What happened to the global economy and what we can do about it
with 67 comments
By Simon Johnson
While the financial reform negotiation process grinds to its meaningless conclusion, the real action lies elsewhere "“ in Jamie Dimon's executive suite.
Dimon, the head of JP Morgan Chase, is apparently seeking to (a) become more global, (b) move further into emerging markets, and (c) become more like Citigroup.
This is terrific corporate strategy "“ and very dangerous for the rest of us.
Jamie Dimon clearly wants to become too big to fail, too interconnected to fail, and "“ above all "“ too global to fail.
He knows that the reform package will, among other (very small) things, create a resolution authority that will give the government more power "“ in principle "“ vis-à-vis failing financial institutions in the future. This is a central part of Tim Geithner's vision for financial stability.
But Mr. Dimon also knows "“ as a board member of the NY Fed and sometime White House/Treasury confidante "“ that a US resolution authority will do precisely nothing to make it easier to handle the failure of a large global bank, e.g., Citigroup, doing business in over 100 countries.
The reason global megabanks will get bailouts in the future is simple "“ policymakers will fear the chaos that would ensue when competing bankruptcy claims swarm over a defaulted institution, much as happened for Lehman (e.g., in London) in September 2008.
Mr. Dimon and his colleagues "“ who include some top former global regulators "“ are also well aware that the G20 (and everyone else) will not make any serious push towards creating a cross-border resolution mechanism.
The best way to signal to creditors that they will be protected in all potential future crises is to make JP Morgan bigger and more global. This will lower the funding costs for the organization and in turn make this global expansion more profitable when times are good "“ and when times are bad, there will be government support.
In effect, Mr. Dimon is constructing a "poison pill" against takeover by the government. This is so simple, so brilliant, and so dangerous that it should take your breath away.
If you press serious administration officials, in private, on how they will use the new resolution authority for Citigroup or (now) JP Morgan Chase, they are quite candid: they would create a conservatorship, as with AIG or Fannie/Freddie. But there is a huge difference between conservatorship and resolution. Resolution is about winding down the company, typically involves firing, and should imply losses for unsecured creditors. Conservatorship is about managing the company as a going concern "“ and would almost certainly in this context involve full creditor protection.
It is perhaps ironic that Jamie Dimon argued strongly, early in the reform process, for a heavy weight to be placed on a resolution authority as a way to prevent future bailouts. His actions now to undermine the effectiveness of such an authority further suggest that this administration was unwise and naïve to rely on his advise in the early formative phases of reform.
The White House may now be waking up to the profound dangers that Mr. Dimon and his successors will pose, but they are still unwilling to do anything meaningful about it.
Written by Simon Johnson
June 26, 2010 at 8:00 pm
Posted in Commentary
Tagged with Jamie Dimon, JP Morgan
Mr. Johnson wrote”
“The White House may now be waking up to the profound dangers that Mr. Dimon and his successors will pose, but they are still unwilling to do anything meaningful about it.”
They already sipped the Purple Kool-Aid.
Anonymous
June 26, 2010 at 8:11 pm
wow, FIRST again. Momma’s little man shining thru.
Michael Shaw
June 26, 2010 at 8:22 pm
And people say only women are catty.
saucymugwump
June 27, 2010 at 10:20 am
Mr. Dimon may now be waking up to the profound dangers that the President and his successors may pose, but as yet has seen no reason to do anything meaningful about it.
Nemo
June 26, 2010 at 9:11 pm
Whatever you do, don’t drink the purple kool-aid. Everyone: do not drink the purple kool-aid!! The orange kool-aid is fine, however.
Oh-oh, it looks as if the US water supply has been laced with the purple kool-aid. Poor suckers!
Owsley
June 26, 2010 at 8:34 pm
Barclays plc ,and Mr. Robert Diamond will have alot to say about JPMC incipient cross-pond foolery, period! Mr. Dimon’s nemesis…Mr. Diamond will have his head tarred, and spiked on the “Tower of London” if he dare bring his insanity to the English people. PS. Europe has had enough of America’s shenanigans. Thankyou Simon,and James,and please “Never Stop the Good Digging for America’s Sake”:^)
earle,florida
June 26, 2010 at 8:40 pm
AMEN
Anonymous
June 27, 2010 at 11:47 am
earle,florida wrote:
“Mr. Diamond will have his head tarred, and spiked on the "Tower of London" if he dare bring his insanity to the English people.”
Metaphorically speaking, death where be thy sting?
Rickk
June 27, 2010 at 3:14 pm
“Sir, I’m just building my empire… it’s all about testosterone, don’t you know?” (says Mr. Dimon)
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