Monday, July 20, 2009

Baseline Scenario -- Good on Jamie Dimon

http://baselinescenario.com/2009/07/19/jamie-dimon-fools-gold/#more-4408


The Baseline Scenario
What happened to the global economy and what we can do about it
The Rise and Rise of Jamie Dimon
with 22 comments
As Simon pointed out earlier, Jamie Dimon has been getting a lot of good press recently. The New York Times portrayed his recent rise to prominence as not only the CEO of American’s number one bank (at least, the number one bank that has not recently been compared to a vampire squid), but as a player in Washington and, according to at least one quip, the man Barack Obama turns to on financial questions:
Now that Mr. Obama is in the White House, Mr. Dimon has been prominent when the president wants to talk to big business.
During one such meeting in late March, as Citigroup’s chairman, Richard D. Parsons, was trying to explain banks and lending, the president interrupted with a quip: “All right, I’ll talk to Jamie.”
I also just read Fool’s Gold, Gillian Tett’s book about (a) the expansion of the credit derivatives market by J.P. Morgan in the 1990s (fascinating) and (b) the financial meltdown of 2007-2008 (familiar). Tett paints a picture of Dimon as a super-competent, details-oriented, finance-savvy CEO who reshaped JPMorgan Chase during the boom and positioned it to emerge from the crisis stronger than any of its commercial banking rivals.
The issue at the center of the Times article is what changes the government will seek in the financial system, and what the major banks are doing to oppose or weaken those changes. Dimon and his colleagues are well within their rights to call their administration contacts and flex their PR muscles to lobby for less regulation as the political climate shifts more and more in their favor (because public fear for the banking system and anger at bankers is clearly receding). As Simon pointed out, it may actually be to his advantage to play along with some of the administration’s proposals, for both political and competitive reasons.
The broader policy question – which may be more a historical question by this point – is why the administration’s would-be reformers even have to fight this battle. Fool’s Gold, or any account of the onset of the panic in September 2008, serves as a reminder of what the world was like then:
Merrill Lynch, Goldman Sachs, and Morgan Stanley suddenly found it impossible to raise funds in the capital markets. So did a host of European banks in Ireland, the UK, Holland, and elsewhere. The implication was brutal: across the Wstern world, the senior managers of a host of the world’s largest banks and brokers quietly told their central banks that they could collapse within days.
That these banks even exist today is solely the result of government intervention. Like Paul Krugman, I think some form of intervention was warranted, because of the huge potential costs – to everyone – of a failure of the banking system. But like Krugman, I also think the government should have acted sooner and more forcefully to ensure that the new benefits handed to banks – most notably a much-strengthened implicit government guarantee – were balanced by new regulatory powers.
What’s clear is that Wall Street in general, Goldman very much included, benefited hugely from the government’s provision of a financial backstop — an assurance that it will rescue major financial players whenever things go wrong.
You can argue that such rescues are necessary if we’re to avoid a replay of the Great Depression. In fact, I agree. But the result is that the financial system’s liabilities are now backed by an implicit government guarantee.
Now the last time there was a comparable expansion of the financial safety net, the creation of federal deposit insurance in the 1930s, it was accompanied by much tighter regulation, to ensure that banks didn’t abuse their privileges. This time, new regulations are still in the drawing-board stage — and the finance lobby is already fighting against even the most basic protections for consumers.
Jamie Dimon may be a great CEO. But that we have to count on his magnaminity to not torpedo the Consumer Financial Protection Agency is a bit much.
By James Kwak
Written by James Kwak
July 19, 2009 at 3:55 pm
Posted in Commentary
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22 Responses
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Like Paul Krugman, I think some form of intervention was warranted, because of the huge potential costs – to everyone – of a failure of the banking system.
I wish someone would explain to me what “costs” were averted by these obscene bailouts.
Something about this Krugman piece has rubbed me the wrong way since a first read it a few days ago:
You can argue that such rescues are necessary if we’re to avoid a replay of the Great Depression. In fact, I agree. But the result is that the financial system’s liabilities are now backed by an implicit government guarantee.
I’ve read Krugman for years and almost always agreed with him, but by now I’m getting sick of what looks like his griping. Does he affirm this hideously criminal system or not?
If he does (and it seems clear that he does), and was just trying to advocate some feckless, anodyne reform from within, well, that didn’t happen. The masters have made their decision. So why does he keep griping about it? Isn’t that just annoying and unhelpful to everyone by now, no matter what your position?
If you really deplore the infamy, isn’t it time to recognize it as the nature of an infamous system, and not some unexpected “abuse” which can be fixed?
The “costs” of believing in TBTF vs. believing it was always a lie and a scam:
Like I said, I don’t understand what putative costs are supposed to have been averted. There’s only one meaningful measure of socioeconomic health, and that’s the number of meaningful, living wage jobs being created or destroyed.
Under the bailout regime, where Wall St was supposed to “get back to lending” and avert disaster for “Main St”, nothing has happened but a sickening job hemorrhage.
The bailed-out banks were even allowed and encouraged to broker mergers and acquisitions which would do nothing but destroy tens of thousands more jobs.
Are the apologists trying to say that things would be much worse if we had let Goldman, JPMorgan and the rest go down to doom like they should have (and finished off the ones that were still twitching)? I can’t imagine how.
On the other hand it’s clear what the costs of the bailouts have been. Trillions of dollars in direct handouts and risk exposures, god knows how many trillions in opportunity costs, the social cost of allowing the further political entrenchment of these parasites, who are now the ultimate disaster capitalists.
Most of all,the absolute affront to freedom-loving people, however many of us are left, is the proposition, now congealed into policy, that we must spend our lives, in perpetuity, living under the thumb of gutter gangsters running a gutter protection racket. All for the sake of trying to prop up gutter debt “consumerism” for a few more miserable years.
For just a wretched little while longer to prop up the delusion that America still has a “middle class”.
How could anyone think that’s worth it? Is there left any basic self-respect?
Russ
July 19, 2009 at 4:33 pm
Reply
Russ,
I’m a spittle flecked right wing monster, and I absolutely agree with you. The banking system/government merger has completed, with all upside going to the banks and all downside going to the taxpayers, in the name stability.
This isn’t capitalism and it isn’t socialism. It’s not even corporatism. It’s just the banks running the show.
It seems like the left (who recognizes the manifest unfairness of the situation) and the right (who recognizes that the huge, centralized banks are inimical to human freedom and the market) could make common cause in bringing about change. Unfortunately, the Washington/New York axis is simply too powerful for anything, short of an unstoppable crisis, to cause change.
I find myself almost, *almost*, hoping for that crisis (which I regard as inevitable in any event) despite the suffering I know it will cause.
This makes even a heartless monster like me a bit sad at times.
Cheers,Carson
Carson Gross
July 19, 2009 at 8:44 pm
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Carson – I don’t believe for a minute you’re a heartless monster. Can’t be if you feeling some rational depression about the sale of Congress to the banks…(instead of the irrational exuberance found on Wall Street.)
And Russ, nice post…
anne
July 19, 2009 at 9:40 pm
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Your right that it’s not capitalism, or socialism, but corporatism is just another word for plutocracy, which, to describe it succinctly is “government for the greedy, by the greedy and of the greedy” to the perpetuation of inequality and catastrophe for the ordinary citizen, ad infinitum. If that sounds too cynical for you, please feel free to couch it in different terms. For me, we have been more abused than that strip-searched girl who finally got her day in the sun with the Supremes. We have all been sold to (or bought by) Wall Street (and to think that Lincoln technically ended slavery over 140 years ago — go fiure!!).
bayardwaterbury
July 20, 2009 at 12:53 am
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I don’t find it comforting that President Obama goes to Jamie Dimon when he needs answers to questions. I find it disturbing to put it very mildly. Isn’t it enough Dimon gets free Op-Eds from the Wall Street Journal to air his views as if he is some unbiased spectator??? That’s not enough??? Dimon needs Rahm Emanuel’s phone number?? I can’t decide which is worse, the extreme cronyism here or the fact that they’re so proud of the cronyism. They’re not even ashamed anymore that people know this???
What’s next?? Is Jamie Dimon going to be like Joseph of the Old Testament and start explaining President Obama’s dreams to him???
Ted K
July 19, 2009 at 4:43 pm
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Perhaps President Obama is a fan of Nietzsche?
Those emerging from the crisis wealthy and strong will be valued and get to determine what is right and wrong.
Bond Girl
July 19, 2009 at 4:53 pm
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But they will exist in a country that their wealth and strength will have destroyed.
anne
July 19, 2009 at 5:18 pm
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I think you have Nietzsche confused with Ayn Rand.
Russ
July 19, 2009 at 6:39 pm
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Cute.
Bond Girl
July 19, 2009 at 6:47 pm
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Re Obama’s intimacy with Jamie Dimon and reliance on his counsel, please note an earlier comment on the preceeding blog. The disconcerting truth is that Obama is a deeply conservative person by temperament and philosophy. All of his behavior on the economy, health care, our military interventions, his defense of the CIA, etc etc makes this point. He is progressive only on the small things, e.g. college student loans. Forget Kenya, Java and what the Harvard Law Review supposedly was. Think instead of his being raised by 3 Kansans: his mother and maternal grandparents.
A speculation: If Obama had married his caucasian girl friend from Columbia and settled in the suburbs somewhere, he in all likelihood would be a promising Republican politician. He has marvellous assets, but they are not harnessed to a progressive vision of America. Moreover, yes he is audacious. But his is not at all courageous in defending positions he himself has staked out.
Sorry, these are the realities.
Michael Brenner
July 19, 2009 at 5:28 pm
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Obama is a “deeply conservative person” in philosophy?? How is his stance on healthcare deeply conservative? Would you call Bill Clinton deeply conservative as well? Maybe but I’d guess not…and he had Rubin as his Treasury Secretary for a time. I agree with you that Washington has been sold to Wall Street but your speculation cheapens your argument. I very much doubt Michelle is the reason Obama is a Democrat. Clinton and Obama are both center Democrats…Clinton with his Caucasian wife and Obama with his African-American wife.
DesolationRow
July 20, 2009 at 1:28 am
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“”Obama is a “deeply conservative person” in philosophy?? How is his stance on healthcare deeply conservative?”"The fact that he’s willing to allow the public option fall by the wayside says alot. Kathleen Sabelius was on The Daily show last week, and every answer she gave was “we are working on a free-market solution to health care” or some derivation of it. She didn’t want to control cost or shut out the existing insurance companies.
I’d argue that Obama is more right than center on health care (76% of americans want a public option), enemy detention (aruging for preventative detention and detention AFTER someone is aquitted), surveillance, and a few other areas.
And the fact that he’d turn to Jamie for policy? Deplorable.
Agoraphobic Kleptomaniac
July 20, 2009 at 4:21 pm
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Before we look to creating this consumer financial protection agency, I think we simply must regulate the shadow banking system – for the sake of the nation. And for the sake of consumers. That’s what is most needed right now.
Last fall, Paulson told us we had to prop up the banking sector – or else the economy would fail.
The economy has failed. It has failed. I don’t know how anyone can look at the economy with any sense of pride and happiness. Unemployment is pushing 10 percent. Underemployment is at 16.5 percent.
Numerous industries are on the verge of collapse – auto, construction, housing, airline, newspaper, banks.
What are the healthy sectors – other than the shadow banking sector? Please tell me that – I’d like to know.
We propped up shadow banking last fall, not the economy. And we see terrific proof that when the government puts its mind to something, it can see phenomenal success.
But to say that the profits of GS, Chase, BoA and Citigroup are their profits to divvy up and pass around internally – that’s a joke – a massive, horrible joke they’ve played on the country. It is impossible that companies in a catastrophically failed sector can turn around and become so grotesquely profitable in such a short amount of time.
The financial sector had collapsed last fall. They exist today solely because the federal government propped up the shadow banking sector with an extraordinary infusion of funds.
Their business acumen has literally nothing to do with their success today. The federal government is the sole source of their astounding good fortune.
What happened to their toxic assets? Why isn’t this profit being used to pay down that toxic debt? Because we can’t figure out a mathematical model to price the debt?
Then their profit is false. And it really belongs to the feds…
Tax the hell out of them.
anne
July 19, 2009 at 5:33 pm
Reply
Check it out… Parsons is basically a Rockefeller. No wonder Vivi Nevo (International Man of History?) likes to hang out with him so much.
http://en.wikipedia.org/wiki/Richard_Parsons
Last annoying thought for the day:
…check out Joseph Stiglitz, courtesy University of Manchester:
http://www.manchester.ac.uk/aboutus/news/display/?id=4671
Uncle Billy vs. Mont Pelerin
July 19, 2009 at 6:19 pm
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It is unlikely the crisis will recede. Consumption has and will drop sharply due to the wealth effect of the lost housing bubble wealth as well as some other effects, absent a larger and better focused fiscal stimulus.
Who now owns the once famous toxic assets? Until the bad mortgage loans are written off, they will drag down the economy.
More importantly, it is likely that China will pull the plug, perhaps tomorrow, perhaps later, and cease subsidizing the US economy. China will retool its factories to manufacture goods and services for the Chinese population and not the US. The dollar will probably crash and may cease to be “the reserve currency”.
Sincerely,
John
John F. McGowan
July 19, 2009 at 11:14 pm
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The Obama relationship with the rich and powerful interests in Financial America (still developing, and largely because his top two Administration wonks, Tim and Larry have gotten his mind into their mindset), is still developing, but is such a tragic thing. It makes all campaign rhetoric about change meaningless. But, let’s face it, it is just American Plutocracy at it’s insideous best!! I wonder when something comes upon in JPM’s boardroom, if Dimon says, “well, let me call Barrack.”?
bayardwaterbury
July 20, 2009 at 12:58 am
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James,
While I agree in blog comments being free for anyone to post their thoughts, I think a number of commenters here seem to believe that the outcome of this crisis should have been the wholesale remaking of our banking, political, and fundamental economic structure – perhaps into something other than a capitalistic democracy. I’d like to ask a question that is much more basic and I think practical and since I regularly read this blog but rarely comment – I hope you and Simon can try to do it justice. If the bank bailouts were needed (and I tend to agree with Krugman that they were), why didn’t this assistance simply come with higher repayment costs? Forget new regulation, forget having greater say over pay, forget greater influence over who gets to stay and who has to go – wouldn’t the best end results be achieved by just requiring higher interest rates on the government loan facilities or better terms for redeeming warrants? If the government was the lender of last resort, essentially giving it the right to declare the terms of the loan, why didn’t it act like it. Why didn’t we just require that TARP funds have more warrants attached or higher costs associated with repayment? Why didn’t these loans come with more adjustments for quick repayment, i.e. so that if Goldman or any other institution wanted to repay more quickly, it could do so but with greater prepayment penalties – just like the banks do when they provide loans to you and I? IMHO – the failure of the government to change the ways of JPM or MS or GS or BofA/Merrill or Citi for that matter is not their failure to enact regulation or exercise political will or might, their failure has actually been poor financial management – their failure to get a good return on their investment.
JimmyJ
July 20, 2009 at 1:07 am
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Perhaps some of us here want something other than a “capitalistic democracy”. Others would be content just to establish capitalistic democracy.
Either course would certainly be a huge improvement over feudal oligarchy embellished with show elections, which is what we have now.
Russ
July 20, 2009 at 3:35 am
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Jimmy J – I think that the banks have already remade our society into something other than a capitalistic democracy. They’ve established an invidious corporate welfare state that threatens the future of our country.
Since this is the situation we find ourselves in today, I heartily agree with you that the government has failed to reap the benefits of being the lender of last resort. That is my biggest issue with the crisis – that the financial companies that failed so dramatically last fall are reaping such astronomical profits while the rest of the nation is being counseled to wait patiently for the recovery.
Paulson told us the government needed to prop up the financial sector (the sector filled with the best and brightest capitalists in the world!) to avoid a deep recession. His initial plan was to remove toxic debt from their books.
Well, that toxic debt is still stinking up the system; we’ve seen dramatic consolidation of a sector that was already “too-big-to-fail” and meanwhile, outside of Wall Street, the very deep recession we landed in after the bailout continues unabated.
And the sector that exists solely because of a government bailout is the only sector seeing astronomical profits. We’ve moved far, far away from the capitalist democracy you describe.
anne
July 20, 2009 at 9:12 am
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Why has NO person posting comments here so far mentioned that the bailour of banks was initiated SOLEY by Republicans. It was Hank Paulson and Ben Bernanke that first went to George W. Bush and said that they had been wrong for over two years–the subprime mortgage crisis was NOT contained and BIG action was needed IMMEDIATELY.Even the American Bankers’ Association later saithat THEY had never asked for the bailouts. Paulson-Bernanke-Bush scared the heck out of Congress and the American people. As a partial result, the economy came to a complete standstill. The costs of that “freeze” haven’t been calculated, unless you consider two consecutive quarters of five percent (plus) declines in GDP to be costly beyond measure.And one more thing. The actions of Paulson-Bernanke-Bush ended any chance McCain might ever have had of defeating Obama. So what has Obama done? Why, continue Paulson-Bernanke-Bush policies vis-a-vis the big banks, of course.
Kirk Tofte
July 20, 2009 at 8:20 am
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“The actions of Paulson-Bernanke-Bush ended any chance McCain might ever have had of defeating Obama.”
Uh, what? (citation needed)
I think McCain did that to himself when he said he didn’t know that much about the economy, and a major advisor of his, Phil Gramm, called us all a “nation of whiners.”
Ahh, those were the days…
Agoraphobic Kleptomaniac
July 20, 2009 at 4:27 pm
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I have been closely following Jamie Dimon since his bank was gifted with the takeover of Bear Stearns by the Gaithner and the Fed.
Dimon displays an arrogance that apparently is a requisite of the JP Morgan legacy.
Even the Wall Street Journal has commented on it.
To call Dimon a Democrat…is to demean the party…and reduce it to its bluest… and meanest… junk-yard dog element.
Lex Wadelski
July 20, 2009 at 12:51 pm
Reply
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