in, we are learning that there are market conditions under which non-banks may not be viable for very long, if they originate and/or hold volatile fixed income assets.
It's an interesting phenomenon. Who would have guessed that there was life in the old commercial bank model, yet?
Back in my days at Chase Manhattan, our group's boss, Corporate Planning & Development SVP Gerry Weiss, attempted a number of efforts calculated to move Chase into some sort of arrangement with a US investment bank, in order to, as he put it, so to speak,
'get their management in charge of our assets, with the advantages of our regulatory structure.'
Therefore, it's ironic to me that something like this might happen. Sure, Sandy Weill agglomerated a bunch of different piece parts to form the now-unwieldy Citi bank. But Salomon and Smith Barney are now almost lost inside of it. And the bankers remained in power, as the investment banks they took over had been weakened by various events.
Now, it would be possible to see a Chase or BofA take Bear Stearns, for example.
An interesting development in the quest for a viable, efficient, profitable organizational structure with which to transact fixed income businesses."
So I guess I did sort of foresee this development. But, being no particular fan of Jamie Dimon, I wouldn't give him too much credit just yet.
For one, Chase is the only true money center bank left standing which can absorb Bear Stearns right now. Citigroup and BofA both damaged themselves with unwise capital markets activities last year.
Second, it's not clear that Chase has really bought much of value. At $2/share, it would seem that the bank doesn't put more than notional value on the 'assets' it has purchased. Mostly, it seems this is a favor to the Fed and the US banking system, as a sort of quid pro quo for the status Chase enjoys as one of the largest US commercial and money center banks.
Now there are some who allege that Bear's CDO book will eventually become quite valuable, yielding a profit windfall to Chase, and, thus, making Dimon look like a prescient hero in a few years.
If that's true, though, again, it's not through any particular wisdom of Dimon's that this has occurred. If Citigroup had been healthier, there would have been a bidding war. And what is the fairness of making Bear Stearns mark such a book to a non-existent, zero-value market, force it to sell itself to Chase for a song, only to allow Chase to hold zero-value instruments in case they do, and, probably will rebound in value over time?
According to CNBC this morning, the Fed preferred Chase to J.C. Flowers as the rescuer of Bear Stearns.
Why? Perhaps Flowers correctly understood the longer-term value of Bear's exotics, and was willing to pay a bit more than $2/share to own them. In fact, it was reported that Chase had bid up to $15/share when competing with Flowers to buy Bear.
I'll add some more thoughts shortly in part two of this post topic.
Thursday, January 03, 2008
Joe Kernen's Selection for Businessman of the Year 2007
On Monday morning, the co-anchors of CNBC's Squawkbox program each selected a 'businessman of the year' for 2007.
I don't know who Carl what's-his-name chose, but I recall Becky Quick selecting a fund manager who shorted mortgage-related instruments with great success. She was going to choose Warren Buffett because Berkshire had a roughly 28% return. The fund manager did much, much better.
Joe Kernen chose Jamie Dimon, CEO of Chase. According to Kernen, with whom I typically agree, Dimon's firm had 2007 total return of -10%, making it a relative star versus Citigroup's roughly -50% return. As I wrote here recently, much of Chase's outperformance over the past five years occurred before Dimon showed up. This year, the company lost its shareholders about 10% of their value.
How about looking among the 10 best large-cap total return performers this year, Joe? I held Apple and National Oilwell Varco, as I noted in this post. Both were among that group.
Why not name Steve Jobs as the businessman of 2007? He introduced a raft of new products, repriced others to throw his competition off balance, and still managed to outperform the S&P500 Index for his shareholders by a wide, wide margin.
But the so-so CEO of a mediocre money center bank? I don't think so.
I like you a lot Joe, but you could have done much better than that.
I don't know who Carl what's-his-name chose, but I recall Becky Quick selecting a fund manager who shorted mortgage-related instruments with great success. She was going to choose Warren Buffett because Berkshire had a roughly 28% return. The fund manager did much, much better.
Joe Kernen chose Jamie Dimon, CEO of Chase. According to Kernen, with whom I typically agree, Dimon's firm had 2007 total return of -10%, making it a relative star versus Citigroup's roughly -50% return. As I wrote here recently, much of Chase's outperformance over the past five years occurred before Dimon showed up. This year, the company lost its shareholders about 10% of their value.
How about looking among the 10 best large-cap total return performers this year, Joe? I held Apple and National Oilwell Varco, as I noted in this post. Both were among that group.
Why not name Steve Jobs as the businessman of 2007? He introduced a raft of new products, repriced others to throw his competition off balance, and still managed to outperform the S&P500 Index for his shareholders by a wide, wide margin.
But the so-so CEO of a mediocre money center bank? I don't think so.
I like you a lot Joe, but you could have done much better than that.
Saturday, December 01, 2007
Citigroup-Chase Merger: An Idiotic Idea
Thursday's Wall Street Journal carried a short piece about this idiotic notion in its 'breakingviews' column. Article authors Rob Cox and Robery Cyran float the absurd notion that two of the countries three largest banks could easily merge, and, further, there would not be regulatory and Congressional outcry.
Apparently, according to Messrs. Cox and Cyran, the mere fact that Citi currently lacks a CEO, and Chase does not, is worthy of advancing the idea of this merger. Further, they are obviously enamored of Dimon, Chase's CEO, writing,
"Not only did Mr. Dimon spend more than a decade carrying Sandy Weill's bags on the shopping spree that build Citigroup, he also has made the financial-supermarket model work for his current investors. Citi shares are down 31% in the past four years, J.P. Morgan's are up 24%."
As I wrote in this post in late October,
"What I believe has occurred at Chase is an initial reduction of discretionary and, then, core expenses by Dimon soon after his arrival at the bank. This temporarily swelled operating margins, as revenue growth crested against a lower expense base. As revenue growth has been affected by the cost-cutting, it has slowed.
Personally, I doubt that Dimon knows much that he did not learn from Weill. His signal achievement since being tossed out of Citigroup consisted of giving BancOne the "Weill treatment." It is not yet clear he's done anything more at Chase, nor that he is capable of more, either.
It would take at least four years of consistently strong revenue growth at Chase, with corresponding NIAT growth, before I would believe that Dimon is capable of leading a financial services conglomerate to consistently superior performance, either fundamentally or technically."
Dimon has in no way yet proved he can grow Chase and deliver sustained, consistently superior total returns for his shareholders. To say he carried bags for Sandy Weill is no compliment, given the fate of Weill's spawn, Citigroup. "Even Chase's price curve indicates that the basis of its current five-year outperformance of the market is due largely to a few months in mid-2003. Which was prior to Dimon's arrival at Chase as CEO. Since then, it's performance has been somewhat flat, and not materially better than the index's, overall, with a significant period of falling returns, from early 2004 to late 2005."
But, beyond Dimon and Chase, the chronic underperformance of the S&P500 Index by our nation's money center banks is widespread. As I wrote in that prior post,j
But, beyond Dimon and Chase, the chronic underperformance of the S&P500 Index by our nation's money center banks is widespread. As I wrote in that prior post,j
"Commercial banking, in general, among the remaining money centers, isn't a good bet to beat the S&P500 anyway. It's not just Citi's problem.As the nearby, Yahoo-sourced price chart for Citi, Chase, BofA, Wachovia and the S&P500 for the past two years shows, none of the banks has outperformed the index. Citi is the worst, by far, Chase the best of the mediocre lot."
As my old boss and Chase Manhattan Bank Chief Planning Officer used to say,
'All you get by merging two or more mediocre money center banks is one great big mediocre money center bank.'
And probably even less than that. If you think Citi's been a mess so far, try doubling its asset size via a merger with Chase and see what happens. It'll be an unmitigated disaster.
The putative savings Cox and Cyrman ascribe to such a merger, 15% of noninterest expenses, or some $93B, is rather similar to those static models that the CBO runs when analyzing the effects of tax cuts. They assume ceteris paribus, when that won't be true.
My guess is that the the 15% estimate comes from mergers of much smaller, simpler banking unions. Chase and Citi have, between them, a wide variety of businesses, many of them the backbone transactions and clearing functions which have made money center banks so special over time.
To even suggest that Dimon, whose banking background is actually quite limited, compared to his extensive time at Weill's feet during the wire house rollups, could even come near pulling off such an integration is simply laughable.
And then, honestly, who is stupid enough to think the Fed and other regulators would simply let two of the nation's largest five commercial banks, in the same city, merge?
This piece was about the wackiest I think I've seen in the Journal in ages. Don't they have better uses for their space?
This piece was about the wackiest I think I've seen in the Journal in ages. Don't they have better uses for their space?
Tuesday, October 23, 2007
Jamie Dimon's Chase: "Time To Grin?" Not So Fast.......
Last Thursday's Wall Street Journal's Money & Investing section featured a glowing, fawning article on Jamie Dimon, CEO of JP Morgan Chase, entitled "J.P. Morgan's Time To Grin." Dimon's smirking mug is prominently displayed next to a stock price chart showing Chase having a 97% rise, compared with Citi's 27%, since Dimon's "arrival" at Chase.
If you only read the article, you'll think Dimon walks on water and has miraculously led Chase to financial success while his old outfit, Citigroup, stumbles under Chuck Prince's mismanagement.
However, the Journal article contains, in my opinion, several errors in reasoning and fact. And investors are not limited to just these two choices in the equity marketplace.
From my proprietary research on equity performance, I have observed certain relationships between key variables and the ability of a company to sustain superior total return performance.
The nearby chart presents some of that information for Chase, from 2001 to the quarterly information available as of the end of last month. The table which is its source appears a little further on in this post. Both may be viewed as larger images by clicking on them.
The Journal article contends that,
"J.P. Morgan Chase & Co.'s record third-quarter earnings showed that the financial-conglomerate strategy can work.
A three-year crusade by J.P. Morgan Chief Executive James Dimon to relentlessly slash costs and invest heavily in technology and core businesses appears to pay off amid a global credit crunch that has roiled Wall Street."
First, one quarter does not a successful performance make. It certainly does not 'show that the financial conglomerate strategy can work,' over time. Merely that in one quarter, it out-earned a crippled rival.
And, by the way, commercial banks are not "Wall Street." This is a mistake no investment banker would ever make. Per my post yesterday, here, I would suggest that simply by virtue of being a commercial bank CEO, Dimon is not a Wall Street executive. He's a commercial banker. Period.
The Journal article further states,
"J.P. Morgan's financial results underscored the potential of the so-called universal bank, a model that Mr. Dimon helped create under the wing of legendary deal maker Sanford Weill at Citigroup. Yet it also shows how the corporate strategy, in which assorted financial businesses are brought under one roof to balance out a bank's performance in tough times, requires a strong and nimble management in order to prosper."
I think it is far from clear that Jamie Dimon "helped create" the "so-called universal bank" under Sandy Weill. James Robinson, Weill's one-time boss, at American Express, failed with the 'financial supermarket' model in the 1970s and '80s. Buying ShearsonLehmanBrothers was one of the steps that disproved the model. Renaming it a 'so-called universal bank' doesn't really change much about it.
The original idea, which Weill also subsequently borrowed from Robinson, was to unite all financial service businesses under one 'umbrella,' pun intended, i.e., the old red Travelers Insurance umbrella logo that Weill so loved. Cross-selling to hopefully capitalize on presumed brand loyalty of financial service customers has been the real driving force of financial services diversification. And it's never worked yet. Not even the purer European 'universal banks' were able to sustain profitable growth, neither prior to their US appearances, nor subsequently.
Thus, I find myself in disagreement with the Journal article's authors regarding Chase's imminent prospects.
To the contrary, I believe that the trends displayed in the chart, drawn from original Compustat data, depict a bank already in a financial performance stall.
If you only read the article, you'll think Dimon walks on water and has miraculously led Chase to financial success while his old outfit, Citigroup, stumbles under Chuck Prince's mismanagement.
However, the Journal article contains, in my opinion, several errors in reasoning and fact. And investors are not limited to just these two choices in the equity marketplace.
From my proprietary research on equity performance, I have observed certain relationships between key variables and the ability of a company to sustain superior total return performance.
The nearby chart presents some of that information for Chase, from 2001 to the quarterly information available as of the end of last month. The table which is its source appears a little further on in this post. Both may be viewed as larger images by clicking on them.The Journal article contends that,
"J.P. Morgan Chase & Co.'s record third-quarter earnings showed that the financial-conglomerate strategy can work.
A three-year crusade by J.P. Morgan Chief Executive James Dimon to relentlessly slash costs and invest heavily in technology and core businesses appears to pay off amid a global credit crunch that has roiled Wall Street."
First, one quarter does not a successful performance make. It certainly does not 'show that the financial conglomerate strategy can work,' over time. Merely that in one quarter, it out-earned a crippled rival.
And, by the way, commercial banks are not "Wall Street." This is a mistake no investment banker would ever make. Per my post yesterday, here, I would suggest that simply by virtue of being a commercial bank CEO, Dimon is not a Wall Street executive. He's a commercial banker. Period.
The Journal article further states,
"J.P. Morgan's financial results underscored the potential of the so-called universal bank, a model that Mr. Dimon helped create under the wing of legendary deal maker Sanford Weill at Citigroup. Yet it also shows how the corporate strategy, in which assorted financial businesses are brought under one roof to balance out a bank's performance in tough times, requires a strong and nimble management in order to prosper."
I think it is far from clear that Jamie Dimon "helped create" the "so-called universal bank" under Sandy Weill. James Robinson, Weill's one-time boss, at American Express, failed with the 'financial supermarket' model in the 1970s and '80s. Buying ShearsonLehmanBrothers was one of the steps that disproved the model. Renaming it a 'so-called universal bank' doesn't really change much about it.
The original idea, which Weill also subsequently borrowed from Robinson, was to unite all financial service businesses under one 'umbrella,' pun intended, i.e., the old red Travelers Insurance umbrella logo that Weill so loved. Cross-selling to hopefully capitalize on presumed brand loyalty of financial service customers has been the real driving force of financial services diversification. And it's never worked yet. Not even the purer European 'universal banks' were able to sustain profitable growth, neither prior to their US appearances, nor subsequently.
Thus, I find myself in disagreement with the Journal article's authors regarding Chase's imminent prospects.
To the contrary, I believe that the trends displayed in the chart, drawn from original Compustat data, depict a bank already in a financial performance stall.Look at growth in revenues and NIAT. Annual revenue growth has been declining since its peak of 50.5% in 2005. It is now down to 18.5%. Similarly, annual NIAT growth declined by more than half in 2007, from 70% in 2006.
Both of these trends are not indicative of long-term consistently superior total return performance.
Over the past five years, Chase has outperformed the S&P, 28.5% to 15.4% per annum. Yet it has not done so consistently. The bank has bettered the index in three of the past five years, but its annual returns oscillate wildly from a high of 90% to a low of -11%.
This leads us to examine the volatility of those total returns. Over the past five years, Chase's return standard deviation is 40%, versus the S&P's 5%. It's common knowledge that holding just one stock will expose you to far more volatility than holding the market, via an index such as the S&P. That said, a simple adjustment of dividing Chase's and the S&P's five-year average total returns by a denominator of one plus their standard deviations yields risk-adjusted total returns only 3 percentage points apart.
What I believe has occurred at Chase is an initial reduction of discretionary and, then, core expenses by Dimon soon after his arrival at the bank. This temporarily swelled operating margins, as revenue growth crested against a lower expense base. As revenue growth has been affected by the cost-cutting, it has slowed.
NIAT growth, as a function of the temporary margin expansion, swelled in 2005 and 2006, only to fall precipitously this past year.
If you are familiar with Dimon's mentor, Sandy Weill's origins, then none of this should surprise you. Weill was the original low-cost consolidator of the brokerage industry wire houses in the 1970s and '80s. He was never an investment banker. Rather, his specialty was combining commodity-like retail brokers, combining back offices, sometimes improving technology, and reaping the improved margins. Eventually, he ran out of wire houses to buy and consolidate, so he sold out to American Express.
By the time he was ousted from Citigroup, Weill had demonstrated that he had learned no new tricks since he lost control of ShearsonLehmanBrothers to Amex. Citi's topsy-turvy growth and increased complexity resulted in serious lapses in risk management and attention to business details. Significant growth was not something Citi achieved, sans acquisition, under Weill.
Personally, I doubt that Dimon knows much that he did not learn from Weill. His signal achievement since being tossed out of Citigroup consisted of giving BancOne the "Weill treatment." It is not yet clear he's done anything more at Chase, nor that he is capable of more, either.
It would take at least four years of consistently strong revenue growth at Chase, with corresponding NIAT growth, before I would believe that Dimon is capable of leading a financial services conglomerate to consistently superior performance, either fundamentally or technically.
Monday, October 22, 2007
On The M-LEC Master SIV Fund: Part Two- Commercial Bank CEOs
On Saturday, I wrote this post, discussing the mechanics of the US Treasury's proposed financial sector M-LEC, or Master- Liquidity Enhancement Conduit- a fund to be owned by a consortium of US financial sector firms. Having thus treated structural aspect of the current SIV problem, and a proposed solution, in this post, I want to discuss who is "in," and who is still "out" on subscribing to this "solution."
Thursday's Wall Street Journal featured a fawning piece on Chase CEO Jamie Dimon, including this passage,
"Mr. Dimon defended the bank's decision to join Citigroup and Bank of America Corp. in forming a massive investment fund that is aimed at shoring up sputtering credit markets. J.P. Morgan, (i.e., Chase) doesn't own any of the structured-investment vehicles that are in trouble, leading some analysts to question why it is participating in a rescue plan. "It's very reasonable for J.P. Morgan to play a role in trying to help the system, and that's what this is," he said in a conference call. "
Thus, we see that the three largest US commercial banks, by asset size, are supporters of the M-LEC.
Late last week, I saw an interview on CNBC with John Mack, CEO of Morgan Stanley. He expressed reservations on just how the M-LEC would help the credit situation. I do not notice Goldman Sachs signing up, either.
So, conspicuously absent from the M-LEC list thus far, are large investment banks.
Why is this? Let me opine. In brief, it's a combination of commercial bank CEO experiences and talent, combined with a confusion of most bank CEOs regarding their priorities- shareholder returns versus financial system protection at shareholder expense.
Quite simply, as a group, US commercial bank CEOs are typically less-broadly experienced and, frankly, less 'smart,' in a business sense, than their investment banking CEO counterparts. Stretching back to the 1970s, I think only David Rockefeller and Walter Wriston were, among commercial bank CEOs, possibly on a par with their investment bank peers in terms of vision and business acumen. Even then, these two were encumbered by the inherent obligation, as leaders of large US banks, to act to protect the banking system, rather than focus primarily on their shareholders' interests.
A look at the nearby Yahoo-sourced price chart since the early 1990s for Goldman Sachs (public since 1999), Morgan Stanley, Chase, Citigroup, Wells Fargo, BofA, Wachovia and the S&P500 confirms this.
Back in the early 1980s, as a Chase Manhattan officer, I watched Chase, Citibank and BofA (California- the original one, run by Sam Armacost) all take huge write-downs for billions of dollars of bad loans which were the eventual result of petro-dollar recycling from the oil crisis of the mid-late 1970s.
Several of us in the Corporate Planning & Development group, all exclusively non-bankers hired by SVP Gerry Weiss, former senior strategic planner at GE, observed that, smart as Wriston and Rockefeller had been in cutting their banks in on this massive dollar flow in the form of loans to developing nations, they forgot to take a healthy risk premium off the top for Chase's and Citi's risks. We paid the price in the 1980s. Thus was spawned the following joke,
Q: How do you create a good regional bank?
A: Start with a money center bank and shrink it with loan write-offs.
Think I'm wrong? Look at the current five largest US commercial banks.
Citigroup is the ailing, mismanaged hodgepodge of acquisitions resulting from non-banker Sandy Weill's grab for the commercial bank's assets. More on this in a future post. For now, note that Weill never ran an investment bank, either. He was seen as a sort of financial version of a Seventh Avenue rag merchant, combining and running retail 'wire houses.' He took ShearsonLehman in and out of American Express, but had to buy Salomon Brothers to actually get an investment bank.
Chase is the result of several mega-mergers of the other mediocre New York money center banks- Manufacturers Hanover, Chemical, JP Morgan- and struggling midwest banks that had once been, separately, BancOne, First Bank of Chicago and, I believe, National Bank of Detroit.
Bank of America is the name appropriated for itself when the one-time North Carolina National Bank, a/k/a NCNB, then Nationsbank, gobbled up the weakened San Francisco financial giant.
Wachovia, the other surviving North Carolina regional bank of the 1980-90s, took over the third North Carolina one-time regional, First Union.
Finally, Wells Fargo is the name taken by a Minnesota bank conglomerate, resulting from the takeover of the crippled Norwest by First Bank System, when that combine grabbed the remaining west coast commercial bank.
The original leaders of all of the large US commercial banks of the 1990s lost their companies to acquirers. The US regional banks which avoided the devastating effects of the LDC loan losses of the late 1980s, plus the real estate development problems of the early 1990s, consolidated the sector and took the marquee names of US commercial banking. So we now have the same names, but with a different CEO lineage. Mostly CEOs supplied by regional banks or second-tier securities trading firms.
It's my contention that the commercial banks are backing the M-LEC because they simply aren't as good a group of CEOs as the investment banks. They will obligingly put their shareholders' capital at risk because they feel they must, as part of the 'bargain' for having access to the Fed discount window.
"had all the fun I can stand in investment banking at the moment."
BofA had reported something like a 90% drop in quarter-over-year-ago-quarter in investment and corporate banking income. You almost feel sorry for Lewis. He's so over-matched when he attempts to use the bank's enormous balance sheet to try to muscle into the rough-and-tumble capital markets. Maybe the Countrywide move of this summer will work out. Maybe not.
John Stumpf was named Chief Executive Officer in June 2007, elected to Wells Fargo’s Board of Directors in June 2006, and has been President since August 2005. A 25-year veteran of the company, he joined the former Norwest Corporation (predecessor of Wells Fargo) in 1982 in the loan administration department and then became senior vice president and chief credit officer for Norwest Bank, N.A., Minneapolis. He held a number of management positions at Norwest Bank Minneapolis and Norwest Bank Minnesota before assuming responsibility for Norwest Bank Arizona in 1989. He was named regional president for Norwest Banks in Colorado/Arizona in 1991. From 1994 to 1998, he was regional president for Norwest Bank Texas. During his four years in that position, he led Norwest’s acquisition of 30 Texas banks with total assets of more than $13 billion. In 1998, with the merger of Norwest Corporation and Wells Fargo & Company, he became head of the Southwestern Banking Group (Arizona, New Mexico and Texas). Two years later he became head of the new Western Banking Group (Arizona, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah, Washington and Wyoming). In 2000, he led the integration of Wells Fargo’s acquisition of the $23 billion First Security Corporation, based in Salt Lake City. In May 2002, he was named Group EVP of Community Banking.
So, there you have it. Lewis, Prince, Dimon, Stumpf and Thompson. The five largest US commercial bank CEOs. Most have careers almost entirely with their current employer. Prince was an attorney at a steel company, then a loan company bought by his current employer. Dimon was apprenticed to a wire house bottom-fisher, Sandy Weill, until Sandy fused the modern Citigroup together, causing massive infighting between four cultures- insurance, investment banking, commercial banking, and retail securities. Then Dimon got himself ousted and headed for the relative safety of an ailing, once-acquisitive midwest bank.
Former heads of Goldman Sachs or Morgan Stanley have become Treasury Secretaries or State Department officials. Sometimes they depart to found or join private equity firms or hedge funds, such as Pete Petersen, Larry Fink, et. al.
Even now, as Citi's Chuck Prince's future is in doubt, the newest rising star at the firm is an asset management czar hired from.... Morgan Stanley!
As I consider the M-LEC and its supporters, I can't help but see it as essentially an attempt by the less-savvy commercial bank CEOs to stave off a fire sale of fixed income assets which they abetted by their operation of various SIVs. Meanwhile, the savvier investment bank, hedge fund and private equity CEOs circle, like sharks in the water, waiting for the inevitable disgorgement of SIV assets to begin. They will wait for near-bottom prices, buy and hold and, eventually, realize tremendous profits for their risk taking.
The mere fact that the commercial bank chiefs back the M-LEC is almost enough, on its own, to convince me it's a bad idea.
In keeping with the overall theme of this blog, perhaps the concluding observation is that you can short commercial bank stocks, and buy publicly-traded investment banks. Even a handful of private equity groups.
Thursday's Wall Street Journal featured a fawning piece on Chase CEO Jamie Dimon, including this passage,
"Mr. Dimon defended the bank's decision to join Citigroup and Bank of America Corp. in forming a massive investment fund that is aimed at shoring up sputtering credit markets. J.P. Morgan, (i.e., Chase) doesn't own any of the structured-investment vehicles that are in trouble, leading some analysts to question why it is participating in a rescue plan. "It's very reasonable for J.P. Morgan to play a role in trying to help the system, and that's what this is," he said in a conference call. "
Thus, we see that the three largest US commercial banks, by asset size, are supporters of the M-LEC.
Late last week, I saw an interview on CNBC with John Mack, CEO of Morgan Stanley. He expressed reservations on just how the M-LEC would help the credit situation. I do not notice Goldman Sachs signing up, either.
So, conspicuously absent from the M-LEC list thus far, are large investment banks.
Why is this? Let me opine. In brief, it's a combination of commercial bank CEO experiences and talent, combined with a confusion of most bank CEOs regarding their priorities- shareholder returns versus financial system protection at shareholder expense.
Quite simply, as a group, US commercial bank CEOs are typically less-broadly experienced and, frankly, less 'smart,' in a business sense, than their investment banking CEO counterparts. Stretching back to the 1970s, I think only David Rockefeller and Walter Wriston were, among commercial bank CEOs, possibly on a par with their investment bank peers in terms of vision and business acumen. Even then, these two were encumbered by the inherent obligation, as leaders of large US banks, to act to protect the banking system, rather than focus primarily on their shareholders' interests.A look at the nearby Yahoo-sourced price chart since the early 1990s for Goldman Sachs (public since 1999), Morgan Stanley, Chase, Citigroup, Wells Fargo, BofA, Wachovia and the S&P500 confirms this.
Back in the early 1980s, as a Chase Manhattan officer, I watched Chase, Citibank and BofA (California- the original one, run by Sam Armacost) all take huge write-downs for billions of dollars of bad loans which were the eventual result of petro-dollar recycling from the oil crisis of the mid-late 1970s.
Several of us in the Corporate Planning & Development group, all exclusively non-bankers hired by SVP Gerry Weiss, former senior strategic planner at GE, observed that, smart as Wriston and Rockefeller had been in cutting their banks in on this massive dollar flow in the form of loans to developing nations, they forgot to take a healthy risk premium off the top for Chase's and Citi's risks. We paid the price in the 1980s. Thus was spawned the following joke,
Q: How do you create a good regional bank?
A: Start with a money center bank and shrink it with loan write-offs.
Think I'm wrong? Look at the current five largest US commercial banks.
Citigroup is the ailing, mismanaged hodgepodge of acquisitions resulting from non-banker Sandy Weill's grab for the commercial bank's assets. More on this in a future post. For now, note that Weill never ran an investment bank, either. He was seen as a sort of financial version of a Seventh Avenue rag merchant, combining and running retail 'wire houses.' He took ShearsonLehman in and out of American Express, but had to buy Salomon Brothers to actually get an investment bank.
Chase is the result of several mega-mergers of the other mediocre New York money center banks- Manufacturers Hanover, Chemical, JP Morgan- and struggling midwest banks that had once been, separately, BancOne, First Bank of Chicago and, I believe, National Bank of Detroit.
Bank of America is the name appropriated for itself when the one-time North Carolina National Bank, a/k/a NCNB, then Nationsbank, gobbled up the weakened San Francisco financial giant.
Wachovia, the other surviving North Carolina regional bank of the 1980-90s, took over the third North Carolina one-time regional, First Union.
Finally, Wells Fargo is the name taken by a Minnesota bank conglomerate, resulting from the takeover of the crippled Norwest by First Bank System, when that combine grabbed the remaining west coast commercial bank.
The original leaders of all of the large US commercial banks of the 1990s lost their companies to acquirers. The US regional banks which avoided the devastating effects of the LDC loan losses of the late 1980s, plus the real estate development problems of the early 1990s, consolidated the sector and took the marquee names of US commercial banking. So we now have the same names, but with a different CEO lineage. Mostly CEOs supplied by regional banks or second-tier securities trading firms.
It's my contention that the commercial banks are backing the M-LEC because they simply aren't as good a group of CEOs as the investment banks. They will obligingly put their shareholders' capital at risk because they feel they must, as part of the 'bargain' for having access to the Fed discount window.
You can't accuse that bunch of being broad-minded, nor good at capitalizing on financial opportunity. In my opinion, they are just too narrowly experienced. Here, for example, are the company biographies of the CEOs of America's five largest commercial banks.
Ken Lewis, BofA CEO
Lewis has been chief executive officer since 2001. He joined North Carolina National Bank (NCNB, predecessor to NationsBank and Bank of America) in 1969 as a credit analyst in Charlotte and served as corporate banking officer and Western Area director in the U.S. Department before being named manager of NCNB’s International Banking Corporation in New York in 1977.
He was named Middle Market Group executive in 1983 when the group was created and was responsible for expanding and improving service to middle market companies throughout the Southeast. He led the bank’s operations in Florida and Texas in the 1980s, served as president of Consumer and Commercial Banking and chief operating officer in the 1990s, and was named chairman, chief executive officer and president of Bank of America in April of 2001.
Lewis was born April 9, 1947, in Meridian, Mississippi. He earned a bachelor’s degree in finance from Georgia State University, and is a graduate of the Executive Program at Stanford University.
To prove my point, Ken Lewis, on his investment banking 'experience' of this past summer, was quoted in Friday's Wall Street Journal as saying he,"had all the fun I can stand in investment banking at the moment."
BofA had reported something like a 90% drop in quarter-over-year-ago-quarter in investment and corporate banking income. You almost feel sorry for Lewis. He's so over-matched when he attempts to use the bank's enormous balance sheet to try to muscle into the rough-and-tumble capital markets. Maybe the Countrywide move of this summer will work out. Maybe not.
Chuck Prince, Citigroup CEO-
Mr. Prince began his career in 1975 as an attorney at U.S. Steel Corporation and in 1979 joined Commercial Credit Company (a predecessor company to Citi). He was named Executive Vice President in early 1996. Mr. Prince was made Chief Administrative Officer of Citi in early 2000 and Chief Operating Officer in early 2001. He was named Chairman and CEO of the Markets & Banking in 2002, became CEO of Citi in 2003, and was named Chairman in 2006.
Jamie Dimon, JP Morgan Chase CEO
Mr. Dimon became Chairman of the Board on December 31, 2006, and has been Chief Executive Officer and President of JPMorgan Chase since December 31, 2005. He had been President and Chief Operating Officer since JPMorgan Chase ’s merger with Bank One Corporation in July 2004. At Bank One he had been Chairman and Chief Executive Officer since March 2000. Prior to Bank One, he had held various senior executive positions at Citigroup Inc., its subsidiary, Salomon Smith Barney, and its predecessor company, Travelers Group, Inc. Mr. Dimon is a graduate of Tufts University and received an MBA from Harvard Business School.Interestingly, after Dimon's ejection from Citigroup, he didn't head for an investment bank, did he? No, he chose a sleepy, down-on-the-heels commercial bank in the midwest.
John Stumpf, Wells Fargo CEO
John Stumpf was named Chief Executive Officer in June 2007, elected to Wells Fargo’s Board of Directors in June 2006, and has been President since August 2005. A 25-year veteran of the company, he joined the former Norwest Corporation (predecessor of Wells Fargo) in 1982 in the loan administration department and then became senior vice president and chief credit officer for Norwest Bank, N.A., Minneapolis. He held a number of management positions at Norwest Bank Minneapolis and Norwest Bank Minnesota before assuming responsibility for Norwest Bank Arizona in 1989. He was named regional president for Norwest Banks in Colorado/Arizona in 1991. From 1994 to 1998, he was regional president for Norwest Bank Texas. During his four years in that position, he led Norwest’s acquisition of 30 Texas banks with total assets of more than $13 billion. In 1998, with the merger of Norwest Corporation and Wells Fargo & Company, he became head of the Southwestern Banking Group (Arizona, New Mexico and Texas). Two years later he became head of the new Western Banking Group (Arizona, Colorado, Idaho, Nevada, New Mexico, Oregon, Texas, Utah, Washington and Wyoming). In 2000, he led the integration of Wells Fargo’s acquisition of the $23 billion First Security Corporation, based in Salt Lake City. In May 2002, he was named Group EVP of Community Banking.
G. Kennedy Thompson, Wachovia Corporation CEO.
Joined the company: 1976
In current position since: 2000
Previous positions at the company: Head of Global Capital Markets; president of Florida banking operations; head of Human Resources; various other management positions
Education: B.A. in American Studies, University of North Carolina-Chapel Hill; M.B.A., Wake Forest University
So, there you have it. Lewis, Prince, Dimon, Stumpf and Thompson. The five largest US commercial bank CEOs. Most have careers almost entirely with their current employer. Prince was an attorney at a steel company, then a loan company bought by his current employer. Dimon was apprenticed to a wire house bottom-fisher, Sandy Weill, until Sandy fused the modern Citigroup together, causing massive infighting between four cultures- insurance, investment banking, commercial banking, and retail securities. Then Dimon got himself ousted and headed for the relative safety of an ailing, once-acquisitive midwest bank.
Former heads of Goldman Sachs or Morgan Stanley have become Treasury Secretaries or State Department officials. Sometimes they depart to found or join private equity firms or hedge funds, such as Pete Petersen, Larry Fink, et. al.
Even now, as Citi's Chuck Prince's future is in doubt, the newest rising star at the firm is an asset management czar hired from.... Morgan Stanley!
As I consider the M-LEC and its supporters, I can't help but see it as essentially an attempt by the less-savvy commercial bank CEOs to stave off a fire sale of fixed income assets which they abetted by their operation of various SIVs. Meanwhile, the savvier investment bank, hedge fund and private equity CEOs circle, like sharks in the water, waiting for the inevitable disgorgement of SIV assets to begin. They will wait for near-bottom prices, buy and hold and, eventually, realize tremendous profits for their risk taking.
The mere fact that the commercial bank chiefs back the M-LEC is almost enough, on its own, to convince me it's a bad idea.
In keeping with the overall theme of this blog, perhaps the concluding observation is that you can short commercial bank stocks, and buy publicly-traded investment banks. Even a handful of private equity groups.
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