It's obvious by now that JP Morgan Chase (NYSE: JPM) failed to meet analyst expectations in their 4th quarter and year end earnings announcement, released today. At issue was a 26 cents per share miss related to legal fees that were almost a billion dollars more than analysts had forecast. Given that their legal fees were almost $8 Billion less than 2013, one might argue that this was an analyst failure and not a JPM failure, but for the moment, we'll let that debate slide. What is worth discussing, however, were CEO Jamie Dimon's harsh criticisms of Federal Regulators that are plaguing the entire banking industry. (Bloomberg: JPMorgan CEO Dimon Says Overlapping Regulators Assault Banks)
"Banks are under assault by the Regulators," Dimon stated today. During the conference call, he shrugged off reports questions for more details with a simple, "You've got to be kidding me." Dimon is spot on accurate in this assessment. Since the 2008 Financial Crisis, regulators have swarmed the banking industry like sharks chasing chum. The amount of needless overhead they have forced banks to incur now has the potential of creating the next crisis.
As Dimon correctly stated, “We have five or six regulators or people coming after us on every different issue.” In the past, issues would be handled typically by a single regulator. The amount of bureaucracy this feeding frenzy has generated in the banks is a severe drain on the bottom line, and it threatens the financial well-being of the industry itself. Worse yet, the type risks this new wave of regulator is uncovering have virtually nothing to do with either the financial or security related risks inherent in a 21st century financial business. They are doing a great job of forcing banks to check boxes in the regulatory risk spreadsheets, but they are doing nothing to identify real risks that would warrant oversight and closure.
Capital requirements driven by seemingly arbitrary and rapidly changing regulatory requirements are also severely impacting the ability of banks to drive revenue. JP Morgan alone is now required to raise an additional $20 Billion in capital by 2019. Similar requirements are straining and constraining other large banks that would under other circumstances, fueling the economy.
To compound problems, the regulators are now using their disproportionate clout to extort exorbitant fees - in the forms of fines - from banks that, in some cases, did precisely what they were requested to do. JP Morgan is another example of this when, during the banking crisis, they agreed to acquire Bear Stearns and Washington Mutual. Their reward for assisting the government in providing this shareholder-funded bailout was to be fined for actions that Bear Stearns and Washington Mutual had executed prior to the JPM acquisition.
Dimon's attack on the predatory practices of today's regulatory bodies was right on the money. For there to be a fundamental shift in this practice, however, we need to see other reputable banking CEOs continue that attack. Dimon cannot stand alone if there is any hope to force the regulators to back down. Short of that, however, the regulators will remain one of the greatest threats to the health of the financial industry. It's a problem that is felt by every bank in the US today, and if left unchecked, it will result in unnecessary failures.
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