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- [00:00]
A
Foreign. Last week, JP Morgan Chase made more than a billion dollars. It did the same thing the week before that and the week before that and the week before that. It is hard to think of any company that towers over its industry the way that J.P. morgan towers over American banking. Today on the show, what is JP Morgan's special sauce and how long will it last? This is Unhedged, the Markets and finance podcast from the Financial Times and Pushkin. I am Rob Armstrong coming to you from Unhedged World headquarters in beautiful New York City. And I'm joined today by Josh Franklin, the FT's US banking editor. Welcome, Josh.
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B
Hi, Rob.
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A
So let's just talk about what this bank is. I'll start with two statistics that stick out for me. About 2 trillion in deposits. I think I have that right. Interest bearing deposits here. Over 2 trillion in deposits, total assets, 5 trillion. Just to give a scale of how big this thing is, what else would you add to the description? Josh?
- [01:24]
B
No, it's an institution that's bigger than most countries. And if you think of what the, what the modern day JP Morgan is, is basically three businesses. You've got the Chase side of the business, which is kind of, it's like the cold room in terms of just like churning along this profit engine.
- [01:43]
A
Yes.
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B
And that's kind of the retail deposits, you know, the Chase branches. You've got the JP Morgan investment bank and trading business, which is kind of the glitzier, kind of a brand enhancing side of the business that, you know, works on the SpaceX IPO.
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A
Yes.
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B
Has Ken Griffin and Millennium and Citadel as, as clients.
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A
Yeah. And if the retail business is the, is the engine room that just kind of churns along, you know, lends higher than it borrows and just makes money steadily, I guess the Wall street business, when it's good, it's really good. Right. It has these immense peaks and it has some valleys, but when it's, when it's jamming like it's jamming right now, it is just a profit.
- [02:26]
B
No, when we're in this mode of animal spirits, there's a lot of money to be made and it really, you know, gives you this, this nice upside. We'll see how long it lasts for. But right now, you know, people are making hay while the sun shines. And then the kind of smaller business is the asset and wealth management business that they have, which is about 20% of profits. And that's kind of this money management business that, you know, doesn't move the needle every quarter, but it's also Another kind of growth industry that. That, you know, JP Morgan wants to be a part of.
- [02:56]
A
So, I mean, I would think, you know, someone was saying to me the other day that we're having the wealthiest cohort of retirees in the history of the world that are kind of hitting retirement right now, and JP Morgan wants to be at the middle of that wave, and it seems like they are.
- [03:14]
B
Yeah, no, exactly. And the funny thing is, on the asset and wealth side of business, for almost any other company, the money that it puts up every quarter would be a standout performer, size wise. But in J.P. morgan, because it is so big, it almost gets obscured a little bit by these two other huge businesses.
- [03:31]
A
So let's go back now and talk about how did we get here? How did it. It wasn't always the case that J.P. morgan was the most dominant bank in the United States and possibly the world. How did we get here?
- [03:44]
B
Yeah. So the key protagonist of the story is Jamie Dimon, who's the CEO. For a person who's familiar to a lot of listeners, he takes over JP Morgan in the start of 2006. And at that time, we call these guys forever CEOs for a reason. They stick around for a long time. When he took over, there were actually a few bigger banks than JP Morgan. You had bank of America and Citigroup, and Dimon had previously worked at Citigroup under his mentor Sandy Weil, were both bigger than JP Morgan.
- [04:15]
A
But of course, 2006 is a momentous year because the next year is 2007.
- [04:21]
B
Yes.
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A
And we all know what happens then.
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B
Yes.
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A
Right.
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B
Then there's the early signs of this brewing financial crisis that comes to a head in 2008. And JP Morgan really maneuvers that better than anyone else. Jamie Dimon manages to sidestep the worst of the mortgage crisis for JP Morgan, and then not only emerges in financial health, but also takes advantage of the crisis to opportunistically buy a couple of companies.
- [04:52]
A
Let's take those one at a time. Maneuvering the mortgage stuff, was it as simple as just owning less crap than the other banks owned? Right. Was. Was there less poison on the balance sheet than maybe at Citibank or Bank of America?
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B
Yes. And I think diamond, he always talks about a. This fortress balance sheet. So it's like whatever we're doing, we have to have enough financial solidity in our business to be able to withstand any kind of crisis. And yeah, and I think they were earlier than others in terms of not waiting for the music to stop in. In terms of preparing for, for what could happen. And so that meant that when the, when the US government was looking for healthier institutions to absorb some of the less healthy institutions, JP Morgan was a kind of credible buyer in that circumstance.
- [05:44]
A
And who did they buy?
- [05:45]
B
So they bought first Bear stearns back in 2008, you know, about six months before the collapse of Lehman Brothers, they got a government backed deal for Bear Stearns which Dimon has talked about. You know, the headaches that it caused because there were lawsuits and they ended up having to renegotiate the deal. But it ended up being a pretty good transaction for, for JP Morgan and really helped accelerate its Wall street business.
- [06:09]
A
Yes, we have to look back on that as a good buy. You know, I remember to Jamie Dimon talking about how, you know, he talks about it slightly like he was doing the world a favor by buying this business. But the fact is now there's this incredible Wall street investment banking and trading franchise that would not be the same without that Bear Stearns.
- [06:30]
B
No, no, it was, it was a cornerstone deal for, for that side of the business and you know, stopped it having to buy something else in the future potentially if you're going to want to compete head to head with like the big investment banks like Goldman Sachs
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A
and Morgan Stanley and meanwhile Citibank is over there selling stuff. Right. They had to sell their very good wealth management business.
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B
Yes, right. You had Smith Barney, which Citigroup ended up selling to Morgan Stanley, which shareholders have really rewarded it for.
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A
So, and before we close out on the crisis, we what happened to bank of America? What do we need to remember about that big rival?
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B
So actually that's, it's an interesting point because of all the institutions that could have built a similar machine to what Jamie Dimon built, Bank of America is the one, because in the crisis they buy Merrill lynch, which is another big storied investment bank and brokerage house.
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A
Yes.
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B
And for whatever reason they just haven't been able to make it fit together to build this business that's thriving on both Wall street and Main street way that J.P. morgan has done. And then the other big thing that J.P. morgan did during the crisis was, was by Washington Mutual, which is another big deposit taking institution that just kind of added to its, its kind of growth on, on that side of the house.
- [07:45]
A
Okay, now I want to disrespect the linear timeline here by hitting a massive fast forward button because things seem to have accelerated since the COVID crisis and JP Morgan has really increased its lead over the Citibanks. The bank of Americas, the Wells Fargos of the world. How did that happen?
- [08:08]
B
Yeah, so the 2010s, it's like good but not great decade. I mean for banking generally. And same for JP Morgan. Like Dimon has a few missteps, most notably the London Whale where JP Morgan lost $6 billion over in its trading business. But that's not job threatening for him in the end or anything like that. But it's not a period of rapid growth. And to your point, things start to accelerate a lot for J.P. morgan starting in 2022. And that's when we see interest rates start increasing a lot. Just to put it in context in terms of this crazy growth over the last four and a half years or so that JP Morgan has had. On the day the Fed started lifting interest rates In March of 2022, J.P. morgan's market cap was about 350 billion. Bank of America, which is the number two bank in size, was 280 billion. So about a $70 billion gap. Today the gap between those two is about $500 billion. So J.P. morgan's worth over $900 billion. It's going to start knocking on the door pretty soon, probably of a trillion dollars. Bank of America is down at 430.
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A
Now I love this story because I remember before rates rose, I remember I was writing columns about this, that bank of America and JP Morgan made very different choices because in the zero interest rate period and the low interest rate period, especially after Covid, when rates were still low, inflation hadn't sparked yet. Everybody got these tremendous amounts of deposits into the business. The government was printing money, et cetera, et cetera. And bank of America and JP Morgan did different things with the money. Can you, can you just talk listeners through that?
- [09:54]
B
Yeah. And bank of America took the decision, okay, where we've got all these cheap deposits, let's deploy them in longer yielding assets. Yeah, sorry, longer duration assets which have a higher yield.
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A
Yes.
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B
And we can improve our margins that way. JP Morgan didn't do that to nearly the same extent as bank of America did.
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A
And people would ask them, analysts would ask them, why aren't you doing this? Yes, right.
- [10:17]
B
And it was, it was not an easy.
- [10:20]
A
So we're talking about basically buying like 10 and 30 year treasuries, stuff like that, mortgage backed securities of long duration. And so you take a deposit, you're paying, I don't know, half a percent poor at the time probably on average. And you buy a piece of 20 year paper at, what was it, two and a half percent, three percent at the time. And that's a spread of a couple of percentage points. And it looks like easy money. Yeah. Right. You can see why, why bank of America might be tempted.
- [10:45]
B
Yeah. And it was for, for a long time. And then rates start going up. And then not only do rates start going up in 2022, but they start going up a lot faster than people were expecting.
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A
Yes.
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B
This was the whole, you know, inflation's transitory argument and everything like that, which we remember well. Yeah, exactly. And so when that happened, bank of America had a lot of securities that on paper were worth less.
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A
Yeah.
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B
If they wanted to sell them.
- [11:11]
A
Just for listener's sake, if you have a bond that has a very long duration and it's a two and a half percent yielder and interest rates go to 5%. Right. The value of that bond has to fall to make the yield equivalent to the yield on a newly issued security at 5%. So the value of the stuff sitting on bank of America's balance sheet really plummets. Huge losses, hundreds of billions of dollars.
- [11:38]
B
On paper.
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A
On paper they don't have to realize those losses and whatever, you know, so.
- [11:44]
B
But on paper it was, you know, one of the biggest losses in the history of Wall street is over $100 billion. But it meant that it was a drag on bank of America's earnings for a long time. Whereas JP Morgan was in a position where they could deploy all these deposits that they had into higher yielding assets and really boost their margins.
- [12:03]
A
Okay, so here is. This leads us directly to an interesting question. Is the key to JP Morgan's success in its excellent choice of rivals?
- [12:13]
B
I think that is a huge part of the story. I mean, better to be lucky than good in some ways. And Jamie Dimon and JP Morgan have been blessed with rivals who couldn't get out of their own way. So you had the bank of America example where they make this really catastrophic decision on the balance sheet. On the balance sheet when interest rates were low, you have Citigroup, that is this huge sprawling global institution with banking licenses in all of these jurisdictions all over the world, hasn't been able to make it work. Underinvested in technology and operations, undersized retail business.
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A
It doesn't have the J.P. morgan engine room.
- [12:51]
B
Exactly. Hasn't, hasn't been able to grow in US retail banking, which is one of the best markets in the world, to be an at scale retail banking player. And then had these huge operational issues that lumbered it with consent orders and regulatory hell for. Yeah, which they're, they're still just Getting out.
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A
Speaking of regulatory hell, Wells Fargo.
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B
Wells Fargo, a bank that during the 2010, looked like it was doing pretty well, growing a lot. And then it turned out that a lot of that growth was based on, you know, selling products to people without their knowledge, which left them.
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A
The regulators don't like that. No thing.
- [13:24]
B
No, no. And they've cycled through a few CEOs and they have had to deal with this asset cap that they've only just had lifted, which basically limited their ability to grow. So you have all these rivals that have, to varying degrees, have not been able to get out of their own way and left a clearer lane for JP Morgan to really be the solid bank. And when you're solid in a field of rivals that are stumbling, you look fantastic as a result. I think if you're giving JP Morgan credit, the fact that all of these rivals have had issues like this, whether or not that's, you know, financial decision making, operational decision making, compliance decision making, it does show how hard these big institutions are to run. So you could say it's, it's a feather in JP Morgan's cap that they've managed to avoid the worst of this stuff. But certainly the fact that there isn't one credible universal banking rival that hasn't had some form of major blunder over the last 10 or 15 years does, I think, go quite a long way in terms of explaining why JP Morgan has become such a dominant player in
- [14:31]
A
the industry, a company on its own at the peak of the industry. Yeah. Well, there is one open question that we haven't discussed, which is can JP Morgan keep it going?
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B
So this is the huge question on Wall street. And ultimately the big question that overhangs JP Morgan is what comes after Jamie Dimon? And I think part of it is the machine that J.P. morgan has built. It is such a money making juggernaut that whoever takes over is going to inherit this billion dollar a week profit engine. But at a certain point, you know, two years down the line, three years down the line, five years down the line, the screws on the machine start coming a little bit loose. You know, you gotta update some parts. And so that's the question of who could possibly follow this guy who's such a huge, huge figure and he is 70 years old. He's talked about, you know, staying on for, you know, maybe three more years. After that, he wants to stick around as executive chair for a time. So even after he hands over the CEO role, he's gonna stick around upstairs in, in the boardroom, which you could argue is gonna make life interesting for whoever does get the job.
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A
I mean, the joke is that the most dangerous job on Wall street is being Jamie Dimon's successor.
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B
Yes. Because the second people think who your replacement could be, you start to look replaceable yourself. And the magic trick that a lot of these corporate leaders play is that they are, they are the key men of these, these big institutions. So from that point of view of like, who is in the dangerous hot seats right now, it's these two gentlemen. Doug Petno, Troy Rohrbaugh. Petno is an investment banker, Rohrbaugh is a trader. And they're kind of in this head to head race right now to be the next CEO of JP Morgan.
- [16:19]
A
We'll be right back with Long and Short. Welcome back. This is Long and Short, which is the part of the show where we go long things we like and short things we don't like. Josh, do you like something or not like something you'd like to talk about today?
- [16:47]
B
I, I'm going to be Long power trips. So I've been casting around looking for weird and unusual uses of AI on Wall street and in investment banking. And I've just started here. Everyone loves to have someone they can talk down to in this industry. And I've just been hearing people kind of berating their AI model. This is often juniors. They're, they're kind of getting this power trip. If they think that the AI has told them something wrong, they'll be like,
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A
and like, you know, AI doesn't sue you. I doesn't call hr.
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B
No, no. And so, so I. And from what I hear, it's kind of giving people this weird power trip over their AI models.
- [17:27]
A
This is the future. I'm going to be short the Magnificent Seven. This is a short term trade idea. Last night Google reported excellent revenues and massive spending. The stock's getting beat up a little bit. I just feel like we're not comfortable with these monstrous tech companies right now. They've been going sideways for two months. I think there's more sideways in their future. We haven't resolved this question of revenue versus spending at these guys. So for me, I feel it's choppy water from here on out. It will not be choppy water when we are back in your feeds listeners on Tuesday. Until then, stay cool. Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Special thanks to Laura Clark, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30 day free trial is available to everyone else. Just go to FT.com and/unhedged offer. I'm Rob Armstrong. Thanks for listening.