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JPMorgan's Dimon Eases Fears About Default Exposure

Jamie Dimon brought his considerable powers of persuasion to bear to calm investors macroeconomic concerns.

JPMorganbeat analysts’ estimates by 6 cents a share Thursday, but the press and the investment community were nervous about Europe, about the potential for a U.S. debt default, about lurking mortgage issues. The worry on the conference calls was palpable. But Dimon carried the day—the shares were still up more than 2.25 percent around one o’clock.

JP Morgan Chase
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JP Morgan Chase

Responding to questions about Europe, Dimon estimated the bank’s total exposure to Portugal, Ireland, Italy, Greece and Spain at about $15 billion. The bulk of that exposure is to Spain and Italy. In his worst-case scenario, JPMorgan would lose about $3.5 billion, he said. Dimon made it clear that JPMorgan was sticking by European sovereign and corporate borrowers, and that it would not pull these positions to save its skin.

”I hope that one day some of these European nations appreciate the fact that we're not cutting and running,” Dimon said to both the press and analysts on two separate calls.

To further soothe investor nerves, Dimon said that a big part of the exposure to the weaker European countries was to corporate borrowers. He noted that corporate borrowers can remain solvent even when their countries default, as was the case in Argentina and Mexico.

From the cheery topic of European debt woes, reporters moved on to the possibility of a U.S. debt default. Dimon had some memorable words: “No one can say with a straight face that a default of the U.S. government wouldn't have a huge impact on the global economy.”

Referring to the possibility that Congress fails to agree to raise the debt ceiling, he said, “I wouldn't take that risk.” The market is assuming this will get resolved, says Dimon, adding that if it doesn’t he expects major upheaval in the markets.

The topic of mortgages came up with both analysts and reporters, of course. JPMorgan added $1 billion to reserves for the potential cost of the settlement with the states' attorneys general over JPMorgan’s role in the mortgage meltdown.

Dimon did his best to make it sound as if JPMorgan, and other banks are steadily climbing out of the hole. He said he expected foreclosures to stay high for another 12 to 18 months, and that home prices would “continue to go down a little” as a result. But Dimon was optimistic, saying the economy would drive the housing market, not the other way around. With a little time, house prices will start to rise again, he said.

It was almost enough to make you forget that CFO Doug Braunstein’s evasive answer to the question from this reporter: Will you have more mortgage charges as big as the $2.3 billion you took this quarter against litigation, settlements and foreclosures?

Jamie Dimon
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Jamie Dimon

"Those numbers reflect our best estimates, but facts and circumstances will change," Braunstein said.

Later, Dimon gave a more substantive answer to analysts. “We think we’re done with the [government-sponsored enterprises], the foreclosure delays and settlements could be a little bit higher, mortgage servicing rights could be a little bit higher, but shouldn’t be a lot more,” Dimon said. As for private-label settlements, he said they’ll raise costs for JPMorgan, but the charges won’t outweigh the benefits the bank gets from releasing credit reserves.

Not the most bullish outlook.

While all these expenses may be leading some firms toward job cuts, not JPMorgan. Dimon said they’re continuing to grow all their businesses. The firm has added 10,000 workers so far this year. Perhaps the strong results in the investment bank this quarter helped save some jobs. When asked about reducing headcount in that business, Dimon said, “We feel pretty good about our investment bank.”

The future of the mortgage business may be less certain. “Owning consumer assets may be something we don’t want to do,” Dimon said. “It may be we’ll originate, securitize, service, but not own mortgages.” He added it’s a decision that may not happen for another eight years, when the regulations kick in.

One of the big factors that will affect that decision is the rules on capital requirements. He sees American banks ending up holding way more capital than they need in the next few years. If that capital can’t be put to use, it will be returned to shareholders, and Dimon promises to look carefully at which businesses generate sufficient returns to warrant the capital they consume.

Meredith Whitney chimed in on the analyst call to ask if banks were well into repricing their services to keep their profits up. In retail, there have been a few repricing efforts in response to the overdraft and credit-card legislation, Dimon said. As for the Durbin Amendment—don’t expect to see the impact of interchange-fee changes until the fourth quarter. He said the bank would not adopt policies that were “consumer unfriendly.”

Corporate customers have not begun to feel the repricing pain. “We’re not even at square one,” Dimon said. He expected certain types of deposits and loans—in particular revolving credits—would see pricing changes in the future.

As to whether the regulators would eventually tell him which businesses he should invest in, Dimon was at his quick-witted best: “It's still America, if the regulators start making capital decisions, then they should be the board.”