Webcast transcript:
Willy Walker: Good afternoon, everyone, and welcome to another version of the Walker Webcast. I have to say that it is an incredible honor and pleasure to have my friend Mary Erdoes back on the Walker Webcast. Mary joined me two years ago when we first went into lockdown to give our listeners some insight to not only the markets we were living in, but the way that J.P. Morgan was managing their global operations during the pandemic. And I was extremely appreciative and thankful that Mary took time during such a busy time in such a concerning time to share with all of us her insights. And here we are two years later, a lot has transpired, and it is wonderful to have you back. I would also say, Mary, that I had my old friend Amor Towles on last week to talk about his incredible novels and for me to be able to go one week from talking with Amor Towles about his incredible writing to talking to you about the markets and how you're managing J.P. Morgan today is a true honor. So let me do a quick bio on you, and then I'll jump into my questions.
Mary Callahan Erdoes is Chief Executive Officer of J.P. Morgan Chase's Asset & Wealth Management line of business – one of the largest and most respected investment managers and private banks in the world, with $4 trillion in client assets and a 200-year-old legacy as a trusted fiduciary to corporations, governments, institutions, and individuals. Since joining the firm 25 years ago, Erdoes has held senior roles across Asset & Wealth Management before becoming its CEO in 2009 and joining the J.P. Morgan Chase Operating Committee, the firm’s most senior management team.
Erdoes serves on the board of the Robin Hood Foundation of New York City. She is also a board member of Georgetown University, where she earned her Mathematics undergraduate degree, and serves on the Global Advisory Council of Harvard University, where she received her MBA.
So, Mary, I'd like to start here. You sit on Zoom calls and conference calls with your global management team, as well as investment professionals from around the world every day. What's the underlying sentiment about the markets in the world we live in today on those calls?
Mary Callahan Erdoes: So, it's unknown, confused, and uncertain on some level and prepared, cautious. All of the world's emotions are at play and it's been a long time since we've had a war on European proximity where you have a situation that we're all facing, we're all focused on. And so, the crisis is not new in this world and it's certainly not new to financial services. But how you deal with it and how you think about it and how you prepare for it, I think is the most important thing. And so, I think you having these dialogues with people to talk about, what it's like inside in terms of how they're preparing for various scenarios, I think anyone telling you they know what the scenario is and exactly what's going to happen in the month of May, June, July, August, next year, whatever is very, very uncertain at this point. But how people are preparing, what they're doing to make sure that they are risk managing, risk mitigating and then also there to help and do things for clients in the future – I think that's the most important thing. And you do it, you do it so well, you've been doing it so well with all of us ever since we went into many of us never even used Zoom prior to lockdown. You got us all used to it. Now you're an expert, and I just love these dialogues that you're having.
And so, at J.P. Morgan Chase, as you can imagine, our job is to always prepare for the worst and hope for the best. And if you do it the other way around, you're going to get yourself in big trouble. So that's how we are wired and that's what we do during every time that we face a risk that is a little bit less certain than the one that we faced the day before or the year before. You can imagine we have our daily meetings. We were in three times a day meeting, sort of early on a couple of months ago. Thankfully, we are not holding them three times a day anymore, and on weekends they've subsided a little bit. But that doesn't mean that the risk management of how we think about things has subsided. I think we're just in a routine now of what we're going to do, how we're going to deal with it. What are the shifting plates around the world? What does it mean for global GDP? What does it mean for local interest rate scenarios in different places in the world? What does it mean for the flow of money and investments? And then just all of the other humanitarian issues that we think about just as people inside of this great firm.
Willy Walker: Yes, that's interesting, you're more concerned and quite honestly sounding pessimistic than I would have thought. And the reason I say that is just that I've heard you in the past speak about talking to your team, about trying not to look at the geopolitical landscape too much because in a long-term economic outlook, those geopolitical situations tend to come and go when long-term markets kind of correct and get to where you want them to go to. Is there something today given just the volume of issues that makes you more concerned than normal?
Mary Callahan Erdoes: I think that your 100 percent right in geopolitical issues and we've had them for centuries don't have long term impact on markets unless you get into severe commodity disruptions like oil crises. And that's one of the things that we have at play here. Just given the changing supply and demand dynamics that are happening in the world. So, that can have impacts that are harder to quantify and longer lasting than most geopolitical issues, the markets have brushed off a whole lot of this. But the question is how long would inflated oil prices affect the world where the shifting dynamics you've got natural gas issues all across Europe, you've got electricity prices. Basically, everything that you think about in terms of pricing stability is out the window right now. Everything is up roughly fourfold on gas and electric prices in Europe. That's not the end of the world if it doesn't last for a very long period of time, but if it's a sustained period of time you've got contraction in GDP that spills over, obviously and then into the rest of the world. So, $110 oil has a pretty big impact, at least, especially on Europe. It's about a point and a half of GDP. So, I think you've got some. I think you've got some real issues you have to deal with and then just the war in general has so many uncertainties as to how long you're dealing with actors that are not necessarily predictable in any measure, so you just don't know. And when you don't know, you don't have any other option, at least in our seat, except for preparing for the worst. That doesn't mean I'm negative on markets. That just means my job right now is to make sure that the companies that I deal with, your company, your family all the way through to the governments and the sovereign wealth funds – have you done risk management? Have you thought about your stress testing again? Did you get too comfortable in the leverage that you had? When you just think back to the world of Fed funds, it was the basis of all pricing in the world for financial instruments, right? Everything is discounted back basically at fed funds rate, plus some risk premium and then you think about that moving.
Just think back when I first started on Wall Street, I landed on a fixed income desk where all of a sudden Greenspan was raising rates by 25 basis points, a clip sort of every month. And then bam, there was like 50 basis points and then bam in the fall, it was like 75 basis point move in the hole where it was like, oh my gosh, so fed funds went from three percent to six percent and you were sitting there saying, how could this be? And so, 10-year treasuries up to if they hit eight percent at one point, I didn't know any better. I thought that was just part of the way the world works. Of course, then everything normalized but I think that there's a whole population of people out there today that don't they don't know anything but a bull market in bonds and low interest rates, and that could change very, very quickly. And when interest rates change, it affects pricing of every financial services instrument that there is because you're just discounting back at a higher rate. I don't need to tell you that that's the business that you're in, that you master, that you do so well and that you help so many people with. And so that's what we're facing but we've enjoyed very healthy markets. We've enjoyed the benefit of very low rates, lots of quantitative easing and sloshing around of central bank money in all pockets of the world to try and help through a global pandemic. And so, we got to deal with the ramifications of that at some point. And so, whether it's today, tomorrow or in a year or two from now, my job is to prepare those portfolios to sustain that because I need those portfolios to be there in 100 years from now. That's my job.
Willy Walker: Yeah. So, in the shareholder letter, it says “Our bank is prepared for drastically higher rates and more volatile markets.” So, interpret just off of what you just said, what's drastically are we talking of four to four and a half ten-year Treasury? Are we talking something significantly north of that?
Mary Callahan Erdoes: I don't think anybody knows. I mean, this morning, the scores were cast range from four hikes to 10 hikes, right? Now, people are calling for cuts. So, nobody knows. This is all going to depend on what plays out with Russia, with the Ukraine, where that spills over. We have major energy policies and things that need to be dealt with around the world. And so, I don't know. I do know they will be higher because what we've done irrespective of the war is that we've pumped a tremendous amount of money into the economy, and we have labor pressures. You have talked about the fact that maybe we're maybe we're dealing with this in a little bit of a ‘not correct’ way…
Willy Walker: It seems like we've misdiagnosed the illness and we're using the wrong medicine for the patient in that sense, right? Rate hikes to try and slow down an economy that really doesn't need to be slowed down. And we're trying to use rate hikes to get rid of supply chain constraints that rate hikes don't solve.
Mary Callahan Erdoes: Yeah, that could be 100 percent right. The question is labor. If you just look at the United States of America, there's so many different things at play. You've pumped in all this money. You've got a gig economy. You've got a stock market that's gone up and you've got housing prices that have gone up. So, if you own any of those things or you play in the gig economy like a regular job of which the world is looking for nearly two million more of those regular jobs that not that many people are excited about anymore because there's lots of different ways you can make your money. And that's causing labor pressures aside from supply chain issues of ships, which is getting better in container prices, which is getting a little bit better. And so, there's a lot of those things that are getting a little bit better and you totally called that saying that's not going to be forever. And in fact, that's not forever. So that's all feeling a little bit better. But labor could have a long, longer standing issue because the correction of housing prices, the correction of how you feel in your bank account that takes a little bit longer to go through. And in the meantime, people, we hired 11,000 people last month.
Willy Walker: So, are they going to go into your new headquarters?
Mary Callahan Erdoes: A lot of them will, a lot of them are working all around the world in different places, helping us to serve our clients where they need us. But that's another exciting topic.
Willy Walker: I actually wasn't planning on talking about this, but now we're on it. I noticed that it's going to be a green building. Was that always the intent or was that something that has come up as the construction began and there's a retrofitting to make it so?
Mary Callahan Erdoes: That's a great question. In all the buildings that we have been building around the world, we try to be the lead certified leader in the community. When we thought about how to make the headquarters of the future for J.P. Morgan, which is on the same site right next door here. (I could put the camera there I would, but I'd probably break something along the way.) The largest purposeful building demolition on planet Earth ever has just occurred during COVID, and thankfully, not a lot of the neighbors were around here, the noise. So that was good. But as we thought about what we were going to create two or three years ago, it was about something that was going to be here and be an example to the community for the next 100+ years. And so that was all about everything we could do that was modern in our thinking and in the sustainability of what we were doing from the way that the water or the electricity to how the people work, to the breathability of the building. And so, the work that we've done with Norman Foster and team and with everybody that's been working on it is really it's just been so exciting. And so, we did a launch of it this week. I think last week, which is why you read a little bit about it in the press and we're super excited about it's not really going to be open any time soon. So, we watch it go up, but we hope that we make something that everyone in New York can be proud of. But last week, the celebration was really about the workers and all that they're doing so that someday they can drive by the building and show their children or their grandchildren the thing that they created. And so, the pride with which these people do their job every day is really just tremendous. And the eight thousand jobs we've created in the city during a time period where that's not normal, it is exciting for us. So, we're proud of it.
Willy Walker: It's really neat. Really, really neat. I want to go to Russia for a second, and in the annual letter, it states that you all aren't concerned about your direct exposure to Russia. It might lose a billion dollars over time to Russia. In running asset management, you have clients all over the globe whom you are extending lines of credit to. You are financing planes and yachts and everything else to the degree you can. When all of a sudden something like this happens, how do you go about working with government officials to make sure that those people who are supposed to be frozen, get frozen? It just seems so incredibly complex. I mean, we obviously go through and say, look at our list of borrowers from Walker & Dunlop. Do they have the revenue exposure to a Russian oligarch who owns an office building or an apartment building in New York? It's a really quick story. You all are so big. You are in so many places. How do you tackle that?
Mary Callahan Erdoes: Yes, same way you tackle any other crisis. I would start with the fact that we're not the biggest and never have been in Eastern Europe in general. So, Russia has never been a super large market for us. What we do in that country and around that country is the work that our multinational companies need us to do. So inbound and outbound flows, clients who need us for a variety of things, but we're not one of the institutions that has ever been a leader in that area and so that's where those comments come from.
How you deal with different things that are happening again, it's not the first time there's been sanctions anywhere in the world and financial institutions. And just like yourself, you go through what you're supposed to do with the government. So that's not tricky. The tricky part is actually what's happening this time, which is that you have different, different government entities giving you different rules. And so, when those collide, that's when you get into “which government am I talking to about what it is I'm supposed to do?” And so generally a firm like ours goes to the highest common denominator, making sure that we're the most conservative and then going above and beyond. And I'm sure you've done it too, which is, you know, this group of clients may be sanctioned. But what's next and what's the intent? What's the spirit of the laws that the governments are trying to do versus maybe something that everyone's misinterpreting? So, we've got a lot of work with the different regulatory bodies around the world saying, this is really what you intended to have happen or is that and so those have been great dialogues and we're working through it. And it's complex, but it's not brain surgery. And we're just not the largest in it.
Willy Walker: Is there a significant amount that's just frozen right now inside of the J.P. Morgan accounts where you sit there and if you went into your systems, it would just be like a frozen account?
Mary Callahan Erdoes: Well, it's a very small portion of our business in general. So, no, I think I'm not even sure there's any one institution that has a sizable portion, but there's other institutions that just have greater market share than us.
Willy Walker: So, I want to shift to how you've grown the asset management business at J.P. Morgan. So, AUM in your business Mary, has gone from $1.9T in 2011 to $4.3T today. That sounds like big numbers, but let's boil that down to, that's $657M of additional AUM per day for a decade. And in our business, a lot of people talk about the fact that Blackstone's BREIT right now is raising $2B a month, and everyone's eyes kind of spin about raising $2B a month. You have raised $2B a week for 10 years straight. Have you done it?
Mary Callahan Erdoes: Well, first of all, John Gray is doing a fabulous job with everything.
Willy Walker: Well done, I like the client focus. That's great. I got it. Everyone who's listening to this from Blackstone.
Mary Callahan Erdoes: We went back and forth on something this morning with each other, and we are very happy clients also and investors in them. So, I think when you have a product or solution that's hitting the mark for the marketplace, but very importantly, just on that one, since we're talking about it, finding that ability to give less liquid instruments to people that in bite sizes that they couldn't have had access to before is super exciting. So, I think that's all great. We do that and more. So, we're just bigger and broader around the world.
We help clients with alternative investments, large cap bonds, stocks international, all the way to cash management and the like, and so we just have a bigger platform. How do we do it? A bit like when I started at this company, the goal never was and certainly is not today to be the biggest asset management firm. I have this very simple saying, which is that we strive to be the best, not the biggest. If you turn that around and you say we strive to be the biggest, there's no chance, very little chance you can end up being the best. If you strive to be the best, you may end up being the biggest. That's just a consequence of being the best. But you can't reverse those in order. And so, we celebrate the empty tombstone all the time, right? Like the deal that wasn't done, the investment that we said, do nothing. I could do nothing, strategy is a really good strategy, lots of times in life, and we've had that conversation with each other, right? There are times where a deal, a transaction, an investment sitting in your hands may be a better solution, and that's hard advice to find. So, we want to be the solutions provider, the advice provider and how we do it every day, we hire great young talent. We train them, we condition them. I say we J.P. Morganize them. We've grown up in a firm that J.P. Morgan himself said “first class business in a first-class way” and that's all you got is your reputation and that's all you should be doing. And so, we have to condition everyone here when no one's looking, “are they doing first class business in a first-class way?” And really, really importantly, in my particular business is never selling. I don't want anyone to ever sell something, that's not the business we're in. We provide solutions only if you need them and only the ones that fit you, and we have a whole wide range of them. But if I go out and I try to sell you something. First of all, you're not going to buy it because you're a very sophisticated client. But second of all, that's not the business I want to be in. So, we've been approaching it that way for a long period of time, and that engendered great trust and confidence in clients. And that doesn't mean every year is a great year for clients. We have great markets, we have less great markets and so people go through that ride with us, but they have come to know who we are and the kind of advice that we give, and it's the trust and confidence every day. I say to every client I find, “thank you for the trust and confidence”. And each day we wake up, every morning we have an eight o'clock meeting, it's 8:00 to 8:30. It's mandatory. I don't care what your job function is here inside of asset and wealth management. We are a markets business. You can be the lawyer inside the firm doing something, but like at the end of every day, we're managing people's money. I need you focused on how we're thinking about managing money. By the way, I don't want one random person out in one office making a call on euro, dollar, or yen currency predictions. I want the currency group that we have making those predictions. So, it's centralized thinking and then localized implementation. I think that's been a really good formula for us.
Willy Walker: As it relates to you don't want somebody making that currency play. If I look at the dispersion of returns across here, I think you have 2,738 at last count. Maybe it's gone up or down over the last week, but 2,738 private bank advisors. If I look at the dispersion of returns, is it more like Nick Saban and the process at Alabama, where he's got all these great high school athletes who come in and they've all got their great moves, but he gets them into Alabama and because he instills the process, they all kind of march together. And that would say to me the dispersion among the returns in your team are quite tight. Or is it more, if you will, a little bit more freewheeling? Well, the returns will be wildly different between one wealth manager and another one.
Mary Callahan Erdoes: OK, that's an excellent question, which, by the way, nobody ever asks me. So, when I first took over the business, the dispersion, we ran these disparate; Michael Cembalest and I (who you know well) I asked him to see if he could give me a picture of everything that I saw because it was a mess. And he did this dispersion chart that was breathtaking in terms of the experience that one client was feeling versus another. And since then, we've been on a journey to never have that happen again, and it doesn't. But that doesn't mean that you and your family's portfolio looks anything like somebody else who's also covered by the same team. Why? Because you start at a different place, you have a different risk profile. You think about the world differently. You have different concentrated assets in a different sector than somebody else does. So, my portfolio manager, J.P. Morgan, won't have any financial services in it. But as I have enough financial services exposure so that the returns will look very different. But the how we get there, the component pieces, those will have very, very similar characteristics, the kind of alternative managers we just talked about, different alternative managers. We don't let everybody just choose whatever hedge fund they want in the world or whatever private equity fund. We spent years cultivating those relationships, doing our due diligence, figuring out which ones and so those who are invested in this private equity manager are going to have similar returns. That's exciting, it's the good kind of similarities in the portfolios. But there are no two portfolios that look the same. Not at all. I haven't found them at all because even if you and your twin brother started on the exact same day with the same amount of money – on day two, you'll look different. Because day two you have a different twist in income needs, tax jurisdictions, number of children, how much you want to give away. Like, everything changes on day two.
Willy Walker: And if you think about those 2,738 private bank advisers, if you looked at the top 10 percent, the 273 at the very top. What differentiates them from the rest?
Mary Callahan Erdoes: Top is a really good question as to how you define that, because I also, in addition to wanting to be the best, not the biggest, try very hard to focus on the best advisers are the ones with the highest client satisfaction. That doesn't mean you have the biggest book. That doesn't mean you have the most famous clients. That means client satisfaction is a really hard thing to judge and so I judge it by asset retention. And whether or not you, a particular family, will continue to stay with us and or give us any new flows that you might have or are going somewhere else. And so, measuring and calibrating, that makes the top. And so, who are the leaders who are the ones that are doing that? They're the ones that are just like in your business, they're the most curious, the most focused and the most intense that sort of never sleep when the things are moving, they care deeply. But I would say our bottom, whatever that is. Those are just the newest ones and they're in an apprenticeship mode. And so, everything we do here is team based. It's not a singular producer that gets to go off and do one thing and however they come out. So that's what clients rely on us for. They don't want a random experience here. They want J.P. Morgan advice, and they want J.P. Morgan implementation. And again, they can make their own calls and do their own things. But they want it to be of the highest caliber. So, I don't want anyone to ever think that they have the B team, right? And that's also why one of the equally most important things is that for clients of our firm, whether you're in the investment bank, whether you're in the private bank, commercial bank – dealing with any of us, if you're covered by someone and you're not, the fit is not right, the communication is just different – makes no difference to us. The people aren't paid commission and we don't need to have this person covering that and oh my gosh, if you pull it away from me, the world is going to end. You’re a client of J.P. Morgan and we hope you’re a client in one hundred years from now, by definition, will be covered by us. So, we need to make it so that it's a culture of you need to be covered by the best people, you can be dealt with in the best way. And how we do that is a team-based approach and it's and it's ever changing.
Willy Walker: I would say as a firm that has grown quite a bit and been challenged by client coverage as we've gone from one product to two products to five products. And you know if you look at our sales force, for instance, who's the in-house contact? If you look inside of our sales force files, 90 percent of the in-house contacts are the people who are the first business at Walker & Dunlop and what we haven't done is grown that and I use J.P. Morgan constantly as an example of having the ability to go to my contacts at J.P. Morgan and not have anybody sit there and say, “Oh, Willy’s my client or Walker & Dunlop is my client.” And having this sense where it's all seamless to us in the sense that if we need something, we just get the resources from J.P. Morgan and who gets paid for it and how they get paid for it is not my worry whatsoever. It's always taken care of on the other side. And I just keep hearing you talk about that kind of the one team approach to be able to do it at the scale that J.P. Morgan has is really quite something.
Mary Callahan Erdoes: Well, it starts from the tone at the top. One of the things that when Jamie first came in, he said we used to have interline of business movements of things when you moved a client from one to the other said you can have a cottage industry of just a bunch of financial people counting the beans inside of the firm where they're moving from one day to the next. Stop. There's none of that ever again. We're not having that. That's not how we're working. We’re one team we’re one firm, and we were a lot smaller then, but thankfully we started it then. And so now today, like you, you would never dream of saying, if you're going to take this client for me, you don't know whatever, like it just doesn't work that way.
Willy Walker: So, in thinking about you mentioned Blackstone a moment ago, one of the things I was curious about Mary is, given the evolving financial services landscape and a Blackstone that has grown up to be such a massive firm, who's a bigger competitor? And I'll use these two just as examples, but I'd love a response, not specifically to the two of them, but I just want to get a sense of the competitive landscape. Is Blackstone a bigger competitor of J.P. Morgan or is Goldman Sachs a bigger competitor to J.P. Morgan?
Mary Callahan Erdoes: Or Walker & Dunlop?
Willy Walker: All we do is work with you guys; we give you so much work. Please, come on. But no, it's an interesting thought today as it relates to evolving or as Blackrock.
Mary Callahan Erdoes: Or is Google? So, I would say the other thing that we're completely conditioned to inside of our firm, if you sat in our operating committee meetings is “everybody is a competitor” every day. If you think that there isn't someone who just started their own company with two people who's not a competitor, then you've lost your sense of reality because we work in a world that is highly competitive, there are new startups every day. There are new, more creative ways of thinking that maybe how somebody who's been doing it for many years. That's why you have to disrupt yourself. That's why you have to have red teaming. That's why you have to have all these things to say, is someone doing it better? We've talked about the different competitive landscapes and sometimes there's different areas that get a little bit comfortable in who they are or what they've done. Everyone's a competitor. The bigger ones, maybe they feel like bigger competitors. The ones you should fear are the ones you don't know about, that are still in the garage, making the thing much better, faster, cheaper, quicker, smoother, easier to use, client friendly than you are. And so, you better work a lot faster or buy them. One of the two, but you better keep going and that's why you need to know your competitive landscape. And that's why you need to constantly be on the search for new talent and new companies that maybe you'll do M&A with. Maybe you won't. But if you don't know what's out there, you have no idea what's coming behind you. What animal is chasing you in the kingdom? So, you need to be on your toes, and you need to do that, and I think that's why we spend so much time externally thinking about that stuff and we're not going to win in everything that we do. But the great part about being in a company like this is we have the resources and the wherewithal to do it. We get especially on the tech front, because we're a user of so many technologies and we actually see firsthand a lot of the stuff that we are joint venture in with or partnering with or buying as a service. And then if we like it, we try to do it faster ourselves. Maybe we will buy it. Maybe we will joint venture with it. Maybe we can become a larger client. But it's a great ecosystem to work in because it's constantly dynamic and you're always finding whatever the new thing is. And so, there's generally one you get angry with on any particular week if they're beating you, but there's no “one” ever.
Willy Walker: So, you mentioned you might acquire them, by looking at J.P. Morgan's balance sheet, you've got a trillion seven of liquid assets, which is about a trillion dollars more than you need to meet your regulatory requirements right now. So, what do you do with an additional trillion dollars? You're massively over capitalized right now. So, what do you do with all that capital? Chase assets or go M&A?
Mary Callahan Erdoes: Our capitalization comes from regulatory requirements. One of the things that nobody is talking about today, thankfully, is safety and soundness of the financial institutions around the world and that's because of the great work that the regulators did post the 2007-08 crisis. And so those are good things and there's all sorts of more complicated things, but not everybody's regulated. And so that's a whole other discussion that we could have at some other point.
Willy Walker: I've come to that in a second. So just going on and then we'll go to that.
Mary Callahan Erdoes: So, what do we do with our capital, right? Every day, we can invest it in new things. We can give it back to our shareholders. We can think of all of the different ways to deploy it. Our shareholders, clients and our employees are all asking us and by the way, our local stakeholders in the communities that we're in, those are the four main constituents that we're trying to serve each and every day are assuming that we're making those tradeoffs and those balances in the right way, and we're thinking about each marginal dollar. Where does it go? Is it better to invest in a new technology? Is it better to let someone else do it and use it as a service? Is it better to return a dividend or on a stock buyback? What's the equation of the day? It changes dynamically. Each business has a different equation for how they do that. And also, you're investing for the future, right? So, I mean, sure, I could give you a dollar back today. But like maybe that dollar would be better invested in something that would be worth more dollars in the future. So, if you're an investor, you want us to be thinking about that and that's what we do. So that's a conversation that never ends.
Willy Walker: Yeah. So, you talked about alternatives and the non-bank sector. So, in the annual letter, it points out that the AUM in hedge funds and private equity has grown from $3.1 trillion dollars in 2010 to $9.7 trillion in 2021. So, you know, triple the size of the market for 10 years. You all obviously play a big role in both raising those funds, doing M&A transactions to deploy those funds, advising the wealth that comes out of those funds. I mean, you're very much a part of it. But does that much capital in the non-bank sector concern you at all?
Mary Callahan Erdoes: Not in the way that we used to talk about shadow banking and where it was and do you know about it, it is much more transparent. I mean, hedge funds used to report quarterly at best. Now monthly is a minimum and some report weekly, and it's just a different world that we live in. So, I think that's why assets have grown three-fold, because the more transparent you are, the more money you can attract. So, everything is getting more sophisticated, more transparent, and it's exciting. So no, it doesn't make me nervous in that way. There's a tremendous amount of assets that are going into the less liquid parts of the market, mostly in private equity, but also in the hedge fund space. Why? Because of whatever portion of your portfolio, you don't want to have to pay a daily liquidity premium because you don't need the money tomorrow morning to go do something with and you shouldn't pay illiquidity premium and it should be in the less liquid markets. Absolutely. It should be because you're investing for decades, not for tomorrow. That's a really important part of that equation. So, I think alternatives will continue to grow drastically as a percentage of the market in general and as a percentage of people's portfolio. And the more you can get that just like we talked about earlier in the conversation, down in the bite sizes of people that don't have to be a large sovereign wealth fund to be able to access the co-invest opportunities that heretofore only large institutions could. That's a great and exciting thing. And so, the democratization of alternatives is the thing that I think will continue to change the landscape for many years to come. I think it's only good unless you get back into that nontransparent, locked up “Oh my gosh, I didn't know” and then you get a liquidity jolt in the markets of some variety, and you need your money, and you can't get your money. And that will have just been due to the overall asset allocation having gone awry and not done the proper stress testing which is the single most important thing everyone should be doing every day. But particularly when times are good, that's when you need to do it the most.
Willy Walker: Two quick things on that one. When you were talking about back when you were first starting and Alan Greenspan raising rates and many people who are much younger than you and I are not knowing or remembering that, when you say that about illiquid investments, it makes you think that the long-term capital management and there are a lot of people in the markets today who don't remember what happened in long term capital management. But you also mentioned Mary, the liquidity premium. And if I look at the big, publicly traded stocks you point out in the annual letter that Google, Amazon, Facebook, and Apple had a combined market cap of $500 billion in 2010 and is grown to 2021 of $6.9 trillion. Does that consolidation of market cap in those four companies concern you at all as it relates to the functioning of the broad public markets?
Mary Callahan Erdoes: It's so impressive, but it's not new, because we had studied this awhile back. AT&T used to make up 13 percent of the stock market back in the 30s, IBM was seven percent of the market in the 70s. That's just one stock, not the five or six that you just mentioned. So, it's great and exciting. It won't be that way forever. You should watch the sectors of the S&P in general. You have tech that rises and falls as a percentage. Look at energy as another great example of a sector that's a large percentage that's a less large percentage now. Maybe that will change. Financial services, consumer discretionary, consumer staples, et cetera. So that's the exciting thing about the market, it never stays the same.
Willy Walker: So, J.P. Morgan had a reasonably well, I'd say, “don't go there” policy as it relates to crypto. I actually have a story about trying to get into crypto and writing an email to CJ Matthew, who you know, manages my money, and CJ came back to me with a very long memo saying that J.P. Morgan couldn't put me into it, but he gave me all these instructions on how I could go do it in another account. And I missed that memo and missed investing in Bitcoin at $19,000 a coin.
Mary Callahan Erdoes: You may get another opportunity.
Willy Walker: Exactly. So, to that, back to 2010 to 2021 look back at the annual letter - In 2010, it was N/A for crypto, today it's a $2.2 trillion market. Are you advising that people who are at the private bank at J.P. Morgan have exposure to crypto?
Mary Callahan Erdoes: No, that's not part of our overall asset allocation advice but that doesn't mean we don't have lots of clients that have it. And I think that for us, long term asset allocation requires testing of long-term correlations to other asset classes and the like. Becoming an asset class is a big deal. There's lots of things people invest in that aren't in our overall asset allocation and doesn't mean they're not fabulous things to invest in. I spend a lot of time with people in the space. I think most of them would say if that's something of interest, one or two percent of a portfolio is a great thing to do. I don't think that there's a track record long enough to make it a very large percentage of anybody's portfolio unless you yourself are in the space and you know something more than everybody else knows. And then you're doing it for a living or for the majority of your brain space and learning. And again, that's what makes the world go round. For us, when we write you memos saying that we can't do it, we can't custody it because we don't yet have the ability to think about the safety and security of assets, and custody for us is one of the most important things that we do for clients, and we're trusted to do that. So, we need time and space to figure out how that's going to work.
Willy Walker: Over the past year, longer than that, since George Floyd's tragic murder, J.P. Morgan has done a lot as it relates to both diversity, inclusion and put a huge sum to recreating communities in America. And Peter Scher, who is just an incredible executive at J.P. Morgan, has been spearheading both on the foundation side as well as the community redevelopment side. As you look at it, Mary, today, what's the most exciting thing that J.P. Morgan is doing to move the needle on the diversity and inclusion front?
Mary Callahan Erdoes: We committed $30 billion in investments that we would make both equity investments, lending to different areas of the world where we could try to make a difference and a major investment with Ariel Investments and Black Fund, everything from low-income housing. Last night we had a board dinner and one of the people that runs that for us talked about the $13 billion in loans they had just put out to low-income housing and then all of the complications with state governments across this country, let alone around the world and how it's seemingly something that should be so exciting to do and yet so difficult to execute. And so it's not just that that we do, but what you talked about, what Peter and team do with policy that you have to work with these governments to explain like this, how we can do our part, but we need you to do your part in order to get this project done sooner so we can get people in the housing so that they can have the dignity and everything that they need to get off the streets and to be on their journey to have a more productive life. Like all of that, that was a deep conversation we had last night.
And so those are the kind of things that we're thinking of, all the way back to what we are doing here inside of this company and our hiring and whether or not everything we do from the way that we recruit from colleges to branches, training, to slates of talent. Did you have a diverse slate? Did you just check the box and have a diverse slate? Are you really embracing it? Why do you want a diverse slate, like questioning the people like you? Do you understand why you want this? Or are you just doing this because someone told you to do it because of the latter? Then move over. We need somebody else managing this group. You want diversity for diversity of opinion, diversity of thought, making a greater place to work, making greater products and services hopefully a reflection of your client base around the world, so you can't look different on the inside than the world looks on the outside. And it's really, I think from these terrible things that happen, that maybe COVID had us focused on more because they were happening before, but the whole world happened to really galvanize around just the tragedy of some of these things. I think it's helped tremendously to have everybody readjust their thinking on what it means to create a more inclusive economy and world that we live in. And so, I think we got to keep leaning into it and J.P. Morgan Chase is just one of the companies. You're doing the exact same thing, and it's great and companies that aren't they're going to be forgotten, and something in the past.
Willy Walker: So, J.P. Morgan's been an exceptional company for women. Last year, you promoted more women to managing director than ever before. The same with the executive director. The number of women as a relates the entire workforce is now up to 49 percent of the total workforce at J.P. Morgan. As you think back on where you were when you joined J.P. Morgan 25 years ago and what it was like to be a female on Wall Street to where J.P. Morgan is now a quarter century later, how have you gotten there? I mean, you've watched that all happen. And not only have you been an instrumental part of it, but you know where the struggles were, you know where there was some plan that was put forth that everyone was like, “Oh gosh, that'll never work, or why are we thinking about doing that?” and instead of falling back to the old, you moved to the new, how’d you do it?
Mary Callahan Erdoes: I mean, I never really thought about it, just to be honest. Just sort of put your head down and do your job. But when I think back about the world that my kids don't even understand how we lived without phones and computers. Technology changed everything, but then COVID really changed everything. So, the technology changed how you work, where you work, like could you go to your kid's soccer game in the middle of the day? Many years ago, you really couldn't because, how was anyone going to reach you and whatever time it took you to get there? And the time you were going to sit there and the time you got back, like that was dead time. And if that was in the middle of the day like that, I just didn't fly. That's not like the world we live in today.
You can go anywhere with your technology. Commuting time is working time if you want it to be. And so, like that changed everything. And for women where there are different times in their lives, where they also have other things on the outside of work that need to be fit in. I wouldn't say balanced, because that's not really a thing, but fit in and work together, and all of that has to function, technology changed that. Everything about what has happened in the world is so much better, and that's why you see the percentage of women in the workforce and particularly in financial services where the markets drive a lot of the hours that you need to be sitting here staring at these screens, it's just very different. You could take the screens with you. COVID changed it even more because now you say, “Wait, I can actually make this home office where if I decide to go home at three o'clock today because I want to be there when the kids come home, because now that they're teenagers, they talk to you for like a sum total of about four minutes and you kind of have to be there for those four minutes otherwise you're going to miss it. But you don't know in four minutes because they don't give you that. You can! So, I'm super excited about what it means for everybody. And it doesn't just mean for people who raise children, moms, and dads both want to have those moments with the teenagers where they'll talk to you. But you have elder care. Life is too short. You don't know what's going to happen tomorrow, and so you better make the most of it. And I am really excited that we were able to prove to the world that it's OK. It's going to be OK. Not everyone has to sit at their desk now.
There's a lot of jobs where that's a little bit harder, and I think that the narrative has to be super inclusive of how we think about manufacturing jobs, service jobs, like all of that stuff. We're going to need to work on as a society so that we don't leave any one sector behind that's not able to have the flexibility. And so, I think there's a lot of thinking that's going to be done on that front. But I'm really excited about the world that my three girls are going to enter into as soon as they graduate from wherever they're going to graduate from.
Willy Walker: Maybe Georgetown, maybe they'll follow in your footsteps?
Mary Callahan Erdoes: Still trying, Willy.
Willy Walker: Was there ever any time in the 25 years where you and your husband Philip just said it's just too much? Your schedules are too much. You're on the road too much. And maybe staying in the role isn't what you ought to be doing.
Mary Callahan Erdoes: Yeah, but if you don't have that, you can't possibly be pushing yourself hard enough. You just can't. And you’re in a job where a whole bunch of people are relying on you, it is a full-on Olympic sport level thing, and if you can't do it, you should let someone else do it. You always have to ask yourself that question. And thankfully, I'm healthy and all that stuff's working. But if it wasn't, you couldn't handle the different stresses or there were medical issues, everything can happen to you in life. And so, you've got to lean into it when it's working and you gotta deal with it when it's not. And God willing, for as long as you and I can keep doing this, we'll keep doing it. But we shouldn't do it for a day longer than we're not going to be the best people in the seat doing it.
Willy Walker: You have an incredibly special and tight relationship with Jamie Dimon, who will go down as one of the great business leaders of all time. And I'm certain, been both a privilege and also an incredibly rewarding experience. I've heard you tell me personally all sorts of things about just what a unique person and what a unique leader Jamie is. To those people who get to see that Jamie externally and all the things that he says and sometimes completely unfiltered, so we actually get the internal Jamie at the same time as we're getting the external Jamie. But what's that special sauce that makes Jamie Dimon what Jamie Dimon is?
Mary Callahan Erdoes: Well, whatever you see on the outside, you can multiply it by a pretty large factor on the inside. I've been working with him for 15 years, and it's a mini university every second of every day. It's super exciting. I think the thing that I've come to appreciate is that his leadership, which we all absorb on a daily basis, he drives so hard every day but never for any other reason, but to make everyone else better, there's not another goal. If there was another goal, he'd lose the people behind him. But he cares so deeply about everybody that works for him. I'm talking not just about his operating committee; I'm talking about the 260,000 people that work for J.P. Morgan Chase. And he genuinely cares. He genuinely goes to every branch he can, every service center. That just wires him differently. So, when he asks an impossible question to answer, you don't dismiss it, you go try to solve it, you go try to answer it, or you don't take what you thought was your answer necessarily is the right answer, because he's asking it for a reason. And generally, there's something in that question that we maybe haven't thought of, and it's a privilege every single day. You know, a very lengthy board meeting that we're in the middle of right now. And it's exciting and we're all really blessed to be working with him.
Willy Walker: Well, I am blessed to have you as a friend, and I am deeply grateful for you to take the time again to join me on the Walker Webcast. Thank you, Mary. Thank you everyone for joining us today. Hope everyone has a fantastic day.
My word of the day is joy and so, Mary, you brought me great joy in spending an hour with me and talking about all the things we've talked about.
Mary Callahan Erdoes: My best to Sheila and the kids and thank you so much for having me. I love doing this with you, so I appreciate it.
Willy Walker: Take care of yourself. I'll see you soon.
Mary Callahan Erdoes: Be well.
