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DealBook: JPMorgan Chase Faces Questions on Potential New Capital Rules

Justin Lane/European Pressphoto AgencyDuring an earnings call on Friday, stock analysts asked questions JPMorgan Chase about how a potentially nettlesome regulation might affect the bank.

It’s often the case that when someone doesn’t want to talk about something, it only invites more questions.

That’s certainly how it felt on a conference call that JPMorgan Chase held Friday to discuss its second-quarter financial results. The earnings were relatively strong. Yet for much of the call, the stock analysts who cover JPMorgan asked questions about how a potentially nettlesome regulation might affect the bank.

The bank’s chief financial officer, Marianne Lake, was willing to discuss the subject, but only up to a point. There was one number she seemed to not want to reveal. The issue relates to something called the leverage ratio, a measure of how much capital a bank has.

Since the financial crisis of 2008, regulators have been introducing new rules on capital because they feel higher capital levels makes banks more able to weather storms. That’s because capital can act as a financial cushion that absorbs losses in troubled times. To measure whether it is sufficient, capital is often expressed as a percentage of a bank’s assets. For instance, a bank with $3 in capital and $100 in assets would have a leverage ratio of 3 percent.

This week, regulators proposed a new leverage ratio rule. They want large banks to hold capital that meets a certain percentage of assets, plus other risks embedded in their balance sheets. And it measures the ratios at different places in the bank’s corporate structure.

At the parent company, the leverage ratio would effectively have to be 5 percent. Meanwhile, regulators want the ratio to be 6 percent at the banking subsidiaries that are covered by federal deposit insurance.

The banks have two months to comment on the rules, during which they are almost certainly going to request changes. Once the proposed rules are put into effect, banks will have until the end of 2017 to comply with the new leverage ratios.

On Friday, JPMorgan Chase estimated that it was already close to meeting the 5 percent requirement at its holding company, saying it had enough capital to get to a 4.7 percent leverage ratio there.

Naturally, analysts also wanted to know whether JPMorgan Chase’s deposit-gathering subsidiaries, which are far larger than the holding company, were close to meeting the 6 percent requirement.

“Do you have any sense that you could give us of where you stand on the leverage ratio at the bank level today relative to the 6 percent requirement?” John McDonald, a bank analyst at Bernstein Research, asked on Friday.

Marianne Lake, the chief financial officer at JPMorgan Chase.

Ms. Lake responded that she would not disclose the bank leverage ratio. She added that it was lower than at the holding company.

A few minutes later, Betsy Graseck, a bank analyst at Morgan Stanley, tried. “I’m just wondering why no bank-sub disclosure. I realize that is different, but — and I heard your answer earlier — but I’m just wondering,” she asked, why the number was not provided.

Ms. Lake replied, “So, Betsy, there’s nothing sinister underlying it.”

The chief financial officer did offer some hints, however.

She said the bank subsidiary leverage ratio would be “small tens of basis points” lower than the 4.7 percent level at the holding company. A basis point is a hundredth of a percentage point. Therefore, the leverage ratio for JPMorgan Chase’s bank subsidiaries might be around 4.4 percent.

Under the proposed rules, those entities would eventually have to increase their capital holdings so they are at 6 percent.

Right now, that would mean JPMorgan Chase would have to raise capital by $40 to $50 billion at the subsidiaries. Analysts at Goldman Sachs and Keefe, Bruyette & Woods estimate a shortfall of as much as $47 billion, which is a far higher theoretical dollar deficit than exists at other large banks’ insured subsidiaries.

(However, Bank of New York Mellon’s deficit is higher as a percentage of existing capital, according to Keefe, Bruyette & Woods).

A capital hole of nearly $50 billion is significant even for a bank as big and profitable as JPMorgan Chase. That may be why the bank didn’t want to go into further detail. The fact that its dollar deficit seems to dwarf that of other banks may also be a source of discomfort. For instance, Goldman analysts estimate Citigroup only falls short by $10 billion at its insured entities.

Mark Kornblau, a JPMorgan Chase spokesman, declined to add to what the bank’s executives said on the Friday call about the leverage ratio.

On that call, JPMorgan Chase executives said the bank could increase its leverage ratio at the bank subsidiaries by moving assets or unwinding derivatives, the financial contracts that generate substantial trading revenue for JPMorgan Chase (as well as some losses, as shown by the London whale debacle last year).

Indeed, if JPMorgan does end up getting hit harder by the new leverage ratio, it may not be a complete accident.

Regulators have long tolerated immense amounts of Wall Street business taking place within insured subsidiaries. But the proposed leverage ratio may be the regulators’ new way of forcing banks to hold higher capital to protect against potential trading losses in such entities.

Goldman Sachs estimates it would take JPMorgan Chase two and a half years to earn the capital it needs to plug the hypothetical gap at is subsidiaries. This matters for shareholders. Using earnings to bolster capital might restrict what the bank can pay out in dividends and spend on stock buybacks. On Friday, JPMorgan Chase’s chief executive, Jamie Dimon, said the bank could step up distributions to shareholders and meet the new leverage ratio requirements. A bank of JPMorgan Chase’s profitability probably can do both.

Still, shareholders might feel more confidence about that assertion if the bank had detailed just how much extra capital it might have to find.

Media Giants Chase Online Ads With Original Shows

Digital and traditional media companies, including newspapers and magazines, have for years been building a video presence on the Internet. But until now the offerings have largely been low-budget, single-camera affairs featuring talking heads.

Last week, however, major media companies like Condé Nast, The Wall Street Journal and Univision presented ambitious slates of original programming to advertisers for the first time.

Companies that were already producing Web content, like Yahoo and Hulu, also announced greatly expanded offerings.

As a result, viewers are being bombarded with an array of new Internet programs — 11 from Yahoo, 14 from AOL and a whopping 30 from Condé Nast, including one that will let viewers watch a Vogue editor, Hamish Bowles, as he shops around the world.

Hulu’s four new original offerings include one called “Behind the Mask,” a show it describes as a “comedic docu-series,” which looks at the world of sports mascots.

These companies are moving rapidly because they believe viewers are now so accustomed to watching programs on devices like mobile phones and tablets that the lines between traditional television and Internet video will blur.

But the companies are also acting out of desperation because many of them can command higher prices for video ads than traditional online banner ads, which are increasingly being undermined by fast-paced algorithmic buying technologies.

Advertisers are also shifting dollars from traditional display advertising to sites like Facebook that can deliver huge audiences. Media companies were wooing ad executives in New York last week during an advertising event called Digital Content NewFronts that is trying to imitate the success of the network television upfronts, which are being held later this month. At lavish open-bar parties, companies not previously known for programming tried to convince advertisers to sponsor shows, or better still, whole channels.

Yet even with the amount of so-called premium content booming, it is not clear ad dollars are following. According to data from the research company eMarketer, spending on digital video — while growing — is expected to reach only $4.14 billion in 2013, a far cry from the $66.35 billion expected to flow into the television market.

Many advertisers say they worry that with so much new content being thrown at the market on so many different platforms, audiences for individual shows will become even more fragmented and microscopic than they already are.

“I don’t care how good your attention span is,” Rino Scanzoni, chief investment officer of Group M, said of the crush of new offerings, “I think it becomes all a blur.” Group M is one of the world’s biggest media-buying and planning agencies.

Ben Winkler, chief digital officer of the advertising agency OMD, which represents brands including Pepsi and Nissan, called it “cable to the nth degree.”

“We are talking narrow, narrow television, niche television if you will,” he said. “If you are reaching just 100 people, is it worth our time and energy?”

AOL is one of the companies making a big bet on “premium video,” or video it hopes will generate greater ad revenue because of higher production values. Tim Armstrong, the company’s chief executive, said in an interview: “Consumers are adopting video very quickly: big investment in devices and networks, big investments by the most talented creative people to get involved in this medium; and big investment in measurement. So I think this industry is about to explode.”

Many online sites are citing the success of “House of Cards,” the Netflix series that drew critical praise this winter, as proof that the moment for video content has arrived. But “House of Cards,” with top-flight talent and sophisticated production values, was hugely expensive. And Netflix relies on subscriptions, not advertising.

For now, most digital companies are looking to produce programming that, while more expansive than one-camera fare, is still cheaper than TV.

Bill Carter contributed reporting.

DealBook: JPMorgan Chase Inquiry Reveals Status Quo After Financial Crisis

Daniel Rosenbaum for The New York TimesSenator Carl Levin, Democrat of Michigan.

People have learned their lesson.

We’ve been told that so many times since the near-death experiences of the financial crisis. Bankers and regulators have flipped roles: now it’s the bankers who are cautious and their overseers who are aggressive.

Details of JPMorgan Chase’s multibillion-dollar trading loss — brought to light by a riveting and devastating report from the Senate Permanent Subcommittee on Investigations — demonstrate what a sham that is. Bankers aren’t acting cautious and chastened. Risk managers aren’t in the ascendance on Wall Street. Regulators remain their duped and docile selves.

What we now know about the incident is that, as the cliché has it, the cover-up was worse than the crime. The losses out of the London office weren’t enough to take down the bank. But as they were building, JPMorgan traders fiddled with risk measures and valuations. The bank’s risk managers defended the traders and pooh-poohed the flashing red signals. The bank gave incorrect information to its regulator. Top executives then made misleading statements to shareholders and the public. All the while, the regulator served its typical role of house pet.

As JPMorgan got into trouble, traders and the responsible executives treated the valuation of trading positions, made up of derivatives, as a puppet made to do what they wanted. The traders pulled on this calculation or that to change the way they were valuing the position to reduce the losses.

Ina Drew, the head of the bank’s chief investment office, referring to how the positions were calculated, asked an underling if he could “start getting a little bit of that mark back.” She then asked if he could “tweak at whatever it is I’m trying to show.” She might believe it is exculpatory that she prefaced the comment by saying to do it “if appropriate” and that the tweak should come with “demonstrable data,” but any idiot working for her would know exactly what she meant: create some rationale to manipulate the valuations to make things look better than they really are.

This discussion did not make it into the bank’s internal report on the incident from January. Imagine that.

Yes, Ms. Drew was ousted. But her actions show that what financial executives do postcrisis when faced with trouble is no different than what they did precrisis. In testimony on Friday, in a quiet voice, she deflected blame up to Mr. Dimon and down to her traders, claiming she was kept in the dark.

The Senate report makes it clear that JPMorgan misled shareholders and the public, particularly on its April 13, 2012, conference call.

That call, which makes up a particularly damning portion of the Senate report, featured a haughty Jamie Dimon famously dismissing the problem as a “tempest in a teapot.”

Of course, it was no such squall. In the call, the chief financial officer at the time, Douglas L. Braunstein, made a number of what appear to be misleading statements about the trades. Mr. Braunstein said the trading decisions were made on a very long-term basis, when in fact the traders were shuffling positions almost daily to make profits and then to disastrously “defend” their positions from further losses. Mr. Braunstein reassured investors and analysts in the call that the trades were vetted by the firm’s top risk managers, when they were not (though top officials, including Mr. Dimon, knew about repeated risk-measure breaches).

This means “there was risk oversight” for the office that made the trades, and the trading “positions needed to comply with limits,” a JPMorgan spokesman, Joseph Evangelisti, said. “We were not aware at the time of all the deficiencies in the risk organization” of the trading group.

In the conference call, Mr. Braunstein also said that the trades were “fully transparent to the regulators,” but, in fact, watchdogs didn’t receive any regular reporting of the positions and received specific information only days before the call.

“What Doug said was accurate,” Mr. Evangelisti said. “No one in senior management at that time believed there was a larger problem in the context of the firm’s size and scale.”

In JPMorgan’s internal report, the call receives scant attention. In testimony before Senator Carl Levin, the Michigan Democrat who heads the Senate subcommittee, Mr. Braunstein fell back on the explanation that he was saying what he believed at the time.

Mr. Braunstein wasn’t available for comment, according to the bank.

Maybe regulators will think it notable that the chief financial officer of JPMorgan misled shareholders in his first extensive comments about the trading losses. Don’t hold your breath.

I don’t even expect much to come out of the evidence that the bank misled regulators. The bank stopped giving its regulator, the Office of the Comptroller of the Currency, important information. At one point, the bank told the agency that it was reducing the size of its positions when it was actually increasing those positions, according to the Senate report.

Despite JPMorgan’s smoke screens, the regulators deserve the public humiliation they have received. They were alerted to risk-measure breaches that should have warned them of problems. By April 30, 2012, just weeks after the trading debacle came to light and before any serious investigation, the Office of the Comptroller of the Currency declared the matter closed, according to internal minutes from a meeting. (At Friday’s hearing, officials from the agency disputed that it was, in fact, closed.)

So, yes, people have learned their lessons, the real lessons of the financial crisis. JPMorgan repeated the same misdeeds that other banks successfully pulled off at the height of the financial crisis: mismarking portfolios of assets and misleading the public. This was condoned by regulators. Regulators and prosecutors have been averting their eyes for years from rotted bank assets and rotted bank morals; why would JPMorgan expect any different reaction in this case?

Mr. Dimon and JPMorgan executives have all publicly donned hair shirts to demonstrate their contrition. Mr. Dimon and Mr. Braunstein even took pay cuts, going from earning many millions to some fewer millions.

JPMorgan argues that Mr. Dimon and Mr. Braunstein told regulators and the public only what they believed at the time. Mr. Dimon and Mr. Braunstein made mistakes, but they quickly worked to clean them up, fire those responsible and change their ways. The losses were small relative to the size of the bank and, if anything, demonstrate the strength of JPMorgan’s diversified business. After all, the bank made record earnings last year.

But I suspect that if you dosed JPMorgan executives with Pentothal, they would reveal they believed all of this attention was a media creation and political showboating — still a “tempest in a teapot.”

“Not true,” Mr. Evangelisti, the JPMorgan spokesman, said. “We acknowledged from the outset that we made significant mistakes, and we have repeatedly apologized for them. We do not blame the media or regulators for these issues. This was our fault totally. All we can do now is fix the problems and learn from them.”

As has happened so often in the wake of the financial crisis, we are left with the spectacle of bankers — here the well-compensated Mr. Dimon and Mr. Braunstein — insisting that they were clueless and incompetent, which would shield them from any allegations of intent to defraud.

As for many longtime officials at the Office of the Comptroller of the Currency, they may well think that this was merely a nuanced mistake that calls for nothing more than careful suggestions of remedies that don’t harm the bank too much. The new head of the agency, Thomas J. Curry, has begun to clean house and re-energize the place, but the overhaul that is needed looks too big for one person.

So let’s take a moment to celebrate a handful of American heroes, Mr. Levin and the staff members at the Senate Permanent Subcommittee on Investigations. Because of them, this corruption has come to light. Friday’s hearing served to emphasize how lonely Mr. Levin’s efforts are. Senator John McCain, Republican of Arizona and the new ranking minority member on the committee, did a yeoman’s job of asking a few questions. Senator Ron Johnson, Republican of Wisconsin, made a few incoherent statements using the au courant phrase “too big to fail,” then scuttled out of the hearing. None of the other senators, Democrats and Republicans alike, bothered to show up.

The 78-year-old Mr. Levin, peering over those glasses that seem surgically attached to the tip of his nose, soldiered on.

But let’s imagine what would happen if this report does what the senator hopes and puts pressure on the regulators to finish a simplified and loophole-free Volcker Rule, which would prohibit banks from making bets for their own profit using taxpayer-backed money. Why should we have the slightest confidence that big banks could be persuaded to follow it? And why should we feel reassured that, if they didn’t, regulators could or would enforce it?

We shouldn’t. And we don’t.