JP Morgan One of Few Looking Smart This Week

As the markets and our government have been roiled by the enormous crisis in the U.S. financial industry, JP Morgan Chase stood out this week for looking smart. As reported today in the New York Times, Morgan was able to raise $10 billion in new capital on Friday despite the turmoil in order to partially finance a buyout of the distressed Washington Mutual (while the purchase price was $1.9 billion, Morgan will have to absorb roughly $31 billion in losses).

Morgan’s acquisition of WaMu comes on the heels of Morgan’s acquisition of Bear Stearns earlier this year. As a consequence, Morgan will have $905 billion in deposits and 5,400 branches nationwide, which will make them the number two bank in the country, rivaled only by Bank of America.

The Wall Street Journal points out that the WaMu deal increases Morgan’s exposure to the consumer market. Only time will tell how all this will play out. For now, though, the interesting question is why Morgan had sufficient strength when so many of its peers are suffering. That’s obviously a complex question but I submit that one perspective that should be examined is that of its intellectual capital.

The principal tangible assets held by a financial company are money, buildings and computers. Knowing the extent of these holdings does little to tell you about how it works and, importantly for analysis of how the present crisis arose, how well it works.

A financial company’s principal intangible assets are its people, its management, its processes, its brand and its customers. While all of these are important and none can be understood in isolation, process deserves special attention in almost every company. In a financial company, unique processes include those for processing transactions and managing risk.

Early in my career, I helped write a 200-page Credit Process Manual for use in Citibank in the Dominican Republic. I wasn’t inventing the process, just explaining it for training and control purposes in the local operation. At the time (this was the mid-1980′s) there was one set of international credit process standards that applied to the enormous network of global branches. Embedded in these standards were global risk management standards. There were additional risk management standards for individual geographies, business units and industries.

There was a dedicated global organization within Citi that did nothing but audit compliance to these standards. My little project was obviously a great introduction to the thinking that goes into credit risk management. As I read in the Times about the reputation for strong execution of Morgan’s CEO, Jamie Dimon (also an ex-Citibanker), I couldn’t help but think of that manual.

I am sure that there were processes and manuals for risk management in every one of the institutions that has failed in recent weeks. The interesting question is how well they were following those processes. This is a great example of the kind of intangibles information that is very relevant for stakeholders of a financial institution. Credit standards often get overridden by CEO’s and senior managers chasing short-term processes.

Stakeholders would greatly benefit from information about the management of credit and risk processes. In the case of recent failures, were these institutions auditing their processes? How often were the standards overridden? Who tracked the audit results? What was done about it?

It’s just a guess. But to get to this point in the process in such good shape, JP Morgan is probably doing a better job than many of its peers managing these critical processes.