Furry Brown Dog

Dedicated to the memory of my canine friend…

The closer your ties with Washington…

leave a comment »

… the larger profits you make it seems.  Today’s NYT has an article on JPM’s CEO who apparently enjoys a close relationship with those in power:

In Washington, One Bank Chief Still Holds Sway

WASHINGTON — Jamie Dimon, the head of JPMorgan Chase, will hold a meeting of his board here in the nation’s capital for the first time on Monday, with a special guest expected: the White House chief of staff, Rahm Emanuel.

Mr. Emanuel’s appearance would underscore the pull of Mr. Dimon, who amid the disgrace of his industry has emerged as President Obama’s favorite banker, and in turn, the envy of his Wall Street rivals. It also reflects a good return on what Mr. Dimon has labeled his company’s “seventh line of business” — government relations.

When Mr. Dimon was fired, he got a supportive call from Mr. Emanuel, who recalled his own firing early in the Clinton years and how he worked his way back into the inner circle.

Another Obama associate is on JPMorgan’s payroll. Mr. Dimon hired William M. Daley, a former commerce secretary and Chicago powerbroker, in 2004 as vice chairman and head of Midwest operations. Since 2007, Mr. Daley has overseen global government relations.

You see it’s not just former ties which bind Mr Dimon to the executive branch of government, but existing ties in the form of political donations:

With the crisis, Mr. Dimon, a longtime Democratic donor, has become even more politically engaged, in the process becoming perhaps the most credible voice of a discredited industry. Other onetime giants like Citigroup and Bank of America find themselves muted as wards of the state.

Citi and Bank of America recently released their earnings for the 2nd quarter. Though both made profits, a closer examination revealed that those were due almost entirely to one-time asset sales:

Citi and BofA's 2nd Quarter earnings

But with a few exceptions, results from both banks were lackluster. Citigroup would have logged a $2.4 billion net loss, marking six quarters out of the last seven in which it has been in the red, were it not for a $6.7 billion windfall from spinning off its Smith Barney brokerage unit into a joint venture with Morgan Stanley.

Bank of America mightn’t have been profitable, Mr. Miller said, without an array of one-time gains like $5.3 billion from the sale of shares in China Construction Bank Corp. and another $3.6 billion from the formation of a joint venture, although a bank presentation shown to analysts Friday indicated net income would have been $1.6 billion absent the items.

In line with what was written earlier, it seems in times of severe economic recession, the closer you align with Main Street and the overall economy, the greater losses you sustain:

While both banks said they were again turning handsome profits, the cheery headline figures masked a sober reality: the results were driven by one-time gains — bonanzas without which both banks would have lost billions.

At the heart of the banks’ troubles are hard-pressed consumers. The question, analysts said, was whether the banks have braced themselves enough for the next wave of bad debts as people slog through a long, dreary recession.

On the other hand, investment banks like Goldman and JPM are earning big money and living the high life simply because their trades don’t concern the general well-being of the US economy.  And as we learn from both Goldman Sachs and JP Morgan as above, it always helps profit margins if you are well-connected with the executive branch and Capitol Hill.  A few days ago, JPM’s Dimon was slamming new regulations on consumer credit cards designed to prevent banks from hurting already indebted American consumers by raising rates:

Mr Dimon said that while JPMorgan supported most of the reforms introduced by the US government, some of the “fast and furious” regulatory activity had gone “a little bit too far”.

He singled out the credit card provisions, which from February will constrain lenders’ ability to raise rates for risky borrowers, and rules that propose to move most derivatives trading on to exchanges as two contentious areas.

If this is the message Wall Street is getting, don’t expect the economy to rebound any time soon.  We’ll likely see a reduction of financial exposure to credit loans to consumers and businesses (to avoid bad loans) while the banks turn more to underwriting equities to exploit current low share prices. We’ll also likely see increasing appetite for risks.  In today’s financial world, banks have ways of making money even if the economy is still tanking. That’s a probably a good reason why monetary policy won’t have as much a bite as its fiscal alternative.  All monetary policy has ever done is to help investment banks finance equity trades which has very limited impact on demand, which is still declining:

Demand is still declining...


Written by defennder

July 20, 2009 at 8:04 AM

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: