Jamie Dimon's Assault on the Economy
The latest letter from J.P. Morgan Chase CEO Jamie Dimon to his company's shareholders is a deliberate effort to obfuscate his own bank's rapaciousness and deflect attention from the enormous sums it has spent lobbying against financial reform. But despite the bank's record of predatory excess, Dimon's revisionist economic history carries significant—and unwarranted— political influence with the Obama administration.
Throughout the letter, Dimon portrays himself and his company as an unfairly ridiculed public servant. In Dimon's version of the financial crisis, J.P. Morgan is a patriotic institution, one which came to its country's aid during its darkest economic hour, agreeing to acquire failing investment bank Bear Stearns when no other megabank was willing, and providing financing to state and local governments to help them weather the recession.
Nowhwere does Dimon acknowledge his company's massive subprime mortgage operation, the ghastly practices of their credit card business, or their outright defrauding of local governments during the years leading up to the Great Financial Crash of 2008. Instead, he bemoans how his bank and its too-big-to-fail brethren have been "demonized" in the aftermath of the bailout that saved them all.
Dimon never explicitly states what he means by "demonized," so it's not clear exactly what kinds of criticisms he thinks are unfair. My own criticism of the company is simple: Like other large financial institutions, J.P. Morgan derives an extraordinary amount of its "shareholder value" from devouring other productive elements of the economy. There are three major examples of this behavoir, and I'll start with the subprime mortgage business, since that particular form of predation brought the global economy to the brink of collapse.
Between, 2005 and 2007, J.P. Morgan issued at least $30 billion in subprime mortgages, according to the Center for Public Integrity. In 2007, the bank was issuing over $3 billion in new subprime loans every quarter. The company ended up weathering billions in supbrime losses, but the red ink would have been more prevalent had Dimon and his cohorts not recognized the risk inherent in the subprime business and started selling off their loans as soon as they had issued them. In essence, J.P. Morgan knew its subprime operations were setting families up to fail—but it could still make a lot of money by extending the loans, and then selling them off to other investors.
As a result, when a subprime borrower proved unable to pay back the predatory terms of her mortgage contract, it was no longer J.P. Morgan's problem—another investor had to eat the losses, while J.P. Morgan paid out big bonuses to its executives. Between 2005 and 2008, Dimon alone took home over $115 million, much of it stripped directly out of neighborhoods around the country.
Not only was J.P. Morgan a major player in the subprime mortgage market, it ran one of the most influential lobbying operations in Washington. Dimon used this lobbying team to protect his booming subprime mortgage business. When state regulators tried to crack down on predatory subprime lending, J.P. Morgan pressured regulators at the federal level to step in and defend his bank. Ulitmately, J.P. Morgan joined six other banking behemoths and the top bank regulatory agency in the country, the Office of the Comptroller of the Currency, in a lawsuit to defang state regulators. The gambit worked until 2009, when the Supreme Court ultimately overruled the banks. But by then the subprime horse was well past the barn door.
J.P. Morgan's other major act of consumer predation came in the form of credit card lending-- retroactively raising rates on debt consumers had already accumulated and gouging them with undisclosed fees. In 2009, Congress finally approved legislation that would end several of these unfair and deceptive practices, and in November, J.P. Morgan said that it expected to lose between $500 million and $750 million as a result of the new law. The company's entire credit card division would book a loss for the year— Dimon literally did not know how to turn a profit on the credit card business without resorting to predation.
With Dimon at the helm, J.P. Morgan even went after local governments, bribing public officials to invest in the bank's toxic securities, and demanding millions of dollars from taxpayers to end the predatory arrangements.
J.P. Morgan wasn't the only bank engaged in these financial assaults on the economy—Wells Fargo, Bank of America and Citigroup were all doing roughly the same things. And the reason they were allowed to get away with it—these companies were all, in fact, rewarded for their abusive behavior with the most generous bailout in economic history—is their size. All of these banks are so large that their failure would wreak havoc on the global economy. At the time of its collapse, Lehman Brothers held roughly $700 billion in assets. J.P. Morgan owns over $2 trillion. After witnessing the economic chaos that resulted after Lehman's demise, the U.S. government simply cannot allow a bank of J.P. Morgan's scope to collapse if it ever finds itself in trouble. That state of affairs gives the company enormous political clout. Lawmakers know that the big banks and their campaign contributions will be around for the long-haul, and are willing to change the economic rules of the game to suit the banks' interests.
By contrast, the economy receives no substantive benefits from banks of J.P. Morgan's size. As Simon Johnson and James Kwak note in their new book, 13 Bankers, we had plenty of large corporations in the early 1980s, and all of them had no trouble obtaining financing when the largest bank in the country was Citigroup, worth just $114 billion, or roughly 3 percent of the U.S. economy. Today, J.P. Morgan is 14.7 percent of the U.S. economy.
Any public policy that presents a massive economic downside with no economic upside is simply irrational. But Dimon argues that targeting the too-big-to-fail crowd is actually a form of ignorant prejudice. Here's Dimon, from his shareholder letter:
"When we reduce the debate over responsibility and regulation to simplistic and inaccurate notions, such as Main Street vs. Wall Street, big business vs. small business or big banks vs. small banks, we are indiscriminately blaming the good and the bad – this is simply another form of ignorance and prejudice."
The point, of course, is that all of our nation's largest banks did truly awful things in the years leading up to the crisis. And if they had not been so big, policymakers would not have allowed them to get away with it.
But despite his bank's active role in fueling the financial crisis, Dimon remains a highly respected figure in Washington. Last July, The New York Times ran a story referring to him as " Obama's favorite banker," and he continues to be a frequent guest at the White House. When asked about the size of Dimon's 2009 bonus earlier this year, Obama praised the CEO's " savvy." It's easy to understand the affinity—Dimon himself has been a big donor to the Democratic Party over the years, while J.P. Morgan spent more money on lobbying in 2009 than any other financial institution. And Republicans are eager for Dimon to switch teams—in February, House Minority Leader John Boehner took Dimon out for drinks to try and coax campaign contributions from the executive.
All of that lobbying has allowed the U.S. economy to work very well for Jamie Dimon. But he has enough money. Economic policy is supposed to work for everyone. Where Wall Street is concerned, that means making sure that the financial system actually furthers useful economic development, and that taxpayers, consumers and small businesses aren't held hostage to whatever giant banks believe to be in their own short-term self-interest. The only way to do that is to remove the political clout of megabanks like J.P. Morgan. And the only way to do that is to break up the behemoths into smaller banks that can fail safely.