Stanford Finance Professor Anat Admati Is Making Jamie Dimon Very Nervous Again Calling His Bank Dangerous

[Gunnar Larson]

https://wallstreetonparade.com/2024/04/stanford-finance-professor-anat-admati-is-making-jamie-dimon-very-nervous-again-calling-his-bank-dangerous/


By Pam Martens and Russ Martens: April 16, 2024 ~

The Bankers' New ClothesStanford Finance Professor Anat Admati has been
valiantly attempting to save the American financial system from the
corrupting influence and disinformation campaigns of men like JPMorgan
Chase’s Jamie Dimon for more than a decade. Her voice is gaining traction
and that’s making Dimon very nervous.

Dimon has admitted in his recent letter to shareholders that his federal
banking regulators want the bank to raise 25 percent more capital. Making
banks hold more equity capital (as opposed to debt) is an issue that Admati
has made a central focus of her arguments for years.

Dimon’s bank would have a lot more equity capital if Dimon had retained the
bank’s earnings each year instead of tapping those earnings to boost the
bank’s stock price by using $117 billion of the bank’s earnings for share
buybacks over the past decade. (Retained earnings add to a bank’s equity
capital.) Dimon became a billionaire as a result of the bank’s inflated
share price, because his Board gave him the bulk of his annual compensation
in shares of stock. (In February of this year, Dimon cashed out $150
million of that stock.)


Standord Finance Professor Anat Admati

In 2011, one year before Dimon called a growing financial crisis at
JPMorgan Chase “a tempest in a teapot,” Admati penned an open letter to the
bank’s shareholders and published it at Huffington Post. In the letter, she
wrote:

“Mr. Dimon claims that higher capital requirements would increase JPM’s
cost, but his reasoning is flawed.

“It is critical first to distinguish capital and liquidity requirements.
Capital requirements are not about what banks ‘hold.’ They do not mandate
that banks passively ‘set aside,’ or ‘hold in reserve’ funds, not putting
them to productive uses. Banks’ investments are not constrained by capital
requirements. Capital requirements refer only to how banks fund themselves.
It is investors, not the banks, who hold the debt and equity (so-called
‘capital’) claims that banks issue. Liquidity requirements, by contrast, do
constrain the types of assets banks hold, and they can be costly. Capital
and liquidity requirements refer to different sides of the balance sheet.”

Less than two years after Admati had penned her warning about how Dimon was
running JPMorgan Chase, the U.S. Senate’s Permanent Subcommittee on
Investigations had concluded a nine-month investigation into how JPMorgan
Chase was using deposits from its federally-insured bank to make high-risk
gambles in derivatives in London. The scandal became known as the “London
Whale.” The Subcommittee released a scathing 300-page report on the matter,
which contained this opening paragraph:

“JPMorgan Chase & Company is the largest financial holding company in the
United States, with $2.4 trillion in assets. It is also the largest
derivatives dealer in the world and the largest single participant in world
credit derivatives markets. Its principal bank subsidiary, JPMorgan Chase
Bank, is the largest U.S. bank. JPMorgan Chase has consistently portrayed
itself as an expert in risk management with a ‘fortress balance sheet’ that
ensures taxpayers have nothing to fear from its banking activities,
including its extensive dealing in derivatives. But in early 2012, the
bank’s Chief Investment Office (CIO), which is charged with managing $350
billion in excess deposits, placed a massive bet on a complex set of
synthetic credit derivatives that, in 2012, lost at least $6.2 billion.”

Let that sink in for a moment. Less than four years after Wall Street banks
had crashed the U.S. economy in the worst financial crisis since the Great
Depression of the 1930s, and just two years after the Obama administration
had passed and signed into law the Dodd-Frank financial “reform”
legislation, JPMorgan Chase was using deposits from its federally-insured
bank to gamble in risky derivatives and lose $6.2 billion of its
depositors’ money.

In a rational banking system, Dimon would have been immediately sacked and
JPMorgan Chase’s ability to use deposits at its federally-insured bank to
make high-risk bets would have been curtailed and fiercely policed by
regulators. Instead, the federal regulator of national banks, the Office of
the Comptroller of the Currency, released a report on March 27 of this year
indicating that at year end 2023, JPMorgan Chase’s federally-insured bank
held $49.68 trillion (yes, trillion) in notional (face amount) derivatives.
That included $3.89 trillion in stock (equity) derivatives; $880 billion in
commodity derivatives; $1.05 trillion in credit derivatives, of which
$238.6 billion were junk-rated; $246.8 billion in precious metals
derivatives and so forth.

Dimon’s Board of Directors, who the last time we looked were deeply
conflicted themselves, not only kept Dimon in place as Chairman and CEO
through the London Whale scandal, but also through the bank admitting to
five outrageous felony counts and a rap sheet that rivals an organized
crime family.

Now, at the worst time possible for Dimon, as he attempts to bully
regulators into scrapping their demands for higher capital at JPMorgan
Chase, out comes Admati with an updated and expanded version of the highly
readable, pristinely documented, seminal book on bank capital and the
bankers’ disinformation campaign around it: The Bankers’ New Clothes:
What’s Wrong with Banking and What to Do about It. The book is co-authored
with German economist Martin Hellwig. In it, Admati and Hellwig write this:

“The term ‘fortress balance sheet’ that Mr. Dimon loves to use conveys a
sense of safety and security, the opposite of vulnerability and fragility.
But if one examines the actual risks lurking around the size and type of
the bank’s investments and debts, the strength of the fortress can be
called into question. A closer look suggests that JPMorgan Chase is highly
vulnerable and is imposing significant risk on the global financial system.

“Some of the risks that make JPMorgan Chase dangerous cannot actually be
seen by looking at its balance sheet because the positions that give rise
to them are not included there. These are risks from business units that
JPMorgan Chase might own in part or that it sponsors, and to which it has
provided guarantees to serve as a backstop if they should have funding
problems. These units might be full-flown subsidiaries, or they might be
mere ‘letterhead firms,’ vehicles without any drivers, that are established
for legal or tax reasons only. The bank’s commitments to these units amount
to almost a trillion dollars, but these potential liabilities of the bank
are left off the bank’s balance sheet. Yet they are quite relevant to the
financial health of JPMorgan Chase.”

The authors note that these same kind of off-balance sheet exposures
bankrupted Enron in 2001 and required bailouts of mega banks in 2007 and
2008 from their off-balance sheet exposures to subprime mortgage debt. (See
our 2008 article on the Rise and Fall of Citigroup.)

Senator Elizabeth Warren said last month in a Senate Banking Committee
hearing that Fed Chair Jerome Powell has become “weak-kneed” and is now
“driving efforts inside the Fed to weaken the capital rule.”

That leaves the Fed Vice Chair for Supervision, Michael Barr; FDIC Chair
Martin Gruenberg; and Acting Comptroller of the Office of the Comptroller
of the Currency, Michael Hsu, on the frontlines of the regulators’ battle
to stand firm on higher capital for the mega banks on Wall Street. The
future financial health of the U.S. economy and the U.S. financial system
depends on these regulators not also becoming weak-kneed.

Not only do these regulators need to stick to their proposed higher capital
rules, but they need to immediately push for the restoration of the
Glass-Steagall Act to separate federally-insured banks from the trading
casinos on Wall Street.
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