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January 11, 2010 Monday 5:58 PM EST
SECTION: PERSONAL FINANCE; Banking
LENGTH: 589 words
HEADLINE: Dimon calls commercial real estate a ‘train wreck’
BYLINE: Alistair Barr, MarketWatch mailto:ABarr@marketwatch.com.
Alistair Barr is a reporter for MarketWatch in San Francisco.
SAN FRANCISCO (MarketWatch) — J.P. Morgan Chase Chief Executive Jamie Dimon said commercial real estate is a “train wreck” during a speech Monday, but noted that many of the problems in the sector have already happened and won’t affect the economy too much.
Dimon also said financial regulation is needed, but described the return of the Glass-Steagall Act, which separated commercial and investment banks, as a “quaint notion” and expressed frustration about recent criticism of the banking industry.
“Commercial real estate is a train wreck, but it’s already happened,” Dimon said during a speech at a J.P. Morgan (JPM) health-care conference in San Francisco.
With roughly $3.5 trillion in commercial real estate loans outstanding, a sizable portion of that debt needs to be refinanced each year. However, the problem is that the value of the properties backing those loans has fallen, he said.
Investors specializing in distressed debt and foreign buyers have been attracted by the lower prices, which has helped refinancing activity. Deals often take the form of a recapitalization, in which the lenders become the equity holders, Dimon added.
Such transactions have less of an economic impact, Dimon said, noting that when the owners of an office building change, that doesn’t necessarily trigger layoffs.
Meanwhile, the worst of the residential real estate crisis may have passed, Dimon said. Prices have “leveled off” in many parts of the U.S. during the past six months and affordability has improved, he added.
Dimon predicted more foreclosures, but described them as a “constant flow,” rather than a “wave.”
As one of the largest U.S. commercial and investment banks, J.P. Morgan has been at the center of the debate about financial reform in the wake of the 2008 financial crisis.
On Monday, Dimon was asked whether Glass-Steagall should be brought back to separate commercial and investment banking.
The J.P. Morgan CEO called that a “quaint notion,” while noting that other parts of the world never had such a law.
J.P. Morgan offers commercial and investment banking services because clients want the company to do things like make loans and underwrite debt sales, while cutting prices, Dimon said.
The major financial institutions that collapsed during the recent crisis, such as Bear Stearns, Lehman Brothers (LEHMQ) and American International Group (AIG) , were either stand-alone brokerage firms or insurers, Dimon added.
The J.P. Morgan CEO conceded that there were “legitimate concerns” about the amount of leverage a regulated financial institution should be able to take, but said current regulatory reforms would tackle things like this.
Dimon also acknowledged “reasonable concerns” about compensation at financial institutions.
“Some people walked away with a lot of money right before their firms collapsed. That ticks me off too,” he said.
However, he also expressed frustration with recent criticism of the banking industry and employees at J.P. Morgan.
“I’m getting tired of the constant vilification of these people,” Dimon said.
Dimon described J.P. Morgan’s operations and employees, including roughly 58,000 staff working in about 5,000 Chase bank branches across the U.S.; 1,900 small-business bankers; thousands of treasury and security-services bankers and hundreds of municipal bankers.
J.P. Morgan’s trading operations are run for clients, he also noted. “It is not a casino,” Dimon said.
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