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| Jamie Dimon, CEO of JPMorgan Chase & Co., gestures during a news conference in San Francisco, Tuesday, Jan. 13, 2009 |
Poor, sad Jamie Dimon, the frustrated and--by his account--tragically misunderstood chief of megabank J.P. Morgan Chase.
It's not enough that he gets to keep the tens of millions of dollars he netted turning an already enormous institution into a sprawling empire of finance that now controls $2 trillion in assets, even as it has tangled ordinary people in the red tape of the foreclosure mess and seized hundreds of thousands of homes. He wants us to like him, too, and give him props for magnanimously saving the world.
The government has been unfairly putting the blame for the financial crisis on Wall Street bankers, he complains to Roger Lowenstein in a profile gracing the cover of Sunday's New York Times Magazine. "It's harmful, it's unfair, and it leads to bad policy," Dimon is quoted as saying, leaving you free to imagine the sad strains of the string quartet playing for him as he nurses a brandy at one or another of his residences. "I am not embarrassed to be a banker," he says.
Feel free to take it as given that Dimon is indeed the wisest, best-intentioned banker around, as Lowenstein eagerly urges us to conclude. ("Dimon's mantra is 'Do the right thing,'" Lowenstein asserts, content to let that characterization sit without scrutiny.) But the intentions and characters of those in the boardrooms of giant banks is the one thing that ought to be pretty much irrelevant by now, as we seek to recover from the worst financial crisis since the Great Depression. What matters from here is the rules at play, and whether they are clear enough and sufficiently enforced to deter the kinds of shenanigans that became standard operating procedure on Wall Street in the years leading up to the crash.
We need rules that make it beside the point whether an enlightened risk manager runs the bank with a focus on long-term health, or rather a corporate looter intent on raking off short-term illusory profits before leaving the mess to someone else. And we need to ensure that Too Big To Fail institutions are sliced down to manageable size.
The personal profiles and motives of the people at the top have no place in shaping the regulatory posture toward financial institutions whose failure is big enough to pose risks for the world economy. What matters is whether the authorities can see clearly how much money a bank really owns and how much it has lent out; whether they force management to set aside real dollars in reserve against something going wrong so that taxpayers are not the only line of defense between solvency and a system-wide panic.
The saddest thing about Lowenstein's suck-uppy portrayal of Dimon is how it invites the public to have faith that a smart and decent guy is at the helm of one of the primary survivors of the financial crisis, as if that should make us all feel better about the prospects of another shock to the system. This sort of faith was the modus operandi of the would-be regulators who allowed a disturbing credit bubble to burgeon unchecked into the financial crisis. They assumed that all was good and stable not because of any dispassionate scrutiny of the numbers, but because of the supposed caliber of the people in control of the money.
For years, as Wall Street grew increasingly fat on borrowed money--expanding its business by lending to people with dubious credit and then trading complicated derivatives that they manufactured out of fresh home loans--Fed Chairman Alan Greenspan counseled that all was swell on the basis of a naïvely ideological conception known as counterparty risk management. The government did not need to examine the books to make sure that megabanks were setting aside real dollars in reserve against its trades going bad. The counterparties to the trades could be depended upon to do that all by themselves. The institutions on the other side of the trades would never agree to deals without first ensuring that their trading partners had the money required to pay up. In essence, the managers at Lehman Brothers and Bear Stearns had much greater motivation to ensure that their trades were properly hedged than any annoying Washington bureaucrat.
The Clinton administration was saturated in this sort of thinking, as a pair of Treasury Secretaries, Bob Rubin and Larry Summers, dismantled the authority of one regulatory agency, the Commodity Futures and Trading Commission, which sought to increase scrutiny of derivatives trading. They, too, argued that leaders on Wall Street had sophisticated risk models that obviated regulatory scrutiny. In short, Wall Street was supposedly full of the sorts of people Lowenstein tells us Jamie Dimon appears to be--smart, trustworthy and decent--so the rules did not matter.
But if there is a single takeaway from the financial crisis, it's this: Forget the individuals running the banks, and keep your eye on the incentives at work. The financial system did not blow up because lazy idiots and miscreants ran the banks, but because Wall Street was overseen by people who were in fact very good at what they did. And what they did was satisfy the market's urge for immediate growth. They got paid enormous sums to figure out how to make their share prices go up in the short term, and never mind the longer-term consequences.
Washington Mutual-- the giant mortgage lender whose remains fell into Jamie Dimon's hands when it finally collapsed--did not fail because its chief executive, Kerry Killinger, was a fool, but because he willingly handed the market precisely what it was paying for: a swiftly growing loan book. The bank handed out mortgages to virtually all-comers, following through on it's mantra, "The Power of Yes."
And the demise of WaMu did not leave Killinger sleeping under a bridge or relinquishing his mansion to foreclosure. He cashed out tens of millions of dollars along the way. For him, this supposed debacle was an extraordinary financial success.
Implicit in Lowenstein's valentine for Jamie Dimon is the assumption that the bankers have been chastened and have learned lessons, which would seem to make another crisis less likely. But that requires that we view megabanks like human beings, as if shame and social standing matter. The people running banks have a fiduciary responsibility to maximize profits for their shareholders. Some will succumb to shareholder pressures to juice up the present while jeopardizing the future--not just the bank's future, but that of the broader economy. Unless we get that part straight and change the rules appropriately, we will be here again.
Worst of all, if we fail to absorb that takeaway and simultaneously allow J.P. Morgan Chase and the other behemoths to control an even bigger slice of assets without limiting their size, the consequences of the next crisis are likely to be worse than the last one.
The recent meltdown laid bare the sharp divergence between the interests of Wall Street and those of everyone else. Ordinary people need a stable, transparent banking system that allows businesses to borrow and households to finance the purchase of homes, cars and education. But the chiefs running banks can cash in spectacularly as individuals even as they lead the rest of us off a cliff.
And now Jamie Dimon complains that this view hurts his feelings. Well, cry me a river, Mr. Chairman, but trusting in the decency of the bankers who control trillions of dollars--as opposed to regulating them effectively--seems an idea that's Too Stupid To Try Again.
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