Why JP Morgan Is JP Morgan

Which is to say, a basket case. Along with Citigroup, and Bank of America.

We all know that JPMorgan Chase is too big to fail. We all know that this means that it enjoys the benefit of a likely bailout from the federal government and the Federal Reserve should it ever collapse in a financial crisis. So why does that make it a poorly run company? It’s possible for a behemoth to be well run; think of Intel in the 1990s, for example.

One reason, of course, is that it’s too big to manage. Even if bribing Chinese officials by hiring their children wasn’t part of the master strategy, not being able to stop it from happening is a sign that things aren’t really under control. (And for “bribing Chinese officials,” you can insert any number of other things, like “betting on the relative values of various CDS indexes,” or “manipulating LIBOR.”)

Mark Roe (blog post; paper) points out another reason. For decades, the supposed cure for bad management has been the so-called market for corporate control. In other words, do a bad job, and someone will take over your company and you’ll be out of a job. That someone might be a corporate raider like T. Boone Pickens, or it might be a private equity firm, but in either case bad management is a sign of opportunity.

Not so with too-big-to-fail banks. For one thing, TBTF banks are impossible to acquire in one piece: no other bank could absorb JPMorgan, even if there weren’t the rule against a banking conglomerate having more than 10 percent of all U.S. deposits. The other option is to engineer a breakup, which is what all manner of shareholder advocates have been arguing for. But, Roe argues, if being too big to fail is your competitive advantage, that would kill the golden goose. Therefore, the market for control doesn’t work properly, and these behemoths continue bumbling along their way—not just threatening the financial, but doing a lousy job at their job of providing credit to the economy.