Unpacking Jamie Dimon’s CEO letter: Recession, the climate, and regulatory woes

In his recent letter, JPMorgan Chase CEO Jamie Dimon addressed SVB, a “no end in sight” recession, regulations, climate change and geopolitical instability. While he doesn’t deem the current crisis to be as severe as that of 2008, he also doesn’t foresee smooth sailing ahead saying “the failures of SVB and Credit Suisse have significantly changed the market’s expectations, bond prices have recovered dramatically, the stock market is down and the market’s odds of a recession have increased.” 

Plus he had a few bones to pick.

Dimon on SVB, Goliath and regulations:

Dimon expects SVB’s demise to reverberate through the industry and the economy at large for some time to come. “Regarding the current disruption in the U.S. banking system, most of the risks were hiding in plain sight,” he wrote, stating that the interest rate hikes, (Hold-To-Maturity) HTM bonds, and SVB’s uninsured deposits were factors that both the industry and regulators were aware of. He added that the Fed’s stress test failed to incorporate higher interest rates, which doesn’t “absolve bank management – it’s just to make clear that this wasn’t the finest hour for many players. All of these colliding factors became critically important when the marketplace, rating agencies and depositors focused on them.” 

Addressing the rising wave of deposits streaming into JPMorgan Chase, Mike Meyo, a Wells Fargo analyst, wrote recently that the “Goliath is winning”. Brushing these comments aside, Dimon adds that “while it is true that this bank crisis 'benefited’ larger banks due to the inflow of deposits they received from smaller institutions, the notion that this meltdown was good for them in any way is absurd.” His emphasis remains on trust, which if dented, affects banks of all sizes. 

In anticipation of new regulation from the Federal Deposit Insurance Corporation (FDIC) in May, Dimon called for elimination of costly ineffective policies and a big picture analysis of how any particular regulation may impact different areas of the financial system. He also asserted that the regulatory outlook should not focus on preventing bank collapses in their entirety but to limit “chance of failure and the odds of contagion”.  

One possible way to ensure this, according to Dimon, is to make policies more “forward-looking and thoughtful” – specifically stress-testing. He suggested that the Fed’s stress testing should not focus only on one scenario, which can create a false perception of how well risk is managed and of having extreme scenarios under control. 

AI, cloud, and climate change: 

JPMorgan Chase talks big on AI and fintech. According to him the firm has 300 AI use cases in areas like risk management and fraud prevention in production. He says the bank is using the popular ChatGPT to enhance its employees' workflows. He also said that the bank currently employs 1000 people in data management and 900 data scientists. However, exact numbers on those employed in JPMC’s ethical AI departments were conspicuously missing. 

“We have spent over $2 billion building new, cloud-based data centers and are working to modernize a significant portion of our applications (and their related databases) to run in both our public and private cloud environments,” Dimon added on the topic of cloud-based systems citing that the bank has now migrated 38% of its applications to the cloud, “work that is hard but necessary,” Dimon wrote.

On the topic of necessity, a running theme across Dimon’s letter is his emphasis on dealing with climate change. “We need to do more, and we need to do so immediately,” Dimon wrote, adding that clean energy initiatives are simply not getting investments fast enough and practical policy changes must come through sooner rather than later. While the CEO touched on climate change and geopolitics many times, there was yawning silence on the subject of Russian state energy giant Gazprom to which JP Morgan Chase provided $1.1 billion in fossil fuel financing in 2021 alone. 

Exasperations

The list of actions Dimon recommends is extensive, from industry policy to departure from academic forms of policy making in favor of collaborative-data based decisions. Along with these recommendations, the CEO also seemed to be frustrated with a few developments. For example, he wrote on the universal proxy law that “in my view, it is likely that not just activists, but also special interest groups will nominate directors. Not only would this be extremely disruptive to the board, but, almost by their nature, special interest groups would be counter to shareholders’ interests.” Before the universal proxy vote, when activist groups wanted to change up the board by nominating new directors, the elections forced shareholder voters to vote for a “slate of company’s nominees or those of the activists”. Now a subtle change in the law allows the shareholders voters to pick nominees from all parties. 

Another pain point was banking’s decreasing role in the U.S economy. Dimon’s woes seemed to be related to “shadow banks” which, according to him, are “fair weather friends” and do not go the extra mile to help clients. These shadow banks are diminishing the role banks play in the economy and are putting up massive competition. 

For Dimon, it is becoming increasingly difficult for banks to remain in the mortgage business because of complex regulatory standards, operational, legal and reputational costs have the business too expensive. He adds that he personally doubts that nonbank credit-providing institutions would be able to provide credit when their clients need them most. And he asks regulators to decide on the role of banking going forward: “Do you want the mortgage business, credit and market-making, along with other essential financial services, inside the banking system or outside of it?”