J P Morgan Chase, United States, Chase Bank America Wells Fargo discussed on Masters in Business
Your your students grad students or undergraduate both everything and executives and students at so we really teach them all. So so much has been going on in the world of banks since the financial crisis. I have to ask you about Dodd Frank and the changes to that. But before we get there. We now live in an era of megabanks all the banks are really relatively giant compared to before the financial crisis, a number of pretty substantial banks were either acquired or or moved over you have Washington mutual, and we'll covy, and, you know, look at all these different Bank, America and Merrill, Lynch. All these giant conglomerations? How is the modern era of banking different than the way it existed prior to the financial crisis? No. We've seen after the financial crisis, essentially, an unrivalled concentration in the financial system financial services. The looking at commercial deposits, for example, which include personal and commercial deposits, but seventeen trillion dollars right in the American. That's just checking and savings and checking and savings accounts for individuals and businesses organizations mega banks, which will call above two hundred and fifty billion dollars, right? So that's things like J P Morgan. Chase Bank America Wells Fargo and much further down. It goes down to, you know, US Bank and. PNC and fifth third and other banks that you might think of as regional. But really have you know? Grown into integrate size right because P Morgan Chase is its balance sheet is trillions of dollars Wells Fargo's above trillion dollars. So we're taking down on some order of magnitude smaller than that. But still very very large banks, and they control about thirteen trillion dollars. Right. Thirteen of the sixteen trillion dollars and these deposits, that's an extraordinary concentration, especially given that the number of institutions we're talking about a couple of dozen, right? This changes as banks balance sheets in size at the margin. But we are seeing financial services dominated by a handful of institutions, and we have not seen that really ever before in our history, including the great merger era late nineteenth century, or you saw trusts around sugar oil. Corn harvesting machines right and fill in the blank there. These this is the great trust era, great consolidation era. But interestingly enough because of the structure of the US political economy banks were extremely decentralized by law. Each Bank for a very very long time. A Bank couldn't have more than one branch. And even after that was changed in the late nineteen twenties. They couldn't have branching across states, and that wasn't finally abolished where you would have a Bank doing business as its own institution across state lines until after nineteen eighty what about the repeal of glass steagle wooded that contribute towards thanks bulking up. I'd say contributed a lot. So I mean, this is this is a point of some debate among historians. It's correlated right with banks a bulking up in in in pretty breathtaking fashion. What some economic historians say, well that's correlated, but wasn't caused by this last eagle was essentially unrelated to this is now that's hard to swallow at least in the short run after around Glass-Steagall final legislative demise. Because of course city grew to become group after city. If you can't comes the first mega back, and so, but then again, you know, a few years after that that was a pretty disastrous merger. They sold most of their insurance business because the synergies weren't present. And then what becomes really the shining example megabank J P Morgan Chase. And if we were list, all of the names of the banks acquired along the way. Over chemical. Absolutely. You know, the Bank for what was Daime diamonds Bank in Chicago. I nationals called any. I believe he was at Smith Barney before that he was a city. He was sandy Weill right hand man in designing the strategy mega banking strategy. He loses in a power struggle goes to manage his Bank in Chicago comes back in JP, Morgan Chase's acquisition, which was essentially an employment contract acquisition. Jamie Dimon become CEO and J P Morgan Chase with help from the federal government embarks on this strategy of just becoming as big as it can be. And so we are truly in an unprecedented era in terms of of banking consolidation. The United States so everybody used to talk about too big to fail. I liked to raise the question have these banks become too big to succeed are they even manageable? When you're running trillions of dollars in deposits can these things be managed, and that will segue right into our discussion of Wells Fargo. Such a great question too big to manage too big to jail too. Succeed. And that the way that you phrased that too big to succeed is a fascinating because it calls into question the time horizon and the short and medium-term say that we're on on leading into a medium-term from the financial crisis management been good to be Jamie diamond. Right. That is a balance sheet. Is venom extremely right fortress diamond is just it's it's unassailable. They were very fortunate your financial historian. You'll appreciate this. Most people don't realize J P Morgan Chase had their own derivatives crisis. But they were let's call it lucky enough or smart enough to have it years before everybody else. So they cleaned up the balance sheet while there was still a bid to hit. When did everybody else? They had nowhere to go. Now. This is another occasion in financial history. That a lot of people don't recognize this is Tim Geithner's signal contribution to to finance in his career to happen before he was secretary of the treasury, and that was in two thousand five thousand seven noting on a spectacular back office problem, Andrew trading. So these are all bespoke derivatives, right? Even even though they're not very fancy pretty plain vanilla. But they all are bespoke because there's no there's no marketplace for them to train on its no exchange for them. And so you would think sophisticated folks in two thousand five we're not talking about one thousand nine hundred five range. So the IT revolution has already taken pretty sure route you'd have some sort of oracle based software system where traders with two headsets on, you know, talking to different people released punching him into computer that would clear it, and we'll be universally access. And you'd think that you'd be around. All right. What they were doing. Instead is on scraps of paper with a little golf pencils. Writing down the nature of the trade is though. Oh, they were signing their sending a prescription handing it back to a runner. We'll take that piece of paper and put it in a stack. Right. And what Tim Geithner realize even though he the New York had had no supervisory authority over these broker dealers. Went to very important point realized that the back office back long was about nine months, while amazing absolutely.