“Big jobs usually go to the men who prove their ability to outgrow small ones,” Teddy Roosevelt once said. JPMorgan Chase (NYSE:JPM) chairman and CEO Jamie Dimon — a history buff who often quotes TR — likely would agree.
These days, the man who built Citigroup (NYSE:C) with mentor Sandy Weill back in the ’80s and ’90s, captains a global financial services company with a $130 billion market cap and total assets of $2.3 trillion. Not a bad run for a guy who learned the brokerage business from his father and grandfather, and whose first job out of college was an internship at Goldman Sachs.
But as the euro zone debt crisis continues to roil global markets, Dimon’s biggest job yet will be balancing the risks of his bank’s growing exposure to the region against the potential market-share coup JPM can score by rushing in, as Alexander Pope would say, “where angels fear to tread.”
The stakes are high. JPMorgan has bought and sold derivatives on a massive amount of debt held by the five most troubled euro zone economies. The total is “$100 billion by $100 billion,” Dimon told a Goldman Sachs (NYSE:GS) investors conference on Wednesday, adding: “I forgot the exact number.”
And Dimon is still buying. While competitors like Bank of America (NYSE:BAC) and Citigroup have cut their quarter-on-quarter exposure by 13% and 38%, respectively, JPM has done the opposite, the Financial Times reports . On June 30, JPM’s derivative exposure stood at $14 billion on the so-called PIIGS (Portugal, Italy, Ireland, Greece and Spain). By mid-November, it had increased by nearly $2 billion.
That’s surely a contrarian way to play a crisis of this magnitude. But Dimon has never been one to follow the pack. Indeed, in 2009 Brendan Wood International named Dimon a Top Gun CEO. He still deserves those shiny gold wings (even if he does espouse some flimsy logic about income taxes on the rich) for these reasons:
He Believes in His Industry. Despite the headwinds facing investment banking — whether from Europe or from complex regulations that boost banks’ capital requirements — he’s still confident the industry in general (and JPM in particular) will roll with the punches and rise stronger. Still, Dimon said at Wednesday’s conference that he expected “flat” investment banking revenue for the current quarter, with the possibility of a slide in mortgage banking. Credit card operations should show a small increase.
Dimon also is convinced that the industry’s current trough is cyclical, not structural — meaning the sector is a victim of bad timing more than bad practices.
He Views Challenges as Opportunities. When Weill fired the Citigroup heir apparent in 1998, Dimon took up boxing to work out his anger. After tearing both rotator cuffs, he gave that up for running — then walked away from New York to run Bank One in Chicago. He axed managers, cut $1.5 billion in costs and shaped up sagging credit card operations. At the end of three years, Dimon had turned a half-billion dollar loss into a $3.5 billion profit.
One year after that, he orchestrated JPMorgan’s $58 billion acquisition of Bank One — merging Bank One’s retail and credit card strengths with JPMorgan’s asset management and investment banking savvy. By the time Bear Stearns crashed and burned on the subprime mortgage pyre in 2008, JPM — not the once-dominant Citi — was the only bank the government deemed strong enough to step in and take over Bear Stearns.
He’s Kept His Bank in Good Shape. Dimon has often characterized JPM, the largest U.S. bank holding company, as having a “fortress balance sheet” that can withstand shocks that crop up with little or no warning, while remaining agile enough to make the best deals in the worst times. That “fortress” focus kept JPM out of dodgier investments like “structured investment vehicles” and “collateralized debt obligations” that later came back to bite rivals like Citi and Merrill Lynch.
As a result, JP Morgan Chase took a smaller hit than its peers during the financial meltdown. It also repaid the $25 billion in TARP money early. On Wednesday, Dimon changed that term to “battleship balance sheet” to illustrate JPM’s financial strength. The company has a whopping $120 billion in Tier 1 capital, which includes disclosed reserves and equity capital. Dimon told the Goldman Sachs conference that by the end of 2012, JPM hopes to meet tougher Basel III requirements of bank capital equal to 9% of its risk-weighted assets.
JPM also wants to repurchase stock and make a ”modest” increase to the dividend. At $34, JPM is trading 22% above its 52-week low of $27.85 in October. The stock has a price/earnings-to-growth (PEG) ratio of 0.84, indicating it may be undervalued, and a current dividend yield of nearly 3%.
Bottom Line: The clock is ticking on whether Dimon’s bold move in Europe wins out — and whether the history he loves casts him as investment banking’s heroic first responder, or one of Pope’s proverbial fools. In the wake of S&P’s dire warning on Monday that it could downgrade the credit ratings of 15 euro zone countries if leaders can’t reach agreement on a fix for the crisis, Dimon’s bold bet will be tested soon.
EU leaders will start discussing a “fiscal compact” at a critical EU summit on Thursday, a change to existing treaties that reportedly would “fast-track” member approval and restore much-needed confidence to global markets. But that’s hardly a done deal.
Fitch Ratings recently reported that U.S. banks could be “greatly affected” if Europe’s debt crisis continues to spread beyond the PIIGS because “exposures to large European countries and banks are sizeable” — and greater than their exposure to “stressed markets.” While Fitch noted that the U.S. banking industry is stable, and that most banks’ fundamentals have improved, “unless the euro zone debt crisis is resolved in a timely and orderly manner, the broad outlook for U.S. banks will darken.”
Despite the odds, I wouldn’t bet against Jamie Dimon. He’s shown an uncanny ability to see light through the darkest skies — and that’s a huge edge in a business that stands or falls on confidence. “Confidence is like a secret sauce,” Dimon told CNBC back in August. “When you go to sleep at night, think about the following before you get depressed and you see the market down 500 points: The strength in the system will blow your socks off when it comes out of this malaise we’re in.”
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.