All Hail Uncle Morgan
If Richard Ramsden is right, well done US Government.
Last month, Ramsden, a reportedly well-respected bank analyst employed by Goldman Sachs, published his hypothesis that, because of new Federal Reserve banking regulations that will initiate tougher capital requirements on the largest of large banks, it would behoove banking behemoth JP Morgan Chase (now a hale combo of traditional and investment banks) to divide its operations into either two (the split just mentioned) or four (branch network, asset management, investment bank, and commercial bank) separate companies.
In his report, Ramsden antagonizes “the debate about whether a breakup could unlock shareholder value given that size is now a regulatory negative.” JPM is by far the largest of what the Fed calls GSIBs – a pretty wonderful acronym for a global systemically important banking organization, itself a pretty wonderful term – with just over $2.5 trillion with a T in assets last year. Ramsden’s bank ends up in fifth place with a paltry, laughable $868 billion in assets.
From the Fed’s press release:
A firm identified as a GSIB would be subject to a risk-based capital surcharge that is calibrated based on its systemic risk profile. Eight U.S. firms would currently be identified as GSIBs under the proposal: Bank of America Corporation, The Bank of New York Mellon Corporation, Citigroup Inc., The Goldman Sachs Group, Inc., JPMorgan Chase & Co., Morgan Stanley, State Street Corporation, and Wells Fargo & Company.
JP Morgan is so big that its regulatory fees, as they stand now, would be 4.5 percent of a firm’s total risk-weighted assets – which (to compare sizes) is 2 percentage points higher than any other bank.
Ramsden’s math concludes that the sheer cost in regulatory fees that will be required to uphold a JPM-Chase in its present state would be detrimental to shareholders in the long-term and would not be offset by the benefits cross-selling services among different JPM divisions.
Whether Ramsden is right is a bit immaterial right now. What’s more amusing is that this is the first time that GS has released a report suggesting the breakup of another GSIB. It’s almost like he’s shorting JPM stock; using the media to manipulate fear is nothing new – i.e. Ramsden’s report, if people believe it, could dip the value of JPM whether a breakup comes or not.
It’s a clever win-win for Goldman. If JPM decides not to break up, perhaps the stock dips and GS makes money if they’re indeed in that game. If they’re not, perhaps they make money on emigrant investors from JPM. If JPM does splinter, Goldman’s investment bank is a bit stronger because it doesn’t have to contend with the intra-company cross-selling that JPM now enjoys.
The true beauty of the Ramsden gambit is that it doesn’t matter what JPM does. Even if Fortune magazine calls GS out for the lack of introspection in the report*, the report is still out there and JPM investors are now like a jury that can’t unhear a piece of inflammatory evidence the judge has ordered them to disregard.
For its part, JP Morgan’s response is equally amusing.
The Fed has mandated that a GSIB’s regulatory surcharge be calculated based on its “size, interconnectedness, cross-jurisdictional activity, substitutability (or short-term wholesale funding), and complexity.
JPM has decided to ignore changing every aspect of their company in that equation, save complexity.
Today Jamie Dimon set forth a simplification plan that included reducing its derivatives operations and cutting $2.8 billion in expenses from its investment banking division in the next three years.
The New York Times reports, the bank is also cutting back on hotel stays, phone lines and lap dances I mean entertainment expenses. Company CFO, Marianne Lake, suggested all the movement combined could reduce JPM’s federal surcharge (from 4.5) to 4 percent.
This all sounds fancy and waste is certainly a devil. But this simplification is addressing just one of five variables that the Fed will be using to flense funds from Uncle Morgan.
Anyway, not like we need to deal with this now. The Federal Reserve proposal won’t be phased in until next year, becoming fully effective on January 1, 2019. By then, JP Morgan Chase will likely have purchased most of eastern Nova Scotia and be well on its way to being the first sovereign corporation. All Hail Uncle Morgan!
*Which it did. Stephen Gandel suggests: Break up Goldman into three divisions: investment banking, private equity, and asset management. Do that, and, based on my back-of-the-envelope math, and using Ramsden’s model, Goldman would be worth at least $100 billion, or nearly 18% more than what its shares are trading at today.