Please turn on JavaScript

Brooks Wilson's Economics Blog: Good Morning American and JPMorgan Chase

Friday, October 16, 2009

Good Morning American and JPMorgan Chase

I watched ten minutes of Good Morning America yesterday and was disappointed in news story about profits earned JPMorgan Chase.  It seemed a blatant case of agenda setting.  The agenda is that private corporations, particularly financial corporations, are dangerous and must be more carefully regulated by the government.  They, and I think they was Diane Sawyer, reported on profits.  It was similar to Stephen Bernard's article, "JPMorgan Earns $3.6B, but Loan Losses Remain High," which was linked to the show's web page. 
JPMorgan Chase & Co. reported strong third-quarter earnings Wednesday as its thriving investment banking business more than offset rising loan losses that the bank warned would continue for the foreseeable future.

JPMorgan, the first of the big banks to report earnings for the July-September period, reported a $3.59 billion profit but also said it roughly doubled the amount of money it set aside for failed home and credit card loans in the quarter.
Hard on the heels of the report on JPMorgan's profits, Sawyer introduced Claire Shipman's report on the dangers of high compensation to financial institutions bailed out by the government stating,
Some good news from some of the banks, but what about these other banks that had billions in profits now after all the taxpayer bailouts.
Rather than report on JPMorgan prudent actions during the housing boom that saved them from the fate of their less prudent competitors, ABC News switched focus to imprudent banks that required government bailouts.  JPMorgan was a well managed investment bank that bucked many of the practices followed by the institutions that the government rescued.  Jeffery Friedman describes JPMorgan's business strategy during the go-go years of the housing boom in Critical Review, "A Crisis of Politics, Not Economics: Complexity, Ignorance, and Policy Failure," 21(2-3):127-183.
J. P. Morgan Chase, which single-handedly accounted for about 44 percent of the world’s derivatives exposure (Slater 2009).18 Moreover, even when it was making very low profits relative to other commercial banks, J. P. Morgan raised the pay of its risk-monitoring personnel (Tett 2009a, 115–17), and after considering the possibility of engaging in subprime securitization to boost the bank’s profits, its CEO, Jamie Dimon, decided that the risk was too great (ibid., 124–28). Earlier on, the J. P. Morgan employees who developed CDO tranching had had the opportunity to apply this technology to mortgage-backed securities.  But they realized that even though “the last time house prices had fallen significantly” across the United States as a whole “was way back in the 1930s,” a similar event might make all the losses within a mortgage-backed CDO “correlate” with each other, which “might be catastrophically dangerous.”

Therefore, "to cope with the uncertainties the team stipulated that a bigger-than normal funding cushion be raised, which made the deal less lucrative for J. P. Morgan. The bank also hedged its risk. That was the only prudent thing to do. . . . Mortgage risk was just too uncharted."

"The team at J. P. Morgan did only one more [such] deal with mortgage debt, a few months later, worth $10 billion. Then, as other banks ramped up their mortgage-backed business, J. P. Morgan largely dropped out. (Tett 2009b)"

Finally, J. P. Morgan “did not unduly leverage [its] capital, nor did [it] rely on low-quality forms of capital.” Instead of targeting a high leverage ratio, as in the examples Jablecki and Machaj use to illustrate the behavior of SIVs—of which it had none—J. P. Morgan aimed for an 8-8.5 percent “tier-1” capital ratio—twice the level required by the Basel rules (Dimon 2009, 16)—despite the higher costs of tier-1 capital.19

By taking all of these prudent actions, J. P. Morgan emerged from the crisis as the strongest of the nationwide American commercial banks.

No comments:

Post a Comment