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“Our government invited us and others to step up, and we did,” Dimon said in the press release announcing the transaction. That was nice of him. It all sounds a lot like his predecessor J Pierpont Morgan, founder of the bank that bears his name, who more than a century ago saved the banking system when the government was incapable of doing so. And it does raise the question of how much we’ve really progressed since then.
I’m assuming most readers will already know the broad outline of the second-largest bank failure in US history. If not, Matt Levine’s superlative explanation is here, JPMorgan’s own slide presentation is here, and Bloomberg News’ masterly Big Take on how First Republic’s jumbo mortgage business brought it down is here. If you’d like to diversify, then there’s plenty of weighty reporting from the Wall Street Journal, the Financial Times, and the New York Times. All of this should bring you up to speed on how First Republic failed, the deal that was struck, and the reasons why it’s been so well received (in a nutshell, because it’s probably going to make lots of money for JPMorgan shareholders).
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Is there anything about this deal that should worry us? The big are getting bigger. JPMorgan already had more than 10% of US deposits, meaning that it was barred from acquisitions, but its size allowed it to prove to regulators that it could buy First Republic at a cheaper price to the public purse than anyone else. It cannot possibly be allowed to fail. That means it needs to be regulated that much more tightly.
Back in 1998, when Travelers Group was about to merge with Citicorp to form Citigroup, with Dimon as its president, the legendary Wall Street economist Henry Kaufman warned that the vast new banks would have to become “quasi-public utilities,” and accept public regulation that would make them “too good to fail.” A financial system patrolled by a few institutions regulated as tightly as water companies would have been “safe;” it wouldn’t have been dynamic, and would have shrunk from taking the risks that help to grow an economy.
At this point, JPMorgan is acting as a public utility, saving public money when it rescues troubled banks. It also has advantages with which even huge regional banks like PNC cannot compete. At present, deposit insurance is capped at $250,000 per account. Many companies need to keep more than this on deposit (although very, very few individuals should do so). That gives a huge advantage to JPMorgan over smaller regional and local banks that specialize in particular business sectors or geographies.
That leads to the following drastic assessment from Robert Hockett, professor of law and finance at Cornell University:
We now have but two choices before us: either we preserve our production-focused regional and sector-specific industrial banking systems by removing Federal Deposit Insurance limits immediately, or we allow financialized Wall Street banks to take all — an outcome that will ultimately necessitate nationalization of the whole sector.
That is the choice that the world has been ducking, at least since Dimon helped to create Citigroup in 1998. Hockett hopes to avoid it with legislation that would raise insurance caps for specific business accounts. The Federal Deposit Insurance Corporation itself seems interested, and the idea has bipartisan support in Washington. This can be viewed as a further shift toward nationalization, in an attempt to accommodate the power accreted by JPMorgan.
Beyond that, there is an echo from a far earlier crisis: The Panic of 1907. You can read about it here, and in this great book. Confidence in a range of large banks collapsed. With no central bank, it fell to J Pierpont Morgan to act as a Dimon-like convener, banging heads together and putting money on the table to get people to calm. Crowds gathered in Wall Street and cheered him as he walked from meeting to meeting.
The Federal Reserve was founded in response. Politicians decided that bank runs couldn’t be allowed to happen so easily, and found it intolerable for the safety of the financial system to rest on one private individual. Morgan was questioned by Congress and offered a soundbite that has lasted more than 100 years. He insisted that personal trust, not money, was the basis of the system:
A man I do not trust could not get money from me on all the bonds in Christendom. I think that is the fundamental basis of business.
The financialization and transfer of power from bank-lending officers to markets has made it harder for anyone to work on such a basis. But the centrality of Dimon suggests that personal trust might still matter almost as much as all the bonds in Christendom. That gives rise to the same concerns that Morgan’s power created 116 years ago.
Dimon’s record is at this point beyond question. His bank has had its scandals along the way, but his place in history as one of the most important bankers since Morgan himself appears to be secure. It isn’t a criticism of him to question the degree of reliance the world now has both in the giant bank he has built, and in the man himself. Dimon is 67. It will take many years for any successor to build up the kind of trust that has been placed in him.
John Authers is a senior editor for markets and Bloomberg Opinion columnist. A former chief markets commentator and editor of the Lex column at the Financial Times, he is author of “The Fearful Rise of Markets.”
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