JP Morgan acknowledged that it can't afford to screw up anymore

Jamie dimonReutersJP Morgan CEO Jamie Dimon

JP Morgan has acknowledged that it simply can’t afford to screw up anymore.

The banking behemoth has come to accept the new world order of Wall Street — a world order in which capital requirements are high (and maybe climbing higher), markets can be painfully calm for long stretches at a time, and legal expenses can tip the scales of profitability.

In other words — the cynical “cost of doing business” on Wall Street has actually become too expensive.

This was an underlying theme during JP Morgan’s Investor Day on Tuesday.

Three things are whacking profits

“We are 100% committed to embracing change,” said Daniel Pinto, the head of JP Morgan’s investment bank.

It’s not hard to see why.

During Pinto’s presentation he explained that three things whacked JP Morgan earnings in 2014 — capital requirements, legal costs, and low revenue (partially due to low market volatility.

JP Morgan knows it has no control over when the market will change and things will get volatile again. So there’s nothing that can be done about that.

As for capital requirements, there’s a distinct possibility that the bank could be required to have even more cash on hand than post-financial crisis regulations require now.

In December the Federal Reserve proposed a rule requiring “globally systemically important banks” (GSIBs) to hold even more capital. Those banks include Bank of America Corporation, The Bank of New York Mellon Corporation, Citigroup Inc., The Goldman Sachs Group, Inc., JPMorgan Chase & Co., Morgan Stanley, State Street Corporation, and Wells Fargo & Company.

Pinto said this measure could have a “high single digit” impact on how much capital the bank has to hold.

JP Morgan can control one thing

So the only one out of those three drags on return on equity that JP Morgan can actually control are its legal expenses. Controlling that is tough, however, because it has to do with culture, and that’s intangible.

At least, it’s intangible until it isn’t. Pinto admitted that some employees have cost the company millions.

To combat that, “we’re rolling out a best in class culture and conduct program,” said Pinto.

CFO Marianne Lake said that the bank is starting these culture programs all over the world and that the bank published an internal report on how it does business.

This is key for JP Morgan’s investment bank especially, Pinto said that he wants to get the bank’s return on equity from 10.1% to 13%, and getting rid of legal expenses is a big part of the plan.

Getting rid of legal costs could put JP Morgan’s return on equity up by 2.5% by the bank’s own calculations.

Staying huge

What’s at stake here for JP Morgan is its size. If it doesn’t seem like it can perform cleanly being as huge as it is, eventually investors will get tired of it.

And that’s nothing to say for the regulators and politicians on the left and right who’ve had their fill. As long as banks get keep getting in trouble for supervisory issues, or keep dragging along weak businesses, the “break up the banks” talk isn’t going to stop. JP Morgan as the biggest US bank, especially hates this kind of talk (though Citi seems to be in most danger of seeing a chop shop.

CFO Marianne Lake addressed this concern head on and at length during Investor Day. She said clients want JP Morgan to stay large.

“We’ve done the work… and we’ve drawn our own conclusions [on what a breakup would look like],” Lake said.

Naturally, the bank concluded that a break up would be terrible. So many synergies would be lost — synergies that JP Morgan’s peers don’t enjoy because they’re simply not as big.

That said, Lake admitted that if you do the break up maths “the revenue lost would be relatively modest,” but added that “benefits of the company as a whole which we don’t measure would likely be lost over time.”

So no more screw ups, or it could be the chop house.

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