JP Morgan’s success can be largely attributed to Jamie Dimon, the chairman and CEO of the commercial and investment bank. In the years leading up to the Crisis, Dimon made the executive decision to drastically reduce the company’s holdings of subprime debt by selling more than $12 billion worth of CDOs to other traders; a business model that at the time was generating billions of dollars worth of revenue for other Wall Street banks. After having identified a rising trend in the number of delayed payments on subprime mortgages, Dimon concluded that the underwriting of such bonds no longer reflected their true value. Securities that had been pooled together by other agencies such as First Franklin were given similar credit ratings to those owned by JP Morgan despite yielding nearly three times less in return, suggesting that there was no credible or logistical system in place which correctly gauged how risky each investment was. Furthermore the upsurge in the price of credit default swaps towards the end of 2006, which were used to hedge against CDOs in order to reduce any potentiallosses arising from default, made any profit that JP Morgan would eventually gain on the original CDO irrelevant. This change in strategy meant that JP Morgan were not performing as well as its rivals, who were still greatly profiting from the exchange of CDOs with other counterparties. As the value of these bonds continued to soar along with their residual commissions, banks were able to convert their debt from their balance sheets into capital which allowed them to make further investments and generate even higher profits. This in turn meant that between 2005 and 2007, JP Morgan fell in ranking from third to sixth in terms of fixed-income underwriting.
Post 2008 Morgan Stanley and Goldman Sachs, some of JP Morgan’s main competitors, have taken a different business approach. Both banks, which were the two only remaining major investment banks in America, declared on 22nd September 2008 that they would become bank holding companies regulated by the Federal Reserve in order to gain access to liquidity and funding. Instead of diversifying its portfolio and following in the footsteps of JP Morgan, Goldman Sachs decided to refocus its attention on current divisions and avoid the opportunity costs that arise from regulatory compliance. For example, Goldman Sachs refused to spin off its private equity subsidiary (GS Capital Partners) to observe the Volcker rule; a section of the Dodd–Frank Consumer Protection Act which was enacted in response to the Financial Crisis, to prevent banks from engaging in proprietary trading. This subsidiary was one of Goldman’s most profitable arms, but the bank maintained that the division would be kept within the organisation and financed through external investors. As well as this, Goldman Sachs established a business standards committee that oversees the practices of the bank and propose strategies to improve clientele relations. Morgan Stanley, on the other hand, no longer has any affiliation with its proprietary trading business after it decided to spin off this subsidiary and no longer focus on investment banking as its main source of profit. Instead, the CEO of Morgan Stanley, James P. Gorman, decided to purchase a majority stake in Salomon Smith Barney’s brokerage division, changing the business’ primary focus from trading to asset management.
Strategy and Future Outlook
One of the key developments JP Morgan wants to make to its business model is to implement a new digital transformation strategy, whereby the bank will use blockchain technology, cloud computing, big data and robotics to provide improved services that will better align with consumer interests. The bank has invested approximately $20 billion in technology over the past two years and currently has 48 million active digital customers, a figure which they are hoping will increase as more online services are introduced. To comply with this digital drive, JP Morgan announced that it will provide more specialised training for its technologists and is also looking to expand its usage of artificial intelligence to generate training content for employees beyond what is currently offered in order to develop consumer friendly digital products. Moreover, JP Morgan is looking to develop its range of mobile apps, Chance Mobile, Finn and JPM Mobile, which are currently amassing nearly 32 million active users collectively/ Chase Mobile, JP Morgan’s most popular app, allows customers to make payments and deposits and gives them access to their financial records from up to 7 years prior. The bank is hoping to extend these services further by integrating a new system into the app called You Invest which will give consumers the ability to make free stock and ETF trades in addition to free access to portfolio-building tools the bank’s stock research.
In January 2018, JP Morgan disclosed a five year comprehensive investment plan worth $20 billion, taking advantage of the changes in the US corporate tax system and a more conducive regulatory environment. The bank stated that they would increase benefits and wages for its 22,000 employees by 10% and expand its retail branch networks into major US markets, establishing up to 400 new offices over the next five years. Furthermore, $1.75 billion (an increase of 40%) will be invested in philanthropic activities that will promote long term economic growth in local communities; for instance the firm has budgeted a $150 million investment for the economic recovery of Detroit.
Finally, JP Morgan will be increasing lending to small businesses by 20% ($4 billion) and will employ 500 new bankers to oversee and give advice to such businesses, which make up 4 million of the bank’s entire clientele. The firm will also be increasing the availability of loans to customers seeking homeownership by approximately 25%, and will expand their homeownership grants by 70% from $1,500 to $2,500 for customers who earn below a specified income, reducing the amount they are required to pay on closing costs or down payments and helping them to secure more affordable housing.