JPMorgan Chase CEO Jamie Dimon is out with his annual letter to shareholders, and, as usual, it's an interesting read. To me the most interesting parts were his defense of big business and the section on regulation and his company's compliance costs.
On big business:
There are huge misunderstandings about job creation in the United States — and these misunderstandings frequently lead to misguided policy....We often read that small business is the primary driver of new jobs — this is both incorrect and overly simplistic. Sometimes those net new jobs appear in small businesses, and sometimes they appear in large businesses. In fact, recent studies show that large companies generally are more stable over time and that their employment goes down less during recessions....
So when you read that small business and big business are pitted against each other or are not good for each other, don't believe it. They are huge customers of each other, they help drive each other's growth and they are completely symbiotic. Business, taken as a whole, is where almost all of the job creation will come from. And without the huge capital investments made by big business, job creation would be a lot less.
Small businesses of all types are essential, dynamic and innovative, and they are a uniquely entrepreneurial part of our U.S. economy. We wouldn't be the same without them.
But that does not diminish what big businesses do. Large companies are very stable, and they make huge investments for the future. On average, they pay their people more, and they provide health insurance and benefits for their employees and their families. Big businesses are an essential part of a country's success.
(Here Mr. Dimon was, intentionally or not, echoing the 2011 Sears Holdings chairman's letter: "Too often, the focus on job creation is on small businesses. One hears about how small businesses are the source of most job growth. What this ignores is the fact that large businesses are large because they service a large number of customers and typically employ large numbers of people as well." My Sears Holdings-related disclosure is here.)
On regulation and compliance:
It has been estimated that there are 14,000 new regulatory requirements that will be implemented over the next few years. Three hundred out of the 400 Dodd-Frank rules still need to be completed. ...Over the next few years, we estimate that tens of thousands of our people will work on these changes, of whom 3,000 will be devoted full time to the effort, at a cost of close to $3 billion....We have strong audit, compliance and legal staffs (these groups total more than 3,600 employees)....
Even senior regulators now recognize that the current proposed rules are unworkable and will be impossible to implement.
The rules also will create unintended consequences. Nearly 40% of all Americans have FICO scores below 660. Many of the new capital rules make it prohibitively more expensive to lend to this segment (if you are a bank). And the Federal Deposit Insurance Corporation (FDIC) now charges us approximately 10 basis points on all assets (not just the deposits it insures – we now are paying the FDIC approximately $1.5 billion a year), making all lending more expensive and, in particular, distorting the short-term money markets that lend large sums of money over short periods of time at low interest rates...
Many bankers would have loved to support proper reform. But it is hard to support something when you were not involved in the process in a meaningful way. In fact, at a bankers' meeting with 100 bank CEOs in the room, 70%-80% said they were afraid to speak up because of potential retribution from the regulators and examiners. This is not a healthy process for policymaking.
Mr. Dimon shrewdly notes that some of the government-imposed rules are self-serving:
The new Liquidity Coverage Ratio gives government and government-guaranteed securities credit only for being liquid – no other assets, including gold, equities or corporate bonds have any liquidity value. This also creates higher demand and, therefore, a higher artificial value for government securities.
Toward the end of the letter, Mr. Dimon also points to some of the progress in the financial services industry over the past 30 years:
Thirty years ago, it cost, on average, 15 cents to trade a share of stock, 1% (100 basis points) to buy or sell a corporate single- A bond and $100,000 to do a $100,000,000 interest rate swap. Today, it costs, on average, 1.5 cents to trade a share of stock, 10 basis points to buy a corporate single-A bond and $4,000 to do a $100,000,000 interest rate swap. ...Reducing spreads, or the cost to do a trade, means that the buyer gets to buy at a better price, and the seller gets to sell at a better price. This is no different from Wal-Mart Stores, Inc. offering you great products at lower prices. Innovation in products, systems and markets has driven down these costs, and the investor and issuer are the beneficiaries.
(He doesn't mention that some of these lower fees are the result not of any particular leadership by JPMorgan Chase but rather the result of competition from Schwab, e*trade, and the like.) The whole letter struck me as well done.