Barbara Rehm noted recently in this newspaper that JPMorgan Chase is widely acclaimed as the Michelangelo of risk management because it "came through the 2008 crisis better than most of its peers."
Jamie Dimon deserves no credit for that.
Citi, an agglomerated mess that Jamie had worked mightily to heap up, didn't come through the crisis on its feet. Its former CEO, Sandy Weil, was the only boss Jamie had ever had. Sandy's ambition was to run the biggest bank ever. Which Jamie now does—after Sandy fired him. Coincidence?
The other large lenders that most notably failed in the crisis, such as IndyMac, Countrywide, Wachovia and Washington Mutual, failed because they created large volumes of unsound mortgages—mortgages with stated income, teaser payments, loan-to-value ratios above 100%, and other fatal defects—whether or not the borrowers had subprime scores, which they often did not.
Prior to the crisis, Chase Mortgage was a top mortgage lender. But it didn't participate in the race to the bottom—either before or after Jamie Dimon arrived. Indeed, in his first annual report after taking charge, Jamie said, "We maintained our high underwriting standards." Why?
Not because some brilliant chief risk officer ran the "parallel outcomes analysis" that Barbara advocates—and then reined in the CEO of Chase Mortgage. A more convincing explanation: Chase Mortgage was a ponderous, sluggish bureaucracy, distrustful of innovation and unable to introduce changes to products or policies at any speed above dead slow.
After Jamie arrived, this didn't change, though he's put the business through four CEO's in six years.
Another reason Chase didn't follow the lead goats may be that Jamie has long shown a personal aversion to nonprime consumer lending. Perhaps that dates back to his days with Sandy Weil at the totally subprime Commercial Credit. Or maybe he acquired it as CEO of Bank One, with its dreadful portfolio of broker-originated home equity loans. Or else he's noticed that subprime lenders don't rise to stardom and top positions in Washington.
His aversion to higher-risk consumers also explains why, when the Federal Deposit Insurance Corp. handed him WaMu, which had previously bought for over $6 billion the subprime card issuer Providian—led for the previous six years by the much-admired Joe Saunders (now head of Visa)—Jamie chose simply to run down the portfolio. Count that as a $6 billion destruction of value. He could afford it because he got WaMu for almost nothing, after Sheila Bair was terrorized by a run. (Full disclosure: In the 1980's, I founded the credit card business that eventually became Providian.)
In fact, pre-Jamie, Chase issued some subprime cards, but Jamie ended that. Too bad, because subprime cards, like subprime auto loans, performed well through the crisis (when many people paid on their cards and not on their mortgages), and have since been highly profitable.
"I won't lend to nonprime consumers" represents the pinnacle of risk management expertise only if the safest car would have no gear higher than first—or if buying only bonds, never stocks, deserves the risk management Nobel prize.
Speculation on derivatives is gambling. Nonprime consumer lending is not gambling—as Capital One, for instance, has shown for over 20 years. Some argue that Jamie's credit derivatives gamble lost "only" some billions, so no big deal. Wrong. What's important is the management weaknesses that this loss reveals. Here's a comparable: