Economics
Scenes from the financial crisis hearings
IT'S always fun when bank bigwigs are dragged in front of the microphones. Kevin Drum has this quote, from JPMorgan Chase's Jamie Dimon:
We didn't do a stress test where housing prices fell.
Oops! It's interesting; many critics of the financial industry credit the process of securitisation with the inflation of the bubble. Since firms were able to offload mortgages, they didn't need to worry about what would happen when prices fell. But it does seem that many on Wall Street didn't actually expect prices to fall. More than that, they couldn't conceive of a world in which prices fell. That's pretty amazing.
Ezra Klein writes:
There was an interesting exchange a few moments ago in the financial crisis hearings. The bankers were asked whether they ever built their "too-big-to-fail" status into their internal strategies. They said no, of course. But J.P. Morgan's Jamie Dimon had a slightly more convincing answer, arguing that the market didn't consider them too big to fail, either. If you look at the interest rates on the money we were loaned, he says, it's pretty clear that the market didn't consider us a riskless proposition.
I'm not sure quite what to make of that. On the one hand, if the financial sector couldn't conceive of a world in which house prices fell, they might also have struggled to conceive of a world in which the financial sector was troubled enough that even relatively small banks would be shielded from collapse, as was the case after Lehman's failure. On the other hand, it's not as though the American government had a track record of standing by while large financial institutions got into serious trouble. And even if big banks didn't have enough of an implicit guarantee to borrow on the same terms as Fannie Mae, firm leaders may still have seen the advantage"”banked on it, really"”of becoming large enough to wield significant clout in Washington, and of being a serious economic liability in times of trouble.
At this point, however, it's crystal clear that large banks can expect government assistance, and so firms are almost certainly building their too-big-to-fail status into firm calculations. And that's something which really has to be addressed, or another crisis will follow fast on the heels of the last one.
Finally, in somewhat related news, there's this:
They are paid a fortune for their ability to make complex decisions about where to invest millions of pounds every single day.
But perhaps the job of an investment banker is not quite as difficult as it might seem.
A chimpanzee in Russia has out-performed 94 percent of the country's investment funds with her portfolio growing by three times in the last year.
But can he write Shakespeare?
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Could Shakespeare have written the commission hearing? I like to think that as long as the government is diligent that when they save a bank, management goes and the shareholders lose all but the last penny, then I doubt too-big-to-fail will end up in anyone's internal strategy. That was something the Bush administration got right and the Obama administration got mostly right.
"O, Banish me, my lord, but kill me not!" -Desdemonna
How can you be surprized that Dimon and the rest never conceived of a world where house prices fell ? J. K. Galbraith pointed out long ago that the path to corporate success consisted in wearing a nice suit and repeating variously the conventional wisdom. The skeptic in business who doubts and acts on his doubts does not rise in institutions; he founds his own.
"they couldn't conceive of a world in which prices fell."
That's not fair. They did expect housing prices to fall, just not nationally. Previous collapses of housing prices since WWII were always regional affairs and that's what they expected this time. They also didn't expect prices to fall as far and as fast as they did.
PBS is known for showing cultural and entertaining programs.
I hope Newshour on PBS devotes about 30 minutes of its show tonight to the commission hearing.
I do "SO" love Kabuki theater.
(We'll pretend we are mad, you pretend you are sorry, and then we'll talk campaign contributions over dinner tonight.)
The link to Drum's article leads to some more interesting articles.
Regards
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