The last time the body language (and ex-intelligence) experts from Business Intelligence Advisors [11]appeared on these pages, their target was Ben Bernanke, and specifically his first ever post-FOMC press conference [12]. This time around, BIA has chosen the analyze what has been left unsaid by none other than the head of JP Morgan in the context of his $2 billion (and soon to be far larger) loss which is still sending shockwaves around the financial world. As a reminder [13], "Using techniques developed at the Central Intelligence Agency, BIA analysts pore over management communications for answers that are evasive, incomplete, overly specific or defensive, potentially signaling anything from discomfort with certain subjects, purposeful obfuscation, or a lack of knowledge." So what would the CIA conclude if they were cross-examining Jamie Dimon?
BIA Between the Lines: Risk? Forget About It: Jamie Dimon, Chairman & CEO, JPMorgan Chase & Co.
JPM’s European exposure is likely riskier than Mr. Dimon would like investors to believe.
Mr. Dimon is asked several questions about JPM’s exposure to Europe. While he provides and quantifies the company’s amount of exposure, his responses consistently reflect efforts to downplay the level of risk associated with that exposure, suggesting that the firm’s risk profile may be more aggressive than he would like to admit.
Specifically, when Mr. Dimon is asked what JPM’s exposure is to troubled nations, he answers it is about $15 billion net of collateral and ultimately acknowledges that the company could lose $5 billion. But Mr. Dimon is also quick to state that “we stress it,” “not because we’re taking a bet,” but they are “trying to manage exposure” in order to minimize concern about the level of risk associated with that exposure. This language, however, belies a sense that the company is taking a “bet” that they are “trying” to manage, suggesting that JPM may be taking on more risk than Mr. Dimon wants to admit. Further, Mr. Dimon states that “I’m not going to feel terrible” should the worst happen. This is likely a preemptive effort to downplay the severity of the financial impact should some countries default, suggesting that Mr. Dimon has concerns that losing money in Europe is more of a possibility than he would like investors to believe.
Further, when asked if it is possible to be completely sure that hedges with counterparties are truly effective, Mr. Dimon does not answer the question. He instead minimizes concern by explaining that “a lot” of the collateral is cash and that collateral that is not cash is not Italian or Spanish sovereign debt. These qualifications, however, suggest that there may be some portion of collateral backing these hedges may not be as effective as Mr. Dimon would like investors to believe.
More significantly, however, Mr. DImon emphasizes that “we know the exposure to every single counter party.” This statement is meant to assure investors that JPM is aware of their level of risk, but falls short of assuring that the level of risk is appropriate. Further, Mr. Dimon casually acknowledges that “yeah something could go wrong” but not “terribly wrong” in an effort to downplay the severity of both the level of risk, and the potential impact of default associated with JPM’s European exposure. This suggests that the potential for losses is more significant and tangible than he attempts to portray.
JPM may be increasing their European exposure more aggressively than implied.
When asked about the potential for buying assets and businesses from troubled European banks, Mr. Dimon begins his response by emphasizing, for the second time during the interview, that “First of all we really want Europe to recover.” While this statement is meant to be supportive of European banks, it also represents a potential “truth-in-the-lie” -- literally suggesting that JPM has a strong, specific interest in seeing the crisis resolved. This takes on more significance when Mr. Dimon’s acknowledges that JPM has purchased assets, but attempts to downplay the extent to which the company has done so by qualifying that there are “certain” assets and divisions, “some” that they have bought, “some” they have made bids on and did not get and “some” they are still evaluating. This effort to minimize JPM’s activity in seeking out and acquiring these assets raises questions about how much additional European exposure JPM has taken on in recent months and about the level of risk associated with that exposure.
Volcker rule may require JPM to significantly change their proprietary trading strategies and risk profile.
Mr. Dimon is asked if regulations will compel JPM to enter new businesses or cause them to exit others, Mr. Dimon tries to give the impression that JPM’s business lines and corporate structure will not change as a result of new regulations. However, his qualification that he doesn’t see “a lot” of change indicates he anticipates some change, and his emphasis that the “fundamental” jobs of a bank will remain the same suggest he likely anticipates more change than he implies. With this as a backdrop, Mr. Dimon’s response to a question about the Volcker rule is notable, particularly since the JPM’s proprietary trading function is in flux.
When asked more specifically about what the company will have to do when the Volcker rule is implemented and what the impact on the business will be, Mr. Dimon doesn’t fully address either question. Instead, he uses the opportunity to minimize the significance of, but also signal his concerns about, the impact of the rule on the business, a mixed message that indicates the consequences of this legislation are greater in magnitude than Mr. Dimon attempts to portray.
First, Mr. Dimon characterizes lower spreads as good for investors, as a natural byproduct of an efficient market and as nothing unusual. This is likely an attempt to minimize concern about the potential negative impact of lower spreads on the compensation in the trading business, but could also be an attempt to give the appearance of a balanced and fair position on the rule. Regardless, these statements signal that Mr. Dimon anticipates that implementing the rule will negatively impact traders’ incomes.
More significantly, Mr. Dimon then turns to complain about the government’s desire to regulate the level of risk associated with proprietary trading. His statement, “if you want to be a trader, you’re gonna have to have a lawyer and psychiatrist sitting next to you to determine your intent every time you did something,” is an attempt to cast such regulation as unduly burdensome, but is also reflective of an effort to discredit the rule by portraying it as ridiculous. This type of “attack” signals that the topic is a threat, suggesting that Mr. Dimon has significant concerns about the effects of the Volcker rule on JPM’s trading strategies. He also states that liquidity is good for investors, and tries to convince listeners that “unions, pensions, widows, retirees [and the] military” don’t want liquidity reduced in the market. By aligning himself with the average American, Mr. Dimon is attempting to dismiss the need for regulation and create a “halo” around current trading practices, a psychological mindset that likely suggests he believes the level of risk taken to date may be higher than most observers would like to see. This effort to convince listeners that there is no need for regulatory oversight of proprietary trading suggests that Mr. Dimon has significant concerns that the Volcker rule could have a significant impact on the company’s trading strategies, operations and ultimately the risk profile of the business.