Last week, Jamie Dimon, the famously blunt CEO of JPMorgan Chase attended the Sanford Bernstein Strategic Directions conference in New York. The format was a one hour Q&A session. Given the negative sentiment around U.S. banks, we thought it useful to highlight comments from arguably the country’s most important and influential banker.

He addressed many key issues, including the economic environment, housing, mortgage repurchases, legal challenges, etc. Below we have included highlights from CallStreet’s transcript of the event. Although the quotes are taken word for word (hence the apparent typos), since it is a long interview, we have in some instances edited the quote for brevity while in others we have bolded text to add emphasis.

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The webcast for those interested in the entire discussion can be found at:

On investor sentiment

“Banks have clouds them: litigation, foreclosure, AGs, G-SIFI charges, SIFI charges, liquidity ratios. Some of the stuff is global. Those are pretty big clouds. There’s no arguing with that. So if you’re an investor, you’re going to look at it and say there is a lot of uncertainty. Some of those may affect products. They affect pricing. You’ve got the Durbin amendment. It’s possible some of it will affect the underlying model. I don’t think it’s going to affect the underlying model. I think that when we wake up in the morning two years from now, consumers, small business, middle market will still be going to banks and large corporate for ECM, DCM, advice, investments, buying securities. Products and pricing will change. Levers will change. Certain things will change.

These clouds – so it is there. I understand that. If you are an investor, it’s kind of bad. The clouds will lift. You know exactly what the final derivatives are, the Durbin rule or the G-SIFI rule; you know if there are changes in liquidity ratios. By the time all those clouds lift, all things being equal, you’ll have banks that make a lot of money and the stocks will be a lot higher.

And so you as investors have got to decide when am I going to buy?… And we told the world we’re going to buy back $3 billion at a minimum because that’s we issue, obviously we’re buying back at a much faster pace than that.”


On the potential for sector consolidation

“I do think there will be M&A in the United States. There are still too many banks. There’s still too much capacity. There’s still too many – so there will be more, not the big banks, but the next size down, buying other companies; MOEs, small banks within regions consolidating. That’s going to be going on for about 20 years. And you’re going to have foreign banks buying here…  But I think you’re going to see some try to get into other forms of business in the United States. And they have huge market caps now, so they can afford to buy companies.”

On the operating environment

… the underlying dynamics are pretty good, pretty broad based, and getting stronger, not weaker. Corporate America is less leveraged than in almost 50 years, more cash, still great companies, good profits. Middle market companies and small business, credit is getting better. That’s existing loans. Credit coming in the door is very good. Charge-offs are going down. Loans are going up. The consumer is far stronger than it was two or three years ago. They’re spending the way they were spending three years ago, but they’re saving 5% now versus dis-saving 5%. And wage growth means that it’s possible that it’s sustainable. And we see credit card spending as being sustainable.

The rest of the world is still growing. Europe is muddling through its sovereign crisis. China is still growing. India is still growing. There are tons of what I consider unused monetary policy out there and excess cash. And so look, I know the sentiment. I know the latest set of numbers. I’m not sure that that’s going to stop the economy from growing.”

On housing

You might be surprised

“… I would say the leading indicators aren’t that bad. Affordability is at an all-time high. It’s cheaper to buy than to rent. Prices are going down. We expect that to continue. The number of homes for sale is going down. Foreclosures, the new inventory of foreclosures will be lower in 12 months than it is today, not higher. Okay, so all that backlog, we’re in the worst part now, and it’s working through. That’s another quarter or two… And also the mix of distressed sales are very high. Distressed sales are 30% below non-distressed sales. And so obviously, prices go down when the mix is going up. But in a lot of markets, non-distressed sales actually are up prices, not down. So I think when the economy recovers, housing will get stronger. It will surprise people 12 months from now.”

On the slippage in home prices

“That category is virtually irrelevant personally, but there’s a little more slippage because you still have a very high level of distressed inventory hitting the market, not more than it was last quarter. And it will probably be this number or a little bit higher this quarter and next quarter, but then it’s going to trend down. So I think you’ll similarly see this weakness for a little bit, but then hopefully it will level off.

People have houses, folks. It’s going to happen, I could tell you this as sure as the sun is going to come up tomorrow. There will be a point where home prices start to go up a little bit. And people are going to want to upgrade their homes, buy a home, move in, and the sentiment will be it’s over. Now is the time to buy, and credit is loosening up for mortgages, not tightening up. So it’s possible that will happen before we all expect it, because everyone has the same sentiment at the same time. So to me, if the economy grows, it will happen sooner than you think.”

“We expect home prices go down. So they’re not current or exact numbers, but we expect another 3% to 5% or 6%. We do it by region and all that. So I don’t think it’s terrible. But I think it is driven by a high amount of distress right now. And we know the amount of distress is going to come down, not go up. It may go up in the next month, next quarter. But I’m talking about over the next 18 months, it is going to come down.

So 5.5 million homes are being sold a year. There are 3 million more Americans a year. We destroy more homes than we build. Normal household formation is 1.5 million a year. We have been forming 500,000 households a year now…  And so people when they get a little more comfortable, people will start buying homes again, and this is just going to take a little bit of time. So we’re in the worst of it right now. If we have a real another recession, no, then I think you will have another leg down. That’s normal in a recession. We don’t expect another recession. I can’t promise that.”

On credit quality

“Large corporate credit is back to very good levels. Middle market credit is back to pretty good levels. Credit card, our own portfolio we’ve told the world — I think the Chase portfolio of loans, the number is close to 10%. This quarter, the quarter now that ended, we told you that we expect it to be around 5.5%. Sometime – early indicators are midyear next year 4.5%, so it’s trending down. 4.5% would be a complete norm. Auto credit is very good. Small business credit is getting stronger… The trend is to lower delinquencies, and the front end of the stuff is down. Charge-offs are half of what they were a year ago in housing. So you’ve seen the worst. And that, of course, is how long it is going to take to repair. I think the next real mover of that will be the economy; jobs and real growth, not underlying dynamics of the creditors themselves.”

On Europe

I don’t think it’s a big concern for U.S. banks. So we’ve had a fairly consistent so far correct prognosis that they are going to muddle through. That is the best option, the one that they pick. I wish they did it. I wish it wasn’t a muddle through. I wish they’d simply solve the issues. But every time one of these things pops up, the ECB, the ESF, IMF, someone comes up to fix their problem and put it off over time, it is the best option because the other options are actually worse… It’s like a game of Monte, except in the one case, you’ll be fixing it after a crisis.

And so I think the right – I think some of these things are going to have to be restructured… I don’t think Greece is going to take down Europe. Greece has $500 billion of debt. Even if you write off $250 billion. It’s a drop in the bucket for Europe. It may not be a drop in the bucket for all the banks that have to bear big portions of that. So typically they’re thinking – if you listen to politicians, they are devoted to making this European Union, which is I think one of the greatest human achievements and endeavors of all time. It has flaws. They’re devoted to making it work.

We’ve been dealing with these countries for 75 or 100 years. We’re not backing out. You can’t run a business, and say okay, nice knowing you, Italy or all these companies…

remember, in a lot of these crises, the corporates did fine. Go back to all these other crises. We’ll be there for a long time. These countries aren’t going away. So we’re willing to take that risk that includes billions if there’s a terrible outcome in those five countries. But I don’t think it will remotely get to Spain or Italy. I think Spain is fine. So I think you are really talking about Greece, Ireland, and Portugal, and Ireland and Portugal in total less than Greece. So I think it is solvable. It’s just going to take a lot of political willpower to get it done.”

On growing organically

We’re growing branches. We’re growing checking accounts. We’re putting a lot more salespeople in the branches. I think year over year it’s up almost 4,000. We’re growing Commercial Bank. Think of the territory of WaMu California, Florida, et cetera. We’re building a commercial bank. They didn’t have one. And we’re building small business. That means hiring bankers, credit, implementation officers, risk systems take time. But those two businesses alone on the WaMu footprint are over $100 billion a year call it five to seven years out. So of course we should do that. That’s a no brainer.

International expansion is almost the same. Think of it as, if we serve a huge multinational and we serve, we do TSS or loans or trade finance, and we do it in 12 of the 40 markets we operate in, and we can add 10 or 12 of the other 40, why wouldn’t we do it? We already have all the overhead. We’re just adding location cost. So we’re going to add probably $200 million of location costs and services, but the margin is going to be – the incremental margins are huge. So I call it the network effect. You spend $5 billion and you’ve got to spend $200 million to increase your network by 20%, you’re actually spending close to $5 billion of that 20%. And so that’s all we’re doing. We’re adding bankers, branches, and products to serve the multinationals where they want to be served.”  

On higher mortgage expenses (including litigation)

“Let me separate mortgage, the charge-offs $1.1 billion. And I think the mortgage reserves are something like… $4 billion a year. Reserves are $15 billion. That $4 billion and now I’m going to add in all the other extra costs. I think there’s almost another $1.5 billion, foreclosure expense, REO expense, all the extra people we have doing modifications, call it $5.5 billion a year, $15 billion in reserves. Eventually, that $5.5 can be zero. I don’t know if it’s going to be level for a while then come down, which is what it may be. We’re cautious, but it’s going to go to zero or close, to maybe $0.5 billion. And the $15 billion will also go to zero. We can get it back. And I can’t give you the exact timing of that. I wish I could. Will they totally offset each other? But at one point, there are going to be four or five accountants that will be hitting the expenses, charges against the reserves not really the reserve space. We want to be really, really cautious for obvious reasons.  

The second one is litigation. We’ve had lumpy litigation. You’ve seen $1 billion this quarter and $2 billion that quarter. And I think last year totalled $7 billion, something like that. Unfortunately, we’re still going to have some of that. We’ve got a lot of litigation. I’ll call it the detritus of the storm across a broad spectrum of things. We’re pretty conservative reservers. We’re looking at what we should be doing. What are we going to do? Which ones are we going to fight? Which ones do we think are reasonable claims, but they’re going to be lumpy for a while. I know it’s disappointing for people who are forecasting. That’s the way it is. A lot of that is mortgage related, but we’re going to put up reserves for litigation reserves related to private label stuff. There are going to be litigation going on for a long time. I wish I could give you a certain answer, but I would say the same thing. Whatever that ultimately is, we still have the $15 billion in reserves. So eventually this will all be over. We’ve paid a price. We’ve paid our penalties, but the underlying number, actually they’re doing pretty well. And those numbers over time will get better, not worse.”

On regulatory capital rule changes

“JPMorgan always ran with probably twice what other people had. And we are – I would consider us one of the most liquid banks on the planet. And so we went through the crisis with capital at 7%, and it never went down. We did a real stress test. A real-life stress test, it never went down tells me we have plenty. Through the forward-looking stress test it doesn’t go out in any quarter.

The 7% is now 10%… I just think it’s too much. You could argue – now if you say I never want a bank to go bankrupt, don’t make a loan. So I believe in the concept we should get rid of “Too Big to Fail.” That’s what the Resolution Authority was for. I just think it’s just too much of one point. I think people should be really thoughtful about how much. If all people are going to say now too much is too much and this can never happen again, well fine. And when you’re out of capital, it will have ramifications. And people pay for credit, with banks holding the balance sheets.”

On uncertainty regarding regulatory capital rules

“The regulators then in a non-political environment should go up to decide and restudy it. And if they really come back and think that 10% is the right number, in three years they can go back to banks and say we really thought about it. Here are some numbers and we’d like to go to 10%, and we’ll work with you to give you some time. The reason I would have done that is to help the global recovery. Get rid of the uncertainty, get capital higher, help the global recovery. Leaving all this additional uncertainty out there to me is why the negative hanging over the global economy. It is one of the reasons you had these slowdown…” 

On differences in regulatory capital, calculation of risk-weighted assets between countries

“But we should be really thoughtful; like why can covered bonds in Europe account for 100% liquidity as an asset, but Ginnie Mae’s can’t. And I can go through millions of examples of types of things I think is unbalanced. But we want them to get it right. We’ve given the regulators all their thoughts, all their feedback. Now their attitude is never again, never again, never again; you’re going to end up with 10% capital for banks like us.”

Yes, I’m not really worried about it because the regulators have said, I believe them that they are going to have a college of supervisors, whatever, to make sure that that’s fairly done. It will still be political. You’re still going to see some countries working with your banks to keep it lower and some countries make it higher. It just should be taken in consideration in the first couple years where you’re going to have huge differences in capital and RWA.

So I’d take them at their word. They’re going to figure something out that makes that a little more balanced. But it not just us – it’s trust preferreds. Some nations can have trust preferreds, some can’t. Some nations got different derivative trading rules and some can’t, market making rules. It’s all these rules – if they’re cumulatively all against a JPMorgan, that’s not so good. I don’t think that’s going to happen, by the way. But in the back of my mind, we have to make sure we protect our company from a playing field which is really tilted against JPMorgan being a global competitor.”

On the impact of capital levels on product pricing

We’re still going to price in the marketplace at the competitive capital ratio. That’s what we’re going to do. And because we have so much capital, you’d probably leave more money with us because it’s a little bit safer. Our cost of borrowing will probably go down relative to a bank holding 7%.”

On changes in liquidity rules

“And then liquidity, the LCR [Liquidity Coverage Ratio] shows us as not having enough liquidity. Now we could fix it overnight, so I’m not really worried about it.”

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