Monday, June 28, 2010

The Poison Pill Jamie Dimon is Brewing in His Executive Suite

Simon Johnson is best when he is decoding the machinations of the banking elite. And, he sure has sniffed out what Jamie "President Obama's Favorite Banker" Dimon is up to. Johnson writes:

While the financial reform negotiation process grinds to its meaningless conclusion, the real action lies elsewhere – in Jamie Dimon’s executive suite.

Dimon, the head of JP Morgan Chase, is apparently seeking to (a) become more global, (b) move further into emerging markets, and (c) become more like Citigroup.

This is terrific corporate strategy – and very dangerous for the rest of us.
Jamie Dimon clearly wants to become too big to fail, too interconnected to fail, and – above all – too global to fail.

He knows that the reform package will, among other (very small) things, create a resolution authority that will give the government more power – in principle – vis-à-vis failing financial institutions in the future.  This is a central part of Tim Geithner’s vision for financial stability.

But Mr. Dimon also knows – as a board member of the NY Fed and sometime White House/Treasury confidante – that a US resolution authority will do precisely nothing to make it easier to handle the failure of a large global bank, e.g., Citigroup, doing business in over 100 countries.

The reason global megabanks will get bailouts in the future is simple – policymakers will fear the chaos that would ensue when competing bankruptcy claims swarm over a defaulted institution, much as happened for Lehman (e.g., in London) in September 2008.

Mr. Dimon and his colleagues – who include some top former global regulators – are also well aware that the G20 (and everyone else) will not make any serious push towards creating a cross-border resolution mechanism.

The best way to signal to creditors that they will be protected in all potential future crises is to make JP Morgan bigger and more global.  This will lower the funding costs for the organization and in turn make this global expansion more profitable when times are good – and when times are bad, there will be government support.

In effect, Mr. Dimon is constructing a “poison pill” against takeover by the government.  This is so simple, so brilliant, and so dangerous that it should take your breath away.
What Dimon is also doing is setting up a corporate version of what some individuals are doing on a personal level, i.e., the multi-flag lifestyle.

On a personal level the multi-flag lifestyle is about living in one country, working in another country and being a citizen of a third. This concept was made most famous by Harry Schultz and his PT (Permanent Traveler) concept. With a multi-flag lifestyle, if authorities question you in a given country you are just "passing through".

Jamie is setting up JPMorganChase to be something of the same on a corporate level. If regulations are particularly onerous for a given type of banking operation, in a given country, Jamie can, for example, tell onerous country X, "Oh we don't do those kinds of operations in your great country x, we only do them in country y."

Jamie will have regulators around the globe so tied up in irrelevant minutiae that he will be free to do whatever he damn well pleases. He's not the President's favorite banker by accident, the man is slick.

1 comment:

  1. This is an old strategy and is well expressed by a cliche about bankers: Borrow a little from the bank and the bank owns you, borrow a lot from the bank and you own the bank.

    Dimon is "borrowing" a lot from the govt...