To Small Businesses and Consumers, J.P. Morgan’s Loss Matters!
The size of J.P. Morgan’s loss has been estimated between $2 billion and $4 billion when the dust finally settles. However, financial analysts have been quick to point out that the loss is small relative to the book value of the company. Therefore, they claim it is unlikely to matter to the bank’s overall operations.
At yesterday shareholder’s meeting Jamie Dimon, Chairman and CEO of J.P. Morgan Chase, stated optimistically that he did not expect the loss to affect shareholder’s dividends.
For the sake of argument, assume that both positions are correct. That is, the loss will neither affect shareholder dividends nor the stability of the bank. If not, then what will it affect? A $2-$4 billion loss in retail banking must create a gap somewhere!
The most logical place is in the size of the bank’s excess reserves (the amount of cash on hand over and above regulatory requirements) or in the amount of money available for loans to small businesses and consumers.
We can easily rule out a reduction in the size of the bank’s excess reserves. Given the current circumstances, J.P. Morgan Chase can hardly afford to reduce its excess reserves.
First, Congress has begun clamoring to make sure it has sufficient reserves to cover any anticipated loss. Second, the growing turmoil in the euro zone is putting pressure on large US banks to increase their excess reserves, not decrease them.
It is believed that J.P. Morgan, along with Bank of America and Citigroup, each has over $14 billion invested in the sovereign debt of the five euro zone countries most likely to default. If Greece should default, contagion will quickly spread to Spain, Italy, Ireland and Portugal. Therefore, J.P. Morgan must be prepared for a potential default. C it must increase the size of its excess reserves.
This means that if the $2 billion-$4 billion loss creates a gap in retail banking operations; it is likely to be on the lending side – particularly, the amount of money available for loans to consumers and small businesses. If small businesses and consumers receive fewer loans, they will spend less money and hirer fewer people.
Ultimately, when cash is taken out of the spending cycle (through a reduction in loans or increase in excess reserves) the same multiplier that created jobs through a fiscal stimulus, will operate in the opposite direction— causing a reduction in jobs.
It is impossible to know how accurate this speculation is. However, common sense suggests that it is more likely to occur than not occur.
At any rate, the next time an analyst claims that J.P. Morgan’s loss is so small in comparison to the overall size of its operation that it will not have any effect, ask them to explain how a $2 billion-$4 billion loss in retail banking can occur without any effect on the amount of loans available to small businesses and consumers.
If they provide an explanation, then ask why does Congress even bother to have hearings into the matter –if it is so insignificant?