JP Morgan Chase 2014 Annual Report Download - page 19

1717
II. BUILT FOR THE LONG TERM
To make sure the test is severe enough, the
Fed essentially built into every bank’s results
some of the insucient and poor decisions
that some banks made during the crisis.
While I don’t explicitly know, I believe that
the Fed makes the following assumptions:
• The stress test essentially assumes that
certain models don’t work properly, partic-
ularly in credit (this clearly happened with
mortgages in 2009).
• The stress test assumes all of the negatives
of market moves but none of the positives.
• The stress test assumes that all banks’ risk-
weighted assets would grow fairly signifi-
cantly. (The Fed wants to make sure that
a bank can continue to lend into a crisis
and still pass the test.) This could clearly
happen to any one bank though it couldn’t
happen to all banks at the same time.
• The stress test does not allow a reduction
for stock buybacks and dividends. Again,
many banks did not do this until late in
the last crisis.
I believe the Fed is appropriately conserva-
tively measuring the above-mentioned aspects
and wants to make sure that each and every
bank has adequate capital in a crisis without
having to rely on good management decisions,
perfect models and rapid responses.
We believe that we would perform far better
under the Fed’s stress scenario than the Fed’s
stress test implies. Let me be perfectly clear
– I support the Fed’s stress test, and we at
JPMorgan Chase think that it is important
that the Fed stress test each bank the way it
does. But it also is important for our share-
holders to understand the dierence between
the Fed’s stress test and what we think actu-
ally would happen. Here are a few examples
of where we are fairly sure we would do
better than the stress test would imply:
• We would be far more aggressive on
cutting expenses, particularly compensa-
tion, than the stress test allows.
• We would quickly cut our dividend and
stock buyback programs to conserve
capital. In fact, we reduced our dividend
dramatically in the first quarter of 2009
and stopped all stock buybacks in the first
quarter of 2008.
• We would not let our balance sheet grow
quickly. And if we made an acquisition,
we would make sure we were properly
capitalized for it. When we bought Wash-
ington Mutual (WaMu) in September of
2008, we immediately raised $11.5 billion
in common equity to protect our capital
position. There is no way we would make
an acquisition that would leave us in a
precarious capital position.
• And last, our trading losses would unlikely
be $20 billion as the stress test shows. The
stress test assumes that dramatic market
moves all take place on one day and that
there is very little recovery of values. In
the real world, prices drop over time,
and the volatility of prices causes bid/ask
spreads to widen – which helps market-
makers. In a real-world example, in the six
months after the Lehman Brothers crisis,
J.P. Morgan’s actual trading results were
$4 billion of losses – a significant portion
of which related to the Bear Stearns acqui-
sition – which would not be repeated. We
also believe that our trading exposures are
much more conservative today than they
were during the crisis.
Finally, and this should give our shareholders
a strong measure of comfort: During the
actual financial crisis of 2008 and 2009, we
never lost money in any quarter.
We hope that, over time, capital planning
becomes more predictable. We do not believe
that banks are trying to “game” the system.
What we are trying to do is understand the
regulatory goals and objectives so we can
properly embed them in our decision-making
process. It is critical for the banking system
that the treatment of capital is coherent and