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NEW MORGAN, OLD VERITIES
Banks occupy a special place in our financial system. Though owned by shareholders, they are quasi-governmental institutions that receive a variety of government subsidies. When they take risks, taxpayers as well as shareholders are on the line, along with depositors' funds. As a result, banks have special responsibilities to behave prudently -- which is just what many did not do during the past decade of wretched financial excess.
One that did behave is J.P. Morgan & Co., helping it become the most profitable major bank in the U.S., whether measured in terms of absolute dollars or return on equity (page 64). Morgan's record is not unblemished: Like most major banks, it lent billions of dollars to less developed countries during the 1970s and early 1980s that it never got back. But Morgan learned from that debacle. While competitors rushed into high-risk real estate and leveraged-buyout lending during the latter part of the 1980s, Morgan, then shifting resources away from lending anyway, stayed on the sidelines.
More generally, Morgan has stubbornly resisted fads that afflict the world of finance and has stuck to old-style corporate verities. The bank stresses tradition and teamwork. It works hard to maintain a strong capital base and its vaunted AAA credit rating. It takes a long-term approach to strategy: Morgan has spent the better part of a decade methodically transforming itself from a loan-dependent commercial bank into a fee-generating Euro-style "universal" bank with capabilities in all major facets of finance. Pursuing that strategy at times hurt the bank's short-term earnings, but despite second thoughts among some executives, it persevered. Thus it was less damaged by the corporate move away from bank borrowing than many of its competitors. Finally, Morgan is unusually sensitive to the needs of its employees. Rather than routinely recruiting from the outside, it fills most openings from within the bank.
Of course, it's easier for a bank with $102.6 billion in assets and the name of J.P. Morgan to accomplish all of this. Yet franchises are not indestructible. In an industry littered with horror stories, Morgan's chief accomplishment is to serve as a useful template of financial prudence and long-range planning for its industry.