Morgan Chase banker warns against interference in markets

Section:

Or at least interference by anyone else....

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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.

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