[DEBATE] : Morgan Chase Banker Warns of Risk of Political Interference

[Riaz K Tayob]

[those masters of allocative efficiency - efficiency?]

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Banker Warns of Risk of Political Interference

By Peter Thal Larsen, Gillian Tett, and Francesco Guerrera
Financial Times, London
Friday, January 30, 2009

http://www.ft.com/cms/s/0/6a0a313c-ef04-11dd-bbb5-0000779fd2ac.html?ncli...

The bailouts of Citigroup and Bank of America could distort the market 
if the US lenders succumb to political pressure when making lending 
decisions, a senior executive at JPMorgan Chase has warned.

Jes Staley, head of JPMorgan's asset management and private banking 
operations, said political interference in the management of those 
lenders that have turned to the US government for large-scale support 
was the "biggest risk" facing his bank.

His comments, made at a seminar on the fringes of the World Economic 
Forum in Davos, highlight the growing concern among financiers and 
policymakers that recent government banking bailouts on both sides of 
the Atlantic could distort the market while undermining global capital 
flows.

The US authorities have in recent months taken on much of the risk on 
hundreds of billions of dollars of loans held by Citigroup and BofA.

The incoming administration of Barack Obama, the president, is exploring 
the possibility of expanding this insurance scheme to other lenders as 
part of a comprehensive rescue package.

"If the big banks start to be geared for public policy as opposed to 
economics we may end up competing against institutions that are being 
run for non-economic purposes," Mr Staley said. "That is the biggest 
risk we see out there."

US banks have been sharply criticised by politicians for their 
reluctance to lend out to companies and consumers the $350 billion (E273 
billion, L242 billion) in government aid they have received.

However, Citi and other banks have argued that in the economic 
conditions it is difficult to make loans to companies and individuals as 
most new lending would be loss-making and end up burdening their balance 
sheets with further writedowns. "Today it is cheaper to buy a loan in 
the secondary market than to make one," Vikram Pandit, Citi's chief 
executive, told Wall Street analysts this week.

The warning was made as one of the leading private equity players said 
on Friday that private equity groups were looking for ways to bypass 
banks when raising capital. Henry Kravis, founder of Kohlberg Kravis 
Roberts, said those moves could accelerate in the coming year, given the 
scale of capital that needs to be raised and the difficulties that banks 
face in using their own balance sheets.

"We have set up a broker-dealer so we can go directly to people who 
provide capital, people like Fidelity, Templeton, insurance companies, 
pension funds and sovereign wealth funds," he told a meeting in Davos.

"We can get long-term debt. It will be smaller but the difference now is 
that we were relying on the banks as conduits . . . .  Now we go 
directly."

Mr Kravis said about $3,000 billion of corporate debt would come due in 
the next five years, most of which was investment-grade debt. This would 
need to be replaced in some form, he suggested -- creating a need for 
private equity groups to provide funds.
The private equity sector as a whole already had some $400 billion worth 
of equity raised, Mr Kravis suggested.