Jamie Dimon's annual shareholder letters have been lauded by no less an authority than missive maestro Warren Buffett, and the JPMorgan Chase boss’ 2011 version ranges from the bank's growth plans to the impact of regulatory reform to why investors should own the stock.
Read Dimon’s entire letter in JPMorgan’s annual report here. Below, some choice excerpts.
Dimon On The Flaws In Dodd-Frank:
No one has considered the cumulative effect of all these changes taking place all at once. And there is little question in my mind that credit contracted globally (particularly in Europe) as a response. Some analysts estimate that even after the European Central Bank’s special three-year lending facility to banks, European banks will need to shed another $3 trillion in assets in the next few years, and that’s assuming that banks don’t try to meet their new Basel III guidelines ahead of time. This can’t possibly help the recovery of an already weakened Europe. With all the new rules, it is unlikely that credit availability will be replaced by new lenders. Even small banks that are exempt from many of the new rules are complaining that these rules will have a substantially negative effect on their businesses – again, not the intended but the unintended consequence. And certainly the new regulatory burdens for large and small banks have become enormous, but it will be a disproportionate burden on smaller banks.
Recently, we have begun to achieve modest economic growth around the globe, somewhat held back by certain natural disasters such as the tsunami in Japan. But I have no doubt that our own actions – from the debt ceiling fiasco to bad and uncoordinated policy, including the somewhat dramatic restraining of bank leverage in the United States and Europe at precisely the wrong time – made the recovery worse than it otherwise would have been. You cannot prove this in real time, but when economists 20 years from now write the book on the recovery, it may well be entitled, It Could Have Been Much Better.
Dimon On JPMorgan’s Role In The Mortgage Crisis:
We were one of the better actors in this situation – but not good enough; we made too many mistakes. We generally were a better underwriter. We did not originate option-ARMs. Many of our problems were inherited from Bear Stearns and WaMu. Even our subprime mortgages outperformed most other subprime mortgages. Early in the crisis, we also stopped dealing with mortgage brokers, some of whom underwrote the worst of the mortgages and probably missold mortgages more than most.
But we did participate in this disaster by originating mortgages that wouldn’t have been given a decade earlier (and won’t be given a decade later). And when delinquencies and foreclosures grew dramatically, we were ill-prepared operationally to deal with the extraordinary volume of troubled mortgages and upset borrowers. Our servicing operations left a lot to be desired: There were too many paperwork errors, including affidavits that were improperly signed because the signers did not have personal knowledge about what was in the affidavits but, instead, relied on the company’s processes. However, the information in the affidavits was largely accurate – i.e., the borrower, in fact, was in default, we did have the mortgage and so on.
Dimon On The Volcker Rule:
We do not disagree with the intent of the Volcker Rule. If the intent of the Volcker Rule was to eliminate pure proprietary trading and to ensure that market making is done in a way that won’t jeopardize a financial institution, we agree. And we believe there are many ways to accomplish this: by holding proper capital, by insisting on proper liquidity, by proper marking of positions, by proper reporting of risk, by constantly turning over the risk in inventory positions as appropriate for the type of security – trading in illiquid securities will have less turnover than trading in government securities – and by making sure that most trading is customer driven – much of the trading the Street does with itself is effectively to syndicate out unwanted risk, which is no different from loan syndication. But by its nature, market making requires that traders, in order to facilitate client business, take positions in inventory that they hope to sell later.
As for why JPMorgan stock makes for a good investment, Dimon admits that the industry faces many issues that make some investors feel that "bank stocks are uninvestable." Those issues -- from global economic concerns to the mess around mortgage litigation and a weak interest rate picture -- are getting closer to resolution Dimon believes, and even the unintended consequences from the increased regulation may be as much to the bank's benefit as its detriment.
Shares of JPMorgan, which fell 2.2% to close at $44.41 Wednesday, are up 33.6% year-to-date. Peers Bank of America -- one of the year's best-performing stocks -- Citigroup and Wells Fargo saw similar declines amid a broader market selloff.