Opportunity Lost

JPMorgan Chase must grow bigger. It’s only our second largest bank now, assets: $2 trillion. But with more growth “We can give so much more, quicker, better, faster. Like Wal-Mart,” Jaime Dimond, JPMorgan Chase’s CEO, told The New York Times, Sunday Magazine, December 5, 2010.

   His bank must be big enough for a corporate customer to borrow a billion dollars from it alone. Only then can we compete with Europe’s big banks, the CEO explains. “Dimond sees the front of the store, which lends money, as linked to the back, which deals in securities.” JPMorgan Chase  owes a corporate customer the convenience of letting it purchase all  financial needs during one stop, under one roof, he says.  

  But what if the customer wants to shop around for the best prices for its complicated, multifarious needs? What if it wants to line up a consortium of competing banks for a big loan, in the traditional way? Is the object of providing a corporation’s total financial needs under one roof actually a way to rope it in, after its first purchase, to all else the bank sells? Is the real object to keep the customer away from comptitors, i.e., to avoid the rigors of free enterprise? In Europe sentiment is building for breaking up big banks, The Wall Street Jouranl, November 3, 2009. Do we need a big JPMorgan Chase to draw business from them if soon they don’t exist?

  The House Judiciary Committee staff posed much the same questions to another renown champion of bigness, Harold Geneen, CEO of International Telephone & Tellegraph Co., The Acquisitors: Too Titanic to Let Sink (chapter 8). ITT was taking over a corporation a month. Like Dimond, Geneen replied that his company amassed corporations because its agglomeration of their assets enhanced efficiency and economy. But our reading of ITT’s subpoenaed documents left no doubt that the acquisitor’s real purpose in pilling up acquired assets was to shift its own debt to those acquired companies and to make an end run around its competitors. It plotted to build a closed economic fiefdom by using the mass of those acquired employees as captive ITT customers. Congress found that, far from enhancing corporate performance, ITT’s takeover campaign thwarted efficiency and economy (ibid., chapter 14).

   The Justice Department promptly brought suit to halt the takeover campaign by enjoining ITT from acquiring Hartford Fire Insurance Co., then the largest takeover of all time. The department aimed to establish precedent against any major U.S. corporation from acquiring any other major corporation. Merely filing the suit halted the greatest bank-merger wave of the time. But lobbyists, for the first time invoking the “too big to fail” doctrine, argued that ITT had grown too titanic to fit into laws of the United States.

   The Justice Department actually swallowed that pretext. It abandoned the ITT-Hartford suit. Ironically, if the department had presevered there’d be no JPMorgan Chase–formed from amassing assets of major corporations that make it too titanic to let sink, immune to strictures that govern free enterprise, such as bankruptcy. Preparation of the suit did reveal, however, Chase Manhattan Bank, before acquiring JPMorgan, had gained takeover funds by rigging the New York Stock Exchange with false takeover transactions (ibid., chapter 4).

   JPMorgan Chase’s assets as already amassed show that the Justice Department was right on track when it sued to block ITT’s Hartford acquisition: takeover campaigns undermine corporate performance. Since becoming our second largest bank through serial takeovers JPMorgan Chase has taken a $45 billion bailout, incurred a $51 billion loss from failed mortgages and other bad loans, set aside $3 billion to cover claims by Fannie Mae and Freddie Mac for selling faulty mortgages, made four million mortgages now delinquent, modified 272,000 loans, and attempted to foreclose on 225,000 of its mortgages but suspended 150,000 of them for faulty paperwork.

   A better idea than to grow bigger should be that the bank actually grow smaller–to the size it would be had the Justice Department not gone off track by scuttling its ITT-Hartford suit.

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