What Jamie Dimon Really Said to Ben Bernanke

In a recent exchange with Ben Bernanke, JP Morgan (JPM) Chief Exective Jamie Dimon said, “I have a great fear that somebody will write a book that the things we did in the crisis will slow down the recovery.” I’ve been working on Wall Street for a couple of decades now and have become master of “Wall Street Speak”. What Jamie really said is, “I have a great fear that somebody will write a book that the things we did in the crisis will reduce our profits and potential for out-sized returns.”

Stocks, junk bonds, exotic derivatives, and leverage imply risk; brokerage firms and hedge funds should be allowed to take them. They also should be allowed to fail. Unfortunately the repeal of the depression era Glass Stegall Act during the Clinton Administration opened Pandora’s Box and the wall between investment and commercial banking activities was knocked down.

Of course with 20/20 hindsight we can see that Senator Byron Dorgan, who sounded the alarm in 1999, was right. Armed with the ability for banks to merge with insurance companies and investment houses, the seeds for the 2008 Financial Crisis were planted.

All that is water under the bridge, so what now? Fast forward to June 2011 and we now have bank lobbyists and Congress butting heads as to how much capital banks should be made to hold. Mr. Dimon contends that the higher capital requirements will reduce the banks’ ability to lend. The truth is it reduces their ability to gamble.

JP Morgan, Goldman Sachs (GS) and some of the other large houses have assembled an army of investment talent. They know that the largest potential returns exist on Wall Street, not Main Street. Give them more capital and that is where the money will go. Revenue projections for banks are flat to down with little organic growth. Investment banking and trading is where they can juice up returns and that means making big bets. Maybe Royal Bank of Canada (RY) is telling us something with the sale of their money losing US consumer banking business to PNC Financial (PNC).

Mr. Bernanke has said “he can’t pretend” that anybody knows what the right balance of regulation and capital is going to be, but that they’re going to try to strike a balance that prevents future crises and keeps banks lending.

Ben, the answer is right in front of you. Think smaller.

If these financial institutions are really “Too Big to Fail” then the solution is obvious. Banks need to look a lot more like banks and a lot less like hedge funds. The time has come to consider having these so called “Too Big to Fail” institutions divest some of their trading and derivative operations and get down to a size where failure doesn’t have the catastrophic domino effects we faced during the crisis.

Perhaps the sum of the parts is worth more than the whole. Given the recent terrible performance by the financial sector, I think shareholders are willing to consider alternatives.

Editor's Note: This article was originally published on Belpointe.