J.P. Morgan Chase & Co. (NYSE: JPM) is in the news today because CEO Jamie Dimon issued a scathing letter to shareholders that effectively is attacking the current political climate in Washington D.C.  If you read through this letter without prejudice (if possible) and if you overlook the word “demonized” used once and a couple of other points, this letter raises some good points.

Dimon was in a far different boat than CEOs running other troubled banks.  J.P. Morgan often acted at the request of the government, sometimes not in its best interests.  Citigroup Inc. (NYSE: C) and American International Group Inc. (NYSE: AIG) do deserve most of the blame here.  It is arguable that even Bank of America Corp. (NYSE: BAC) acted often at the request of Uncle Sam, yet the bonus issues prevailed there and Ken Lewis was effectively destroyed.

The letter to shareholders actually spells out many of the issues and the solutions.  It does include some criticism — rightfully so.  Jamie Dimon is not the culprit here.  He is perhaps the biggest solution.  He did not run the risk management into the dirt like AIG.  He did not run Lehman Brothers or Bear Stearns out of existence, although he did buy Bear Stearns “at the request of the government.”  Every banker statement out there and every behind the scenes report covering this effectively exonerated Dimon of looking for the government handout or bailout.  Many institutions did fail and many did not fail that should been allowed to fail.  Dimon wants the notion of ‘too big to fail’ removed from the economic equation, even if that means J.P. Morgan Chase.

J.P.Morgan did participate in the TARP, but this was also forced on it.  Dimon does not say that it was mandated, but other bank executives and former government officials have said and hinted that this was not just offered money with a request by the government to accept it.

Whether or not you believe the stance is up to you, but Dimon claims that JPMorgan would have survived even without a financial rescue and that many other financial institutions would have survived as well.  But he rapidly admits that things would have been far worse, that many other banks and institutions would have failed, and that his bank even prepared for things to get worse….

We have taken some excerpts from the full shareholder letter for review.

“We have endured a once-in-a-generation economic, political and social storm, the impact of which will continue to be felt for years or even decades to come.”

“On March 16, 2008, we announced our acquisition of Bear Stearns at the request of the U.S. government; on September 25, 2008, 10 days after the collapse of Lehman Brothers, we bought Washington Mutual.”

Despite the firmer regulation and restriction, Dimon wants the company to grow… “To provide better service to our millions of customers, we plan to add 2,700 personal bankers and more than 400 investment sales representatives in 2010.”

As far as the cost of the 2009 business practice changes…. “$500 million to $750 million” in after tax income.

Dimon says the bank could hike its dividend if economic conditions improve and potential regulatory reform is settled.  “We hope to be able to increase the dividend to an annual range of $0.75 to $1.00 per share. To do so, we would like to see three specific things happen: several months of actual improvement in U.S. employment; a significant reduction in consumer charge-offs (which improves earnings and diminishes the need for additional loan loss reserves); and more certainty around the regulatory requirements for bank capital levels.”

Dimon addresses compensation in many issues and from many angles.  But he also defends pay in many forms for those who perform and for legitimate banks…  “Much of the anger about highly compensated individuals at banks relates to the argument that all of these companies would have failed, which we do not believe is true…”

On TOO BIG TO FAIL and on bailouts and on regulation and reform… “The era of bailouts must end, and the oversight of system-wide risk must increase, among other changes…. we think it is important to complete financial reform this year.”  Also noted as follows: “The premise that all banks would have failed had it not been for the government’s actions is incorrect. This premise is behind much of the anger toward banks and some of the policy recommendations that are meant to punish banks. We should acknowledge that the worst offenders among financial companies no longer are in existence. And while it is true that some of the surviving banks would not, or might not, have survived, not all banks would have failed. I know I speak for a number of banks when I say that some of us accepted the Troubled Asset Relief Program (TARP) capital not because we needed it to survive but because we believed we were doing the right thing to help the country and the economy.  We were told the government wanted even the healthy banks to take TARP to set an example for all banks and to make it easier for the weaker institutions to accept the capital without being stigmatized. JPMorgan Chase and many other banks were in a position to try to help, and that is what we did.”

“….we reluctantly prepared for the situation to get worse, with a possible U.S. unemployment rate of 15% or higher.”…  “(We did use the Term Auction Facility (TAF), a special government sponsored depository facility, but this was done at the request of the Federal Reserve to help motivate others to use the system.)”

Here is where the media is latching onto Dimon’s words…. “In the current political environment, size in the business community has been demonized….”  Also noted was “As far as the public or politicians take punitive efforts against banks like ours, this is simply another form of ignorance and prejudice.”  Those statements were not used with kid gloves, but Dimon has shown over and over how he can prevail against any politicians in a public hearing.  It might help if the politicians and regulators at least had a better clue about what they were after other than an attacking soundbite, but that is a different issue entirely and that is not what Dimon has said in his letter.

Bankers are easy to demonize.  The industry is one that needs reform even above the regulatory changes we have seen.  But the industry is needed, like it or not… socialist or capitalist.  Institutions will be allowed to fail ahead, and it is obvious that the  politicians are going to pick a few vulnerable institutions later this year or next to make an example of.

This letter sounds much like Jamie Dimon is digging in and will now fight for what is right, whether he gets criticized by politicians or not. But… he should also be part of the solution here.

Dimon’s full 36 page letter to shareholders is here.

JON C. OGG

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