Webcast transcript
If you think back a year, how much of your time was used doing your business versus operating business including risk and liquidity management?
ME: I am so honored to be a part of this - thank you for having me be a part of this and having this dialogue with you. And more importantly, thank you for your trust that you give JP Morgan and the great things you do for the people your company helps. It has been quite a wild ride. This is not the first financial crisis that JP Morgan has gone through. We have been here for over 200 years. We added to the playbook from the Great Financial Crisis, how do you get all of your employees to work from home, and deal with legal and compliance issues. We have over a quarter of a million people at our firm. We have over 90% of our employees working from home and dealing with customers calling in with complaints, getting cash into the offices, and then most recently added to that the PPP program getting cash into the hands of small businesses. All the while, the management team working from home getting all of that done along with the rest of the employees.
If you ask me how much time I spend on my business versus the operating business of the whole firm, it is hard to pull apart the two. But we have a regular cadence where the Operating Committee comes together every morning and again at 5:00 p.m. and we meet once on the weekends. That is something we put into place right away.
I remember when our mutual friend, Kevin Warsh said to me, I think it was back in Q4 of 2008 as he was sitting at the Fed. They were looking into the abyss and they didn’t know how far it went and kept throwing ideas at that wall. He and Chairman Bernanke would say okay, what can we do there? How does this feel similar to the Great Financial Crisis this is a shorter time frame, we can kind of see the end here? Give me a sense of the operating committee talking about risk and liquidity as it relates to 2008-2009.
ME: It is such a good question and it ties into some of the other discussions we’ve been having with the other leaders in asset management. Just take the first couple days of this crisis, had it not been for all the people in 2008 who had to take the time to figure out what programs would work in which way; what negotiations would work with the government. We reeled off the CPFF, MDCF, MMLF, PMCCF, SMCCF, the TALF and MLF all within one week. Just think about that. That would be an impossibility to do had we not had the playbook from 2008. That has worked and has shored up the markets. We would not have been as prepared as we have been. There will still have been pressures in the high yield market and there will still be pressures in markets up and coming. You have a functioning credit market and a very healthy equity market, that obviously thinks that this will be a V-shaped recovery.
So, the question at hand is what is that? I haven’t met anybody who knows the answer to that. There is no playbook for this and there is no one that understands when there will be a vaccine. Just think about what China does; you are fully traced at every moment, you get a QR code for the train car that you are on, your temperature is checked everywhere you go and if they find out that you are sick, you will be notified and be in quarantine. That is not how the rest of the globe functions so we can’t take that playbook from China and how is it going to work and how is it going forward. You can’t bet against modern medicine in figuring this out. The question is the time gap. How many issues will we have? We have to figure out how many jobs will be displaced, how many people will not pay their mortgage, and for how long, how much permanent damage will be done to the economy, what unemployment could look like. This is an unknown for everybody.
How much outside input is the New York Fed looking for at this time? In your earnings yesterday, Jamie mentioned that your outlook right now is going to be a good recovery in the next six months. You guys bank for half of America and you have really good insight on what that banking and finances looks like for the average American. How much are they listening and what will the recovery look like for the back half of the year?
ME: After 2008 the FED put together a number of groups to come together and get closer to what is happening to markets and technicalities and all the way through forward looking issues. So, we meet every couple of months to get together. After 2008, it was really a function to listen and became a mechanism to realize that maybe we don’t really understand how the markets are going to react. They have become much more active and the leaders who are on that committee are excellence. They talk about everything from bond markets to energy to the FED putting $2.2Trillion in to keep going. They are listening and we are also giving them feedback on the programs they have put in place. It is a good time to put business and government together especially in times like this.
When we shift to business at JP Morgan Chase, you have to have two different mindsets. You are constantly preparing the company for the worst, what if it is not a V-shape come back. How do I deal with employees, vendor strategies, location strategies, being global, different rates and then we have the investment mindset. You have to be really hard and cold when it comes to the company stuff versus how you’re managing the money. So, when you think about how clients are managing money, you don’t bet against the U.S. stock market. It is the greatest form of capitalism in the world, it is where the most entrepreneurial businesses exist in the world. We will rebound and we will come back.
We put loan loss reserves in place, so we are prepared. We always want to be a fortress balance sheet in good times and in bad. We want to zig when the world is zagging. You want to still be able to lend to small businesses and big companies in good times and in bad.
Glen Hutchens was on CNBC, and said the object was to flatten the curve and we have flattened the curve, this week everyone is waking up and saying, what next? So, you gotta look on the downside versus when do we look for opportunities in the market to put money to work, you’ve got the two sides to consider. One of them is clearly on your operating calls and I’m assuming it’s all downside protection and at the same time, you manage $2.5 - $3 trillion dollars for your clients where you’ve got money managers across the globe saying we’ve gotta put money here and we’ve gotta put money there. How do you kind of bifurcate those two views?
ME: You’ve gotta take a long walk in between meetings. If you are a student of history, you look at all the times we had wars and civil unrest and invasions, and none of them, none of them except for the oil crisis in the seventies were fundamentally market changing. Each one of them if you had the foresight to ride through, you would ride through them. That is exactly what the stock market is doing. The markets will continue to find new times as we go by and there will continue to be winners and losers in the market, and we will continue to invest in the U.S. economy. That is generally what people should do and generally what they should think about, but the world is trying to think about sports, is football coming back, how do these things play themselves out? The more you think about these things, you realize the entire country needs to figure out how to get it back together because you can’t have pieces of this working and some pieces not. You will see the government pushing for getting some sort of normalcy and that will have to coincide with virology testing and other things like, how do we get the healthy people working back in the system. There are some really helpful things in the pipes that will come about in these pharm companies and we cannot bet against that.
Just want to go back to China, some of the notes that I picked up in a recent call, were that the supply chain looks much improved, a lot of companies have brought people into company dormitories so they can get back up and running, the auto industry is operating now at about 80% capacity, KFC is back at 90% in terms of store openings, malls at about 50% with increased daily traffic, restaurants by about 70%, airlines at about 40% capacity, and the one major caveat that I saw was that Beijing was still on lockdown and people coming in and out of the city must go through a designated airport and still must quarantine themselves for two weeks. Taking out for a moment, Mary, the very real societal controls that everyone says that we can’t use as a model for the U.S. Once we get back to the new normal, any thoughts of how we get back to that? It is not data we can look at to get back on our economic roadmap.
ME: It is not data, the same way we look at our data, they don’t have regulations on the way they report things the same way we look at them. So, to say that the malls are back to 50% at what they used to be isn’t to say that people are buying things, it is people are going out because it is a place to go and you can see the pictures of the people walking in the mall. And that is okay it is a sign that people are getting back to some semblance of life which is the first step in getting the economy fulling functioning.
We now have a call with the China team every morning and we have the analyst show us pictures of what the restaurants look like and yes, the airlines are back but I’m sure that each of the seats isn’t taken on the planes that are flying, so you would want to drill down on that information. You can just take it as a symbol and a sign of where it is headed.
I am very hopeful that a lot of the signs that we see, and you can extrapolate from bigger cities like Hong Kong and Singapore, where we have people coming back into our offices running the AB playbook. People aren’t going to want to go back to work like they used to. They aren’t going to want to sit on a trading floor with all those people. You will want to weave in the ability to do more things at home. There are all sorts of things that need to be thought about. Maybe you will want to use the same amount of space but there will be much less densification of that space. The companies that are thinking about that now, and not being shell shocked, and waiting for someone else to figure that out, are the ones who will not be behind. The companies thinking about that will be the endgame winners. We’re going to come out of this, and it is going to be fine. We need to work our way into little ways of normalcy. We don’t need to jump back into normalcy we need to take little steps into normalcy.
Do you think that the U.S./China relationship that was quite frosty before this, will become mended after this or will we snap back to that as it comes to trade and other issues?
ME: It’s going to be hard, obviously there is the blame game going on. And we are going to have to work ourselves into a Zoom meeting, which is not the same as an in-person meeting. A lot of how we hold ourselves together with countries is coming together, a lot of in person meetings going from one country to another to try to figure out how we’re going to mend fences. We are going to need some time for that. Countries will be more isolationist for a while, we may not open travel airways like we did in a very quick time period. Countries are going to have to fix themselves first.
I’m going to have to tell you, I’m not only tired but physically tired from Zoom meetings. I’m on Zoom calls from 8:00 a.m. to 6:00 p.m. at night and whether I’ve gotten out of my seat or not. I am just physically exhausted at the pace of this world. It just saps my energy.
ME: It is such an important topic because they are the most intense days any of us have ever had, just work alone. Forget about the interaction you have with your family in tight quarters. Nerves are just heightened as you go through time, but an eight-hour day is the equivalent of twelve-hour workday a month ago. At least you had five or ten minutes in between things. If you don’t force yourself to have some boundaries, as to how you’re going to do things, it is just going to become more miserable because we are not going back to how things were anytime soon.
What we don’t realize is, is that we have invaded them. You have invaded on a function of a house; you brought your whole company into that. You gotta figure out what are the rules of the road and you need to figure out how to have fun, to meditate and you have to find a way to have boundaries. If you don’t, the mental health issues are really damaging if you don’t have those boundaries. Invest in some time to listen to the podcasts and the mediations it can really help ground things.
The first three weeks of this were crisis management, then total inbound, then last week we were flattening the curve, and now we are in the what’s next mode. Have you done anything with your team? Your team is global. You have a quarter of a million people on your team. Have you put anything in place from changing from the crisis management mode to change it into the enduring mode?
ME: Start your days together and end your days together and that helps to distinguish clear boundaries of when your workday begins and ends. Constantly having bookends of when to start and when to end really helps and finds the time to have the virtual cocktail, wear your favorite sporting gear, or have calls to share your pets, etc.
One thing I have been trying to do would is drop in to Zoom meetings, whereas usually, I would have to travel to the Philippines for that meeting or fly to Madrid.
Let’s all just be real, and be human, and get to know each other on a very different level.
Let’s turn to some research Michael Cembalest put out. Michael’s research is so incredibly insightful and powerful. This week he put out a number of graphs of COVID-19 of the deaths, sickness etc... I don’t want to get into the actual data there but the one thing I took from the data was don’t be too quick to draw conclusions if one country did a great job and another country didn’t. These things just change constantly.
We shouldn’t be concerned about the economy having a V-shaped curve or a U-shaped curve, what should we be thinking about as it relates to the recovery, this lag of GDP following the crisis as it relates to recovery? What is your takeaway from the data from Michael?
ME: Michael and I have been working together for twenty-three years and he is one of the smartest minds I have ever met. He is spending 150% of his time speaking to medical professionals all around the world and thinking about all the things that he learns and combining that with coding work and analytics. Then applying it to things like this. One thing that you learn is that every graph, in the beginning, was overly basic and every single one of those was wrong thus far. He is trying to unpack that (data set) and make some predictions going forward knowing that the numerators and denominators that we are seeing around the world are incorrect.
People are dying, not in hospitals, and they are not being recorded. People are dying in hospitals and being overly counted one way or another. We just don’t know. So, he is spending a lot of time on that work and what a lot of people would not know about working with Michael for twenty-three years is that he is generally sour on a lot of this work and he is much more on the hopeful side of the economy recovering. That’s where he is on this, knowing we could all be wrong on all of this. We’re always monitoring and adjusting. The world will rebound and there will be a lot of pent up demand. We will have a big chunk of lost GDP. We are going to have a big chunk of things that we are not going to do going forward and that has not even before been calibrated. We are all living this life brand new and only time will tell. At the end of the day, it is about people having the wherewith all to live a comfortable life, and that people have shored up enough assets, liquidity to make sure their portfolios are balanced and that they can weather the storm. So, you can get a really strong rebound of GDP and that is what the whole base case is.
As you think about the recovery, is the lowest grade of junk debt something that could trip us up as we get out of this?
ME: Absolutely. People are trying to live off these government programs and you can only live like that for so long. That is not sustainable. You need to make things you can actually sell to make a profit and I think that the credit market is in for a big readjustment.
I think I read in your earnings yesterday that you guys took out a $800 - $850M provision against your bridge book. But that your bridge loan was less, but as it relates to those defaults, as it relates to the sector, you guys are much better capitalized than you were in the Great Financial Crisis.
ME: I wouldn’t spend a lot of time worrying about how the banks are doing right now. The banks are there to lend to them and the same for the consumer markets, people don’t have anywhere near the leverage that they had. The debt is the lowest it’s ever been. Not everybody has the money to withstand against long-term crisis, but a lot of people are much better off than they were to withstand short-term challenges. You just aren’t going to see the same problems as the regular corporate markets.
You work for someone I think is going to go down as one of the best business leaders ever. Jamie is almost in a class unto himself. What’s it like working for Jamie? What makes him so special as a leader?
ME: Let’s just start with the fact that he is so in tune with his own health. He woke up one morning and said something didn’t feel right. So, he and his wife, Judy, got up and went to the hospital and they found a tear in his heart. He went through surgery and has been recovering from home and still been working like nothing had happened. There are people in life who have strength and resilience and work towards the greater good of the people and the communities. It is just every day his ability to run the whole ship then deep dive into any particular issue that is coming up with any team and then let it go. It just cascades down and it is his relentless focus to details. It is the attributes like Willy Walker has that make for great leaders. They thrive on it and they are like junkies for the pulse of what is going on, they want to know what is going on, so if you want their help, they can be there to make it happen.
There are more women in the asset management than ever before. What have you done with recruiting and creating career paths, especially for women and minorities?
ME: Any of us at JP Morgan Chase, are like anyone else, no one wants to be at the top because they are a certain race or religion. Once you set the expectation that you are hiring for talent, because of how great they are, then that is when the really great talent will show up at your doorstep. Thirty percent of the portfolios are managed by women and it is because it is a result- driven program. Once you get to that level, then it is a self-fulfilling prophecy, and it will sustain itself.
Given the discussion going on inside of your teams, are we risk on or risk off? Are we completely out of crisis; just generally speaking where are you looking for opportunity to put money to work?
ME: We are definitely on the prowl for opportunity. We have spent a lot of time with our team and we are looking for opportunity and right now is a good time to have that liquidity to pounce on any opportunity that may present itself.
