The New York Times Doesn't Get "Too Big To Fail"
New York Times (NYT) journalist Andrew Ross Sorkin suggested in a column this week that size is relative in banking: "Big, in Banks, Is in the Eye of the Beholder," read the headline.
No. Not even JPMorgan Chase (JPM) chief Jamie Dimon, who's quoted at length in the article making the case for preserving large banks, would deny the company is big (otherwise he wouldn't be making the argument). Clearly, there are many objective standards for judging size in banking, such as total assets, deposits and market capitalization.
The Federal Reserve has no difficulty identifying the biggest institutions. Nor do financial regulators, equity analysts and, you can be sure, bankers themselves. TARP administrators also seem pretty clear on the concept, while even the great unwashed are getting a clue. There isn't a scintilla of doubt, except perhaps in the mind of editors at the NYT, about what constitutes bigness in banking.
Channeling Dimon, Sorkin notes one of the main reasons why big financial companies should ostensibly be free to roam -- big companies need them:
If Pfizer, for example, needs to raise $20 billion for a takeover bid, or Verizon needs to raise billions to lay fiber optic cable for its FiOS service, they cannot efficiently go to 20 different community banks looking for the money.True. Global corporations aren't going to bank with the local Savings & Loan. Which is why, as I've argued before, no one in their right mind supports eliminating big banks. The issue is whether such institutions can continue to provide their invaluable services while operating as smaller, less risky companies.
In other words, can JPMorgan still "operate around the world and employ millions of people," as Dimon said, at a fraction of its current size (forget that the company has only a couple hundred thousand employees).
As far as shareholders are concerned, unquestionably so. In 2003, three years after Chase Manhattan and JPMorgan merged, or long enough for it to reap the full benefits of the deal, the company had total assets of $771 billion. It operated around the world. That year JPMorgan Chase had a return on common equity of 16 percent, which was higher than what the company recorded before the financial crisis in 2006, when it had assets of $1.3 trillion.
Size, in banking, is no more in the eye of the beholder than profitability.