this video was brought to you by nebula for most of its history America has probably had the most fragmented banking system in the world and this was a deliberate policy choice to avoid concentrating Financial power in the hands of a few Bankers Congress designed regulations to favor smaller Regional Banks and anytime a bank got too big it would be promptly broken up however today there's one American Bank that stands Head and Shoulders Above the Rest J P Morgan not only is JP Morgan the biggest bank in America by any metric it's also become systemically important
to a historically unprecedented degree it's the only Bank big enough to bail out its struggling peers it's the market maker for us treasuries and its CEO Jamie Diamond is almost a politician in his own right so in this video we thought we'd take a look at how JP Morgan became the banking Behemoth it is today why this is a violation of American history and why JP Morgan size combined with its systemic importance presents a difficult dilemma for [Music] Regulators before we start if you haven't already please consider subscribing and ringing the bell to stay in
the loop and be notified when we release new videos so JB Morgan's booth era really begins with the arrival of Jamie Diamond as CEO in 2005 when diam took over JB Morgan was one of a handful of big American Banks but by no means the biggest and it's specialized in Investment Banking and wealth management rather than retail banking over the course of the next two decades or so however Diamond who is still CEO today has transformed JP Morgan into both America's largest and most systemically important Bank diamond made his plans clear almost immediately after taking
charge in his first letter to shareholders in early 2006 he wrote size scale and staying power matter and announced his intention to create what he described as a fortress balance sheet in other words to make JP Morgan so big and so safe that it could weather any crisis and following this announcement Diamond did three things that helped JP Morgan moved to the front of the pack the ver was to cut costs and bureaucracy now diamond made his name as the AER but effective CEO of Bank One in the early 2000s and he pulled a similar
trick at JP Morgan cutting back stuff like consultant fees and executive perks the second he did was to take advantage of the liberalization of American banking laws for context for basically its entire history America has had banking laws that have tried to prevent big Bank monopolies and instead encourage smaller Regional Banks now this is for a variety of reasons including a general anti-elitist weariness of Bankers but it's also because one of the lessons learned by the American political class from the 19th and early 20th century is that big Metropolitan Banks didn't actually lend enough and
especially not to poorer rural areas in a sense this is still true today and smaller Regional Banks still account for an outsized fraction of small business loans unlike in other developed economies now banks will also rarely allowed to operate outside of their home state in part because States used to receive significant revenues from taxing their Charter Banks even today America has probably the most fragmented banking system in the developed world no Bank holds more than 15% of all deposits and there are over 4,100 commercial Banks spread across the country compared to about 350 in the
UK and 260 in Germany America has also never really had a National Bank per seale like Deutsche Bank in Germany or BMP parar in France which have both historically cooperated with their respective governments however beginning in the '90s many of these regulations were relaxed allowing American Banks to grow in scale the first bank to take advantage of this trend was City Bank which established itself as America's largest retail bank in the early 2000s but Diamond was quick to catch up and JP Morgan would overtake City Group only a few years after his arrival the Third
third thing that diamond did and perhaps thing he's most known for was anticipate the 2008 financial crisis now Diamond has always held weekly meetings with the heads of JP Morgan's main businesses to discuss potential risks and in 2006 in one of these meetings diamond and members of JP Morgan's management identified risks involved with subprime mortgages which allowed them to reduced their exposure 18 months before other Banks did in Alessa shareholders in early 2007 Diamond Pressly warned about a quote industry excesses and mismanagement in subprime home loans and that the ultimate impact could get ugly this
meant that when the crisis struck JP Morgan was sort of the only Bank left standing which is why it was able to rescue two failing smaller banks in be Sterns and Washington Mutual Diamond also claims that JP Morgan neither wanted nor needed a bailout but agreed to tap into a treasury Department emergency support to remove the stigma for other firms diamond and other JP Morgan Executives have said since that they regret the Acquisitions and apparently made massive losses on both of them but this was the beginning of both JP Morgan's industry dominance and its special
relationship with the federal government as their go-to bailout guy this became apparent again last year when JB Morgan bailed out First Republic Bank after it suffered a bank run a few days after the collapse of silicon Val Valley Bank and that's because JP Morgan was basically the only big bank that could absorb First Republic Bank of America apparently couldn't take the risk and City group and Wells Fargo weren't even invited because of ongoing regulatory issues this deal was a win for both the FDIC and JP Morgan the FDIC were able to maintain Financial stability without
costly or politically controversial bailout while JP Morgan were able to buy up a whole load of assets on the cheap and circumvent the fdc's anti- monopo regulations that would normally ban Acquisitions for any bank that controls more than 10% of all deposits anyway after the acquisition of First Republic JP Morgan is now by far and way the biggest bank in America and it does everything retail banking Commercial Banking Investment Banking trading Payment Processing Card Services wealth management you name it JP Morgan does it JB Morgan now has subsidiaries across the world too and it Banks
not just just other countries but also other governments the IMF and even the World Bank JP Morgan has also emerged as a deao market merger in the US Treasury Market which is a lucrative business in its own right but also makes JP Morgan especially important to the American government all in all JP Morgan is now the largest non-chinese bank in the world with nearly 4 trillion dollars of assets under management and they now hold more deposits than any other US Bank despite paying interest on a lower overall fraction of deposits not only that but JB
Morgan's market cap is now more than the next two biggest American Banks combined and last year they made more profit than any American Bank ever breaking in nearly 50 billion doar unsurprisingly some politicians and Regulators now worry that JP Morgan's size is both monopolistic and inconsistent with America's long tradition of decentralizing banking Elizabeth Warren for instance described the first Republic deal as deeply troubling and other analysts have drawn parallels to the Panic of 1907 where JP Morgan's founder and namesake jpo Morgan locked rival financiers in his library and cajoled them into propping up struggling institutions
to prevent a rash of Bank runs while Morgan was widely credited with saving the American banking system the episode prompted Congress to create the Federal Reserve so that the system would never again be so reliant on one banker and 30 years later JP Morgan was broken up by the glass steagle act but taking on JP Morgan again today could be difficult both because of its systemic importance and because taking on Jamie Diamond who's been a vocal critic of banking regulation is just no easy task that's not the end of the story though and if you
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