Dimon calls commercial real estate a 'train wreck'
J.P. Morgan CEO says return of Glass-Steagall is a 'quaint notion'
Jan. 11, 2010, 6:35 p.m. EST
By Alistair Barr, MarketWatch
SAN FRANCISCO (MarketWatch) -- J.P. Morgan Chase Chief Executive Jamie Dimon said commercial real estate is a "train wreck" during a speech Monday, but noted that many of the problems in the sector have already happened and won't affect the economy too much.
Dimon also said financial regulation is needed, but described the return of the Glass-Steagall Act, which separated commercial and investment banks, as a "quaint notion" and expressed frustration about recent criticism of the banking industry.
"Commercial real estate is a train wreck, but it's already happened," Dimon said during a speech at a J.P. Morgan (NYSE:JPM) health-care conference in San Francisco.
With roughly $3.5 trillion in commercial real estate loans outstanding, a sizable portion of that debt needs to be refinanced each year. However, the problem is that the value of the properties backing those loans has fallen, he said.
Investors specializing in distressed debt and foreign buyers have been attracted by the lower prices, which has helped refinancing activity. Deals often take the form of a recapitalization, in which the lenders become the equity holders, Dimon added.
Such transactions have less of an economic impact, Dimon said, noting that when the owners of an office building change, that doesn't necessarily trigger layoffs.
Meanwhile, the worst of the residential real estate crisis may have passed, Dimon said. Prices have "leveled off" in many parts of the U.S. during the past six months and affordability has improved, he added.
Banks could be hit with fees
The Obama administration is likely to slap banks with a fee designed to recoup losses associated with TARP, in a move that could help lower the deficit and reduce risk-taking by big banks.
Dimon predicted more foreclosures, but described them as a "constant flow," rather than a "wave."
As one of the largest U.S. commercial and investment banks, J.P. Morgan has been at the center of the debate about financial reform in the wake of the 2008 financial crisis.
On Monday, Dimon was asked whether Glass-Steagall should be brought back to separate commercial and investment banking.
The J.P. Morgan CEO called that a "quaint notion," while noting that other parts of the world never had such a law.
J.P. Morgan offers commercial and investment banking services because clients want the company to do things like make loans and underwrite debt sales, while cutting prices, Dimon said.
The major financial institutions that collapsed during the recent crisis, such as Bear Stearns, Lehman Brothers (OTHER:LEHMQ) and American International Group (NYSE:AIG) , were either stand-alone brokerage firms or insurers, Dimon added.
The J.P. Morgan CEO conceded that there were "legitimate concerns" about the amount of leverage a regulated financial institution should be able to take, but said current regulatory reforms would tackle things like this.
Dimon also acknowledged "reasonable concerns" about compensation at financial institutions.
"Some people walked away with a lot of money right before their firms collapsed. That ticks me off too," he said.
However, he also expressed frustration with recent criticism of the banking industry and employees at J.P. Morgan.
"I'm getting tired of the constant vilification of these people," Dimon said.
Dimon described J.P. Morgan's operations and employees, including roughly 58,000 staff working in about 5,000 Chase bank branches across the U.S.; 1,900 small-business bankers; thousands of treasury and security-services bankers and hundreds of municipal bankers.
J.P. Morgan's trading operations are run for clients, he also noted. "It is not a casino," Dimon said.
Regulation
J.P. Morgan supports more consumer protection in the financial-services industry, however, Dimon said the current system should be improved instead of creating a new consumer protection agency.
J.P. Morgan also supports better oversight of derivatives, including trading of these contracts via a central clearinghouse, Dimon added. But he also said that there should be "appropriate room" to trade complex derivatives over the counter.
Regulators also need "real authority" to take over failing financial institutions. Equity and some debt holders should be wiped out and regulators should be able to run the firm for a while, finance its operations and then sell it later intact, Dimon explained.
Financial institutions can't just be shut down because they move lots of money around constantly. If that is halted, a lot of the value of the institution could be lost, Dimon added.
Former Treasury Secretary Henry Paulson was right not to bail out Lehman Brothers, Dimon said.
The bailout of AIG and other massive government support for the financial system weren't perfect, but policy makers including Paulson, Federal Reserve Chairman Ben Bernanke and current Treasury Secretary Timothy Geithner did well with the little time they had, Dimon added.
Without such action, "the country would be in a lot worse shape," he said.
The Fed's balance sheet more than doubled to more than $2 trillion as the central bank bought mortgage-backed securities and Treasury bonds to keep borrowing costs low and stop the economy falling further.
The Fed was, in effect, replacing the purchasing power of the financial institutions that failed during the crisis and the central bank will remove the stimulus "over time," Dimon explained.
However, the J.P. Morgan CEO said he was worried by the combination of monetary stimulus and large fiscal deficits. That means the Fed may have to sell some of its holdings of mortgage securities and Treasury bonds at the same time as the U.S. government is borrowing a lot by issuing new Treasury bonds. |
