Winds Of Change In Banking

“Another Executive Leaves JPMorgan” reads the headline of the business section in the New York Times. The question is, what is going on at JPMorgan Chase (JPM)?

The timing of this last leaving is raising questions. The latest major departure is Frank Bisignano, the co-chief operating officer. The questions are about the status of Jamie Dimon, Chairman and Chief Executive Officer of JPMorgan, the “persistent executive turnover,” and the up-coming board meeting where a debate is raging about whether or not Mr. Dimon should hold both top positions.

To me, there are two reasons for the recent departure events. First, Mr. Dimon is in control and he does not like what has happened inside JPMorgan over the past two years or so, with “the London Whale” and other events that have tarnished the “bravo” image of Mr. Dimon and his bank. The activity going on inside the bank remind me of a “turnaround” operation!’

But, there is a second reason for the things that are going on. Mr. Dimon is moving JPMorgan into the future.

If this is true, then this whole effort is to move JPMorgan into the future in the face of the “hostile” regulatory environment that exists, in the face of the changes that information technology are forcing on the banking industry, and the changing nature of the financial industry.

If I were Mr. Dimon, my feeling would be that the current regulatory environment “sucks”!

Being John Mason, my feeing is that the current regulatory environment “sucks”!

In either case, the basic feeling is that I really don’t want to run a bank. I want to run something different.

Second, whatever is being done in the financial industry, the future of commercial banking…of finance in general…is information technology. Finance is nothing more than information. Ultimately, finance is nothing more than 0s and 1s. Thus, whatever you call a financial institution in the future it will just be another name for a information processing organization.

And, if we are dealing in information technology, as Fred Tomczyk, CEO of TD Ameritrade was quoted as saying about the discount brokerage business, “…it’s a scale business. It takes a lot to compete in terms of investments and technology and marketing. There are only one or two-maybe-transactions left.”

If you have an account at TD Ameritrade why do you need a commercial bank?

Third, there is the changing nature of the financial industry. You look at the largest seven “commercial banks” in the United States in terms of revenues and you find in number five position, Morgan Stanley and in number six, Goldman Sachs Group, and in number seven, American Express.

In addition to that the total assets in the commercial banking sector are less than half the total “banking” assets in the United States. Total “banking” assets in the United States, according to the Federal Reserve System consists of those institutions that take deposits and are monitored and regulated and then there is the “shadow” banking system that does not take deposits and are not monitored and regulated to any degree.

What is the difference? All financial institutions are “intermediaries”. They receive funds from “savers” and lend the funds to “borrowers. But, the “savers” do not need to be depositors. The “savers” could be anyone providing the financial institution with funds to lend. The crucial thing is that the “credit intermediaries” have the ability to earn a sufficient spread on the difference between the interest rate they pay the “savers” and the interest rate they charge the “borrowers.”

These “intermediaries” can also buy assets, trade in assets and hedge assets and so on and so forth and earn fees rather than interest. And, there are other things these “intermediaries” can do to earn income. In these areas they don’t really need deposits.

And, officials at the Federal Reserve claim that perhaps most of what the investment bank-like institutions do…that is, Morgan Stanley and the Goldman Sachs Group…is really “shadow banking” and not commercial banking.

One can, therefore, really question whether most of what JPMorgan Chase does is commercial banking. David Reilly in the Wall Street Journal tells us that JPMorgan’s “total net loans of $708 billion at the end of the first quarter equaled less than a third of total assets of $2.4 trillion. Trading Assets and securities holdings were slightly more than its loan book. And its derivatives holding are the largest of any U. S. bank.”

He goes on: “Meanwhile the banks trading operations are a significant driver of profit. In the first quarter, JPMorgan’s corporate and investment bank produced net income of $2.6 billion. That was equal to 40% of overall profit and slightly exceeded the income generated by the bank’s consumer and community banking business.”

Why do I really want to be a commercial bank? Much of the deposit business is just a headache and it is so costly…think of all those branches out there…with hardly any customers ever in them.

The new chief operating officer, Matt Zames, was co-chief operating officer with Mr. Bisignano. But, Mr. Zames is coming from the fixed-income area. His background? He worked for a hedge fund, Long Term Capital Management.

Maybe JPMorgan Chase is thinking less of being a “commercial” bank and moving more and more of its business into the “shadow” area. This would be consistent with talk now being heard in Congress. Congressmen are apparently concerned that these too-big-to-fail institutions like JPMorgan should not have their non-depository business protected with deposit insurance. In essence, these too-big-to-fail institutions should be split into “real” commercial banks with deposits, and “shadow” banks or institutions that do not need deposit insurance.

As organizations like JPMorgan Chase earn more and more of their income from corporate and investment banking operations, asset management and corporate/private equity sources, why should they want to keep the consumer and community banking areas? If we are getting enough earnings from these other sources, let’s just “spin-off” the banking “stuff”.

I would bet that of the top twenty so-called commercial banks in the country in terms of assets, more than half the revenue of these financial institutions comes from “shadow banking” sources.

So, maybe Jamie Dimon is moving on. Maybe Jamie Dimon is trying to create a financial institution that will be a part of the future, not one that tries to hang onto the past. I believe that Jamie Dimon is smart enough to do this and brazen enough to carry it off.

Therefore, the current level of activity is showing us who is in charge. The future needs new ideas and in many cases new people to achieve that future. So JPMorgan is working through a turnaround and it is becoming more and more technology based, and is moving more and more into the “shadow.” If this is the case, I am much more hopeful for the performance of JPMorgan in the future than I have been recently.

Editor’s Note: This is the first of a series addressing the implications of profound changes underway in both the domestic and global economies. Future business success will require entrepreneurs to foresee the impacts of these changes and steer their firms accordingly.

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