Jp Morgan Part of Banking

JP Morgan part of banking conglomerate JP Morgan Chase has always been an investment bank. Since its founding in 1871 it has existed to provide capital for businesses, to facilitate merger and acquisition activities and to underwrite issues to the capital markets. The company has forged success based on not only its business acumen but its principles as well. This is encapsulated in the phrasing of J.P. Morgan, Jr. when he testified (before the Senate) "at all times the idea of doing only first-class business, and that in a first-class way" (JP Morgan Chase, 2008).

The mission statement of JP Morgan is "to be the best financial services company in the world." (JP Morgan, 2009). The company believes that to do this they need to be the best at every business they operate, innovate and create powerful brands. This flows from creating a world-class team and a winning culture. Execution is the final component of JP Morgan's prescription for success, including sound financial discipline, eliminating waste, and maintaining strong internal governance and controls (Ibid).

The company has over the years accentuated its success and integrity with leadership in corporate support of government, such as during the First World War. Charity and support for the arts are also hallmarks of the JP Morgan corporate culture.

History and Organizational Structure

The bank that would become known as JP Morgan Chase had its antecedents in the Bank of Manhattan, founded in 1799. The JP Morgan arm of the future bank was founded in 1871 as Drexel, Morgan & Co. By J. Pierpont Morgan and Anthony Drexel. The company grew rapidly thereafter on the strength of reorganizing financially troubled railroads. By the 1890s the company was the world's pre-eminent investment bank, working on mergers that formed industrial giants such as U.S. Steel and General Electric (JP Morgan Chase, 2008).

When the Banking Act of 1933 forced a separation of commercial banking and investment banking, JP Morgan carried on as a commercial bank, spinning off its investment bank. The first of many major mergers came when Morgan and Guaranty Trust merged in 1959. The banking industry was by law decentralized, but this led to major banking firms buying smaller banks. They operated them separately at first, but as laws fell, commercial banking empires began to emerge. Then came an intense round of mergers and acquisitions that laid the framework for the modern structure of the American banking industry. Chemical Bank and Chase Manhattan merged in 1996.

The modern JP Morgan Chase is the product of successive rounds of banking industry consolidation. By the time JP Morgan merged with Chase Manhattan in 2000, the company was comprised of several formerly major banking entities (Ibid). For the most part, most of the antecedent brands no longer exist, but JP Morgan and Chase still operate as separate entities. They have also added several other companies within the past few years. Consumer banking giant Bank One was added in 2004. In 2008, the JP Morgan unit absorbed struggling investment bank Bear Stearns. In the fall of 2008, retail bank Washington Mutual was absorbed. That deal is being contested by WaMu shareholders, who feel that their institution was illegally seized by the FDIC.

The JP Morgan arm retains a strong investment banking flavor, and is organized around six business units. These are Asset Management, Commercial Banking, Investment Banking, Private Banking, Securities Services and Treasury Services (JP Morgan, 2009). While the firm's structure is broken out along functional lines, there is some geographic segmentation. Asset Management, for example, operates in 24 different countries. These geographic offices, however, play a minor role in the organizational structure and are essentially branch offices.

While the business units form the physical architecture of the firm, the governance architecture is more complex. On the Executive Committee, membership is based on specific functions that are otherwise subordinated to the business unit. So from JP Morgan, the Executive Committee has members from Wealth Management, Investment Banking, International and others on the Executive Committee. Both line and staff functions have membership on the Committee, hinting at a weak form of matrix structure wherein staff functions such as human resources and IT contribute to multiple business units and have a degree of autonomy (JP Morgan 2008 Annual Report). Thus, JP Morgan's structure is built along the six business units, but there will be contributions to JP Morgan from the internal staff function units as well.

Competition

JP Morgan is subject to a wide number of competitors, representing its presence in six major banking sectors. The investment banking industry can be measured underwriting revenues. From 1996-2003, JP Morgan had a 5.4% market share, good for 6th place in the industry. They are one of the so-called Tier 1 underwriters. The five larger competitors are Goldman Sachs, Merrill Lynch, Morgan Stanley, Salomon Smith Barney and Credit Suisse First Boston. Goldman held 15.8% of the market, nearly three times that of JP Morgan. The four competitors just below JP Morgan were Lehman Brothers, DLJ, Deutsche Bank, and UBS Warburg (Ellis et al., 2005).

As this list indicates, investment banking has traditionally been the provenance of specialist firms. Today, however, most major industry players are essentially banking conglomerates like JP Morgan Chase. The world's major banks -- Credit Suisse, HSBC, Deutsche Bank, Citigroup and Barclays are all major competitors in most of JP Morgan's segments, along with Goldman and Merrill. This shift away from specialized investment banking has had an impact on competition in the investment banking industry.

Competition in the investment banking industry is intense. The firms competing in the industry are global banking powers, each with substantial financial backing, established corporate pedigrees and global reach. The opening of capital markets has brought foreign competition into the marketplace, but has also allowed JP Morgan to move into international markets. For buyers, there is often a health competition amongst investment bankers for the right to take an issue public.

The intensity of competition does not always translate into price competition. For example, the major firms seldom engage in price competition for mid-level deals, which historically have been priced at 7% (Ellis et al., 2005). This reality recognizes the fact that investment banking is a lucrative business for all concerned and that price competition would damage that. Instead, the nature of competition focuses on relationships. There is a high degree of brand loyalty in the industry, such that repeat issuers often establish tight relationships with their investment bankers.

The relationships that JP Morgan enters into are based on trust. That trust is not simply between the actors in the firm and the particular staff members at JP Morgan with whom they interact. The trust exists at a corporate level as well. If the customers do not trust in JP Morgan's governance and integrity, they have relatively low switching costs and will take their business to another shop. Evidence of this can be seen when Arthur Andersen began to bleed customers in the early 2000s in the wake of multiple oversight breaches. When trust is broken in these relationships, companies act to protect their shareholders and move to another firm in which they can place more trust. Thus, integrity is an important competitive advantage.

At JP Morgan, this has been the case since the company was founded, those principles having been espoused in the 1930s. So they have always been part of the culture. The intense nature of competition in the industry, however, demands that any firm wishing to stake out a competitive advantage must take additional steps. At several points in recent history, the importance of tight internal controls as an advantage in the competitive landscape has led JP Morgan to proactively improve its internal controls (Hoffman, 2002). Thus, JP Morgan's reaction to the competition has been to shore up its governance programs and reinforce its corporate culture. There are multiple layers of superexecutive governance, an unusual step. The corporate culture is built almost entire around integrity and this is used as a major motivating factor for employees -- they must conform to JP Morgan's standards or they will find themselves on their way out.

Compared with the rest of its competitors, JP Morgan stands as having excellent management of its employees' behavior. Even within the framework of a global organization, the company's ethics are self-regulating. In one instance, the company's London arm was working on a leveraged buyout of Dow Chemical. This was a $50 billion dollar, but a questionable ethical situation, given that Dow was a major customer of the New York parent. The New York side was highly skeptical of the deal and eventually prevailed (Moore, 2008). The deal was somewhat sour, since it did not involved any senior management. The result of this conflict, however, was that the ethics-first corporate culture of the U.S. parent was disseminated in no uncertain terms to the profits-oriented UK subsidiary.

Overall, the investment banking industry has come under considerable fire for a wide range of ethical issues. However, aside from some peripheral involvement in the Enron scandal, JP Morgan has responded to the demand for integrity well. The company has avoided the major scandals that have dogged many of its peers, and remains well-regarded in the industry.