He's listening. Photographer: Simon Dawson/Bloomberg
He's listening. Photographer: Simon Dawson/Bloomberg

A bank's financial statements don't measure the health of its children or the joy of their play, the beauty of its poetry or the strength of its marriages, the intelligence of its boardroom debate or the integrity of its executives. Honestly, they barely even measure its assets and liabilities. But JPMorgan is breaking new ground in what measures it chooses to report to shareholders, with this magnificent chart from Jamie Dimon's letter in its annual report:1

Hours! One million hours on resolution planning!2 Four hundred people for liquidity planning! Also, workstreams, there are some workstreams.

Dimon's letter is a fascinating document. Since it's a Jamie Dimon production, there are some amusingly tone-deaf moments,3 but overall it's really good. Among other things, it's his most sustained and quantified complaint about financial regulation yet. The gist is that everything has trade-offs: Every action that regulators have taken to make banks safer has also imposed some cost on the banks. And, banks being banks, the incidence of those costs is unlikely to be on shareholders or employees. Instead, customers will pay for them, or risks will be pushed to other bits of the financial system.

Wholesale deposits, for instance, will be a money-loser due to new leverage and liquidity rules; "therefore, over time, banks probably will minimize this type of deposit, and clients will seek other alternatives, probably in the money markets." (Scary money markets!) Undrawn revolvers will incur new capital and liquidity charges, and will become up to 60 basis points more expensive, so "Banks will either have to charge more for this product or focus more acutely on the nature and value of the particular client relationship as a whole in considering whether to make revolvers available to that client."4

There's lots more of this, and it is consistently interesting. You can accept that it is in JPMorgan's interests to exaggerate these costs of regulation without rejecting the basic point: There will be some costs. And exactly what those costs will be, and how the financial system changes to flow around them, will be perhaps the most important financial story of the next few years. JPMorgan's view of that story is biased, of course, but it's also an unusually broad and well-informed view. So it's worth a read.

Because really the best thing to do with that chart is just to let the enormous magnitude of the numbers wash over you. There are so many of them, but each number represents its own crazy story. That one million hours a year devoted to resolution planning is 500 full-time employees.5 You could start a good-size boutique bank with the people who come into work every day of every year to prepare for the day that JPMorgan goes bankrupt. There are 8,000 employees "dedicated solely to building and maintaining an industry-leading Anti-Money Laundering (AML) program." JPMorgan employs more AML compliance officers than the Treasury and the Fed combined.6

One thing I think about sometimes is whether big banks are "too big to manage," or perhaps "too big to supervise." This is sort of a sterile enterprise, in general; you manage the best you can, delegating and decentralizing and sometimes regretting some of your delegation.7 But these numbers are so big! Five hundred people worked full-time for a year on JPMorgan's Fed stress tests, at JPMorgan. How many people at the Fed can say the same?

If your model of financial regulation is an essentially adversarial one, then, umm, the regulators are obviously overmatched. But of course that model isn't right, or not entirely anyway. JPMorgan's 8,000 AML employees aren't there to help JPMorgan launder money without getting caught. (Really!) They're there to enforce the law, so that law enforcement doesn't have to. JPMorgan's stress-testers are mostly there to provide data and modeling support to the Fed's fewer and less focused stress-testers, and to implement the Fed's goal of planning for bank stresses. Most of the regulation of JPMorgan has been outsourced to JPMorgan. And they take their jobs seriously! Millions of hours worth of seriously.

That's why JPMorgan's view of financial regulation, and the future of the financial system, is so interesting. In some sense, JPMorgan is the financial system. It is gigantic, it offers every financial product,8 it interacts with every sort of client and it implements every financial regulation. It gets the complete view, and then reports back to regulators, and to us. It's a time-consuming job, but someone's got to do it.

1 It's page 13 of the letter if you want to be able to actually read it.

2 "1+ million" but who's counting.

3 I think this is actually a nice sentiment, but there's some evidence of self-regard:

In the past few years, we had started to see regulatory and enforcement actions against our competitors -- and saw signals from our regulators that things were going to get tougher going forward. Our response generally was, “We know what we’re doing.” Well, we should have done more self-examination. We need to be better listeners and do a better job at examining critiques of others so we can learn from other people’s mistakes, too.

Later there's a weird section where Dimon says, "Cruelties such as torture and slavery over many, many years have become increasingly rare (though they tragically still exist)," and concludes by quoting Martin Luther King's "arc of the moral universe" line. The arc of the moral universe is long, but it rarely intersects with investment banks' annual reports.

4 And those who don't get revolvers?

Non-bank financial competitors will look at every product we price, and if they can do it cheaper with their set of capital providers, they will. There is nothing inherently wrong with this -- it is a natural state of affairs and, in some cases, may benefit the clients who get the better price. But regulators should -- and will -- be looking at how all financial companies (including non-bank competitors) need to be regulated and will be evaluating what is better to be done by banks vs. non-banks and vice versa.

So, they'll be going to shadow banks. (Though Dimon doesn't like the name: "They do not operate in shadows.") Is revolving lending "better to be done by" non-banks?

5 Assuming a 2,000-hour year. It's 250 full-time employees working like bank analysts, or 2,500 employees devoting every Friday to resolution planning, or every one of JPMorgan's 251,196 employees attending one terrible four-hour brainstorming session. But page 12 of the letter says "500 professionals globally across our lines of business and support functions are working on the firm's annual Recovery and Resolution plans," so I guess that means 2,000 hours each.

6 Treasury has 341 employees at the Financial Crimes Enforcement Network and 3,782 at the Office of the Comptroller of the Currency. That's total FinCEN and OCC employees, mind you, not dedicated AML ones. OCC does a lot of stuff other than AML. The Fed has 412 employees devoted to bank supervision and regulation at the Board of Governors level, and 3,904 at the Federal Reserve Banks. Again, that's all financial supervision and regulation, not just AML. There are about as many AML employees at JPMorgan as there are all financial regulators at Treasury, the OCC and the Fed, combined.

7 Dimon, in contrite mode:

We generally have had a preference for leaving things somewhat decentralized, if possible, to foster responsibility and innovation throughout the organization. We've prided ourselves on our controls, and, for the most part, we did them well. But not all critical controls were consistently executed throughout the firm -- and they should have been.

I guess that's not all that contrite.

8 Except the ones it's getting out of for regulatory reasons! Stay tuned for which ones those are, I guess?

To contact the writer of this article: Matt Levine at mlevine51@bloomberg.net.

To contact the editor responsible for this article: Zara Kessler at zkessler@bloomberg.net.