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'Too big to fail' gets even bigger

February 16, 2010 | 12:30 pm
JPMorgan Chase & Co. has taken lots of heat for being "too big to fail," but that is not stopping the nation's second-largest bank from getting even bigger.

The New York-based bank said Tuesday that it had agreed to pay $1.7 billion for a commodities trading shop that has been jointly owned by Royal Bank of Scotland and Sempra Energy, the San Diego-based power company that provides natural gas service in Los Angeles.

The expansion of JPMorgan comes at the same time that President Obama and former Federal Reserve chief Paul Volcker have been pushing a proposal to make banks like JPMorgan smaller. Could the bank, led by Chief Executive Jamie Dimon, be thumbing its nose in the direction of Obama and Volcker? At least one banking analyst thinks so -- and likes it. 

“I believe that Mr. Dimon is demonstrating a courage sorely lacking elsewhere among other leaders of American banks. Bravo!!” wrote Richard Bove of Rochdale Securities in a note to clients that included, yes, two exclamation points. Bove has been critical of the Obama administration’s efforts to rein in banks.

For Bove, JPMorgan’s boldness is evident not only in its decision to grow, but also in its decision to bring on new commodities traders by absorbing the unit known as Sempra Commodities, which specializes in selling metals, oils and natural gas. Obama is seeking to stop commercial banks from doing proprietary trading, which involves trading with a banks own funds, and Bove believes that the purchase would increase, rather than decrease JPMorgan’s capabilities in this direction.

“Is it possible that JPMorgan Chase does not see these proposed rules and laws going into effect for any sustained period or perhaps not at all?” Bove asked.

JPMorgan does appear to have shown some restraint in the deal to acquire the trading unit. While the unit's current owners also wanted to sell the group's U.S. operations, JPMorgan bought only the foreign components in what may have been an acknowledgment of the Volcker proposals' potential consequences for the domestic banking scene. The purchase will give JPMorgan new trading and energy storage facilities overseas. Sempra Commodity's domestic operations will be sold separately.

A spokesman for JPMorgan did not comment on Bove’s note. In a statement, JPMorgan’s chief executive for investment banking, Jes Staley, said, "This almost doubles the number of corporate clients our commodities franchise can serve and enables us to offer them more products in more regions of the world.”

JPMorgan's stock rose more than 2% Tuesday after the deal was announced.

Sempra Commodities was created by Sempra Energy. In 2008, RBS acquired a stake in the unit, which the European Union is forcing the bank to spin off. The sale to JPMorgan still has to be approved by regulators.

-- Nathaniel Popper