Earth shaking words from a giant on Wall Street.
The insiders know the next collapse is coming. What form it takes may remain a surprise to account holders and investors who are not on guard.
But JPMorgan Chase chairman and CEO Jamie Dimon is positioning his firm to pick up the pieces after it hits.
A loud warning from a person who may be considered a de facto spokesman for the insiders who prevail on Wall Street, Dimon’s comments are more than just precautionary and foreboding – they spell out the mechanism with which the big banks and the technocratic controllers will seize and concentrate power during the next crisis.
Problem-reaction-solution… and the new rules of the game.
Another crisis event is coming in the financial markets. That much is clear.
How bad it will be depends upon how well you withstand the new rules of engagement.
Dimon writes in his April 8, 2015 shareholder letter:
Some things never change — there will be another crisis, and its impact will be felt by the financial market.
The trigger to the next crisis will not be the same as the trigger to the last one – but there will be another crisis. Triggering events could be geopolitical (the 1973 Middle East crisis), a recession where the Fed rapidly increases interest rates (the 1980-1982 recession), a commodities price collapse (oil in the late 1980s), the commercial real estate crisis (in the early 1990s), the Asian crisis (in 1997), so-called “bubbles” (the 2000 Internet bubble and the 2008 mortgage/housing bubble), etc. While the past crises had different roots (you could spend a lot of time arguing the degree to which geopolitical, economic or purely financial factors caused each crisis), they generally had a strong effect across the financial markets
Dimon, the consummate insider who held a board position on the powerful New York branch of the Federal Reserve during and after the near-collapse, thinks his institution will do far better than last time, hinting at some observations and scenarios war-gamed by his firm’s research consultants that could be triggered by geopolitical and currency flashpoints
Regarding the Eurozone, we must be prepared for a potential exit by Greece. We continually stress test our company for possible repercussions resulting from such an event (even though, in our opinion, after the initial turmoil, it is quite possible that it would prompt greater structural reform efforts by countries that remain).
The recent volatility of oil, dropping to historic lows and setting in new tensions in global affairs and finance, while destroying jobs, may be enough to set it off. The full effects of pump prices and economic warfare via oil prices aimed at the economies of Russia, Iran and other potentially hostile nations is still very much in motion, and clearly a tinderbox.
Also regarding geopolitical crises, one of our firm’s great thinkers, Michael Cembalest, reviewed all of the major geopolitical crises going back to the Korean War, which included multiple crises involving the Soviet Union and countries in the Middle East, among others. Only one of these events derailed global financial markets: the 1973 war in the Middle East that resulted in an oil embargo, caused oil prices to quadruple and put much of the world into recession. We stress test frequently virtually every country and all credit, market and interest rate exposures; and we analyze not only the primary effects but the secondary and tertiary consequences. And we stress test for extreme moves – like the one you recently saw around oil prices. Rest assured, we extensively manage our risks. (p. 16)
Whatever the cause of the crisis, the weight of historically unprecedented market interventions by central banks and changing technology and practices is creating ruptures in the structure of society that have the potential to explode during the next turn of events, directly threatening personal wealth.
The aftermath of the 2008 crisis has slowly crippled average Americans, sharpening the decline of the middle class, creating fierce new waves of poverty and evaporating hopes for new opportunities and stable jobs. Its effects have been blunted by government “reform” to pacify the masses and media coverage to bolster optimism, and a psychologically healing band-aid was placed over the wounds.
In the meantime, the entire playing field has been changed. Consumers and little guy institution stand to be engulfed in the aftermath of the next crisis. Problem-reaction-solution is a game the bankers know well, and have a crafted strategy for, just as a coach holds a playbook.
These “reaction” transactions of the next financial crisis will be intensified by the new financial terrain:
• automated, rapid via computers, algorithms, big data;
• “shallow markets” and threatened with “illiquidity”;
• positioned to charge for deposits and transactions while less likely to lend and returning little or no interest;
• vulnerable to cyber theft and subject to account freezes;
• market “depth” limited by gravity of actions of big fish in the pond – big banks, Federal Reserve bond purchases, derivatives moved by enormous players and rapid computerized trades; dark pools of billionaires steering big deals from the shadows;
Dimon’s JPMorgan Chase has hired the tech necessary to follow completely the actions of the entire financial spectrum – right down to individual accounts, while “leveraging” data with 3rd party companies using it for their own purposes and adding on a layer of complexity to purchaser, depositor, customer data profiles.
According to Dimon, the likely mass movements of capital and desperate players when the next run on the market sets in are fairly predictable.
Good collateral will dry up; credit will be slow to extend and tough to come by; there may not be enough treasuries to soak up bad assets – and most pointedly, banks may not even accept deposits.
And many will suffer, panic and turn to the arms of JPMorgan Chase and its peers, and into the safe harbor of treasuries and government-backed instruments and institutions. The central banks and the obscured insider syndicate hold all the cards and remain in control of the solution.
Many things will be different — for example, there will be far more risk residing in the central clearinghouses, and non-bank competitors will have become bigger lenders in the marketplace. Clearinghouses will be the repository of far more risk than they were in the last crisis because more derivatives will be cleared in central clearinghouses. It is important to remember that clearinghouses consolidate – but don’t necessarily eliminate – risk.
There already is far less liquidity in the general marketplace: why this is important to issuers and investors. […] For issuers, it reduces their cost of issuance, and for investors, it reduces their cost when they buy or sell. Liquidity can be even more important in a stressed time because investors need to sell quickly, and without liquidity, prices can gap, fear can grow and illiquidity can quickly spread – even in supposedly the most liquid markets.
Market depth is far lower than it was, and we believe that is a precursor of liquidity. For example, the market depth of 10-year Treasuries (defined as the average size of the best three bids and offers) today is $125 million, down from $500 million at its peak in 2007. The likely explanation for the lower depth in almost all bond markets is that inventories of market-makers’ positions are dramatically lower than in the past. For instance, the total inventory of Treasuries readily avail – able to market-makers today is $1.7 trillion, down from $2.7 trillion at its peak in 2007. Meanwhile, the Treasury market is $12.5 trillion; it was $4.4 trillion in 2007.
The determination of markets around Federal Reserve policy is critical. “Hints” of the Fed slowing its bond purchases caused such an “unprecedented” and significant disturbance in the market, that statisticians claimed it was a once-in-3-billion-years event:
Recent activity in the Treasury markets and the currency markets is a warning shot across the bow.
Treasury markets were quite turbulent in the spring and summer of 2013, when the Fed hinted that it soon would slow its asset purchases. Then on one day, October 15, 2014, Treasury securities moved 40 basis points, statistically 7 to 8 standard deviations – an unprecedented move – an event that is supposed to happen only once in every 3 billion years or so (the Treasury market has only been around for 200 years or so – of course, this should make you question statistics to begin with). Some currencies recently have had similar large moves. Importantly, Treasuries and major country currencies are considered the most standardized and liquid financial instruments in the world.
Dimon notes many factors that are different from the 2008 era and which will determine the outcome of emergencies to come.
Today, banks are starting to charge customers for deposits, a reflection on the insane effects of negative interest rates.
Tomorrow, when the next crisis hits, megabanks like JPMorgan Chase may not accept deposits at all, according to Jamie Dimon’s assessment:
And now, a thought exercise of what might be different in the next crisis
In a crisis, weak banks lose deposits, while strong banks usually gain them. In 2008, JPMorgan Chase’s deposits went up more than $100 billion. It is unlikely that we would want to accept new deposits the next time around because they would be considered non-operating deposits (short term in nature) and would require valuable capital under both the supplementary leverage ratio and G-SIB.
In a crisis, everyone rushes into Treasuries to protect themselves. In the last crisis, many investors sold risky assets and added more than $2 trillion to their ownership of Treasuries (by buying Treasuries or government money market funds). This will be even more true in the next crisis. But it seems to us that there is a greatly reduced supply of Treasuries to go around – in effect, there may be a shortage of all forms of good collateral.
It is my belief that in a crisis environment, non-bank lenders will not continue rolling over loans or extending new credit except at exorbitant prices that take advantage of the crisis situation.
The markets in general could be more volatile — this could lead to a more rapid reduction of valuations
Moreover, JPMorgan and other big banks are expanding their policies of charging customers to hold deposits, validate funds and make transactions – charges that JPMorgan sees as the “true cost of moving money.”
With new measures for cybersecurity, fraud protection and payment verification in mind, JPMorgan is slated to tack on new processing fees and add costs for all transactions, and especially ‘outmoded’ payments like cash and checks and the loafing “free riders” who use them:
For example, it costs retailers 50-70 basis points to use cash (due to preventing fraud and providing security, etc.). And retailers often will pay 1% to an intermediary to guarantee that a check is good. A guaranteed check essentially is the same as a debit card transaction for which they want to pay 0%. For some competitors, free riding is the only thing that makes their competition possible. Having said that, we need to acknowledge our own flaws. We need to build a real-time system that properly charges participants for usage, allows for good customer service, and minimizes fraud and bad behavior.
Technology is changing your access to financial markets, loans and ultimately your own money.
The gravity will tend towards the big banking institutions – that much Dimon is assured of – and the data firms who give it “leveraged power” through technological monitoring and authorization systems. Transactions that are approved and controlled through this system will be speedy and secure; others will be slower, marginalized and perhaps even prohibitory:
Big, fast data. We continue to leverage the data generated across JPMorgan Chase, as well as data that we purchase to create intelligent solutions that support our internal activities and allow us to provide value and insights to our clients. For example, we are monitoring our credit card and treasury services transactions to catch fraudulent activities before they impact our clients, we are helping our clients mitigate costs by optimizing the collateral they post in support of derivatives contracts, and we are highlighting insights to our merchant acquiring and co-brand partners.
Moreover, Silicon Valley is moving into Wall Street to use big data in making big changes in traditional banking practices. Loans and other instruments can be approved and move faster, while start up tech firms gain the position of underwriting loans with data-based practices and steering the development of the new system. Dimon writes: Silicon Valley is coming. There are hundreds of startups with a lot of brains and money working on various alternatives to traditional banking. The ones you read about most are in the lending business, whereby the firms can lend to individuals and small businesses very quickly and – these entities believe – effectively by using Big Data to enhance credit underwriting. They are very good at reducing the “pain points” in that they can make loans in minutes, which might take banks weeks.
Tech firms are admittedly steering this brave new system of banking.
As for the unspoken levels of funny business that invariably go on during crisis of all types – in finance, in wars and in social upheavals – Dimon naturally says very little.
What is not said in these shareholder letters is that the agreements, under the table and above board, between Wall Street, the Federal Reserve, the political circles of Washington and the various levers maintaining the status quo is that the tidal wave of corruption and criminality that triggered and consumed the 2008 Financial Crisis has been swept under the rug; the reforms have set it in, the bad players have been scolded and punished, and the game will go on.
Nothing will ever be done to hold into account the real offenses which led up to a near-total economic disaster last time. None dare call the looting, fleecing and confiscation of wealth for what it is. Not inside the system.
Throughout Dimon’s 39-page letter from April 8, he repeatedly admits that his bank never had an unprofitable quarter during the actual 2008-2009 crisis. Through the typical corporate gloating and positive spin for share holders, Dimon underscores the fact that the banking interests that he represents are admittedly stronger than ever after more than six years, and better equipped to “manage” the reactions of the next crisis, which he has admitted is sure to come.
The new system of banking – reformed from the all but the worst problems of the last crisis – retains power over its own affairs, and knows the ropes, rules and regs as only a participant in building that system could.
In the new world, in order to improve the consistency of controls, regulators have demanded that most risk and control functions be centralized, including Risk, Compliance, Finance, Oversight & Control, Audit and Legal. In doing this, we have given huge amounts of additional authority to functions at our corporate headquarters.
The possibility of “rigging markets” and manipulating economic events not only remains in the hands of the largest banking corporations, but it is stronger than ever with a firm partnership between Silicon Valley and Wall Street that is directing the course of events.
Stand by for rough seas.