Paging Jamie Dimon

Surprise, surprise — GMAC needs more money. As you may recall, GMAC was the one institution that got a C- on the stress tests this spring that were impossible to fail. I imagine the analysts at the Fed really wanted to give it an F, but they couldn’t. In any case, it seems that GMAC is too big to fail, because of its importance to the auto industry. Yves Smith says, “The reason for more dough to GMAC is so GM and Chrysler can continue to finance auto purchases, not as a result of greater than expected losses on its existing portfolio. So this is cash for clunkers under another brand name.”

Again, not surprisingly, the government is treating the 50% ownership threshold as some sort of magic line. From the Times article:

“With all three helpings of federal aid, it is possible that the government could wind up owning at least half of the company. But GMAC and Treasury officials are discussing ways to structure the investment in a way that could limit the government’s ownership interests. One possible option would be to also ask some of its private preferred stockholders to convert their investments into common stock.”

So I have two ideas. The first is that if we put more money in GMAC, we should divide it in two and let the mortgage lending part fail. If we insist on keeping the whole thing afloat, that means we are subsidizing both the auto lending part (which is supposedly critical to the economy) and the mortgage lending part (which isn’t).

The second is that this would be a great time for JPMorgan Chase to get some good PR by stepping in and offering to replace GMAC as the funding source for GM and Chrysler dealers, so the government can abandon GMAC. Or even buying GMAC outright, including assuming all its debt and committing to subsidize the auto business, for $1 or so. Yes, that would make JPMorgan bigger, which I’m not thrilled about. But from Jamie Dimon’s perspective, it would show the potential benefits of having big banks that are willing to act in the national interest now and then, and it would be a little like Goldman declining to haggle over the price of buying back its warrants from Treasury.

Now the idea of relying on big banks to serve the national interest obviously sounds like bad policy to me. But if Jamie Dimon wants to take this problem off the taxpayer’s hand, I think he would be welcome to it.

By James Kwak

15 responses to “Paging Jamie Dimon

  1. Yes, if you pay people to screw up, they tend to screw up again.

    Seriously, this is not really an argument for JP Morgan Chase to do anything. It emphasizes the need to end “too big to fail” and break up the giant banks.

    Political pressures will tend to lead the government to subsidize failing established businesses and industries (e.g. Goldman Sachs and JP Morgan Chase, as well as GM) instead of letting “the miracle of the market” work and new businesses and industries rise. Sometimes this will work out, like the Chrysler loan back in the 1970s. Often it will not.

    The government has other options to deal with the current crisis that mostly don’t involve propping up failing or badly run businesses.

    1. Work with China to revalue the yuan and retool China’s industry for domestic (Chinese) markets, e.g. the rural population. This will help revive manufacturing and other industries in the US.

    2. Break up the giant banks. More competition is good.

    3. Support reasonable expenditures at the state and local level, make up for the shortfalls.

    3. Expand government support for R&D activities (NASA, DOE, DOD, NSF, etc. etc.) that the private sector does little of. Support more diverse research programs.

    4. Focus on infrastructure — roads, buildings, parks, etc. etc. — that improves the country and directly boosts aggregate demand. Tax cuts to the prosperous, cash handouts and loans to banks, and so forth are unlikely to work in a liquidity trap.

    5. Unwind the failed mortgage backed securities. Take them apart. Write down the mortgage principal amounts to post-bubble values. Avoid/stop a foreclosure wave that may lead to a negative bubble in housing and other assets.

    Sincerely,

    John

  2. One zombie propping up another, simply laundering the loot extracted from the public who are crushed flat under the wobbling Tower, instead of having the government convey it directly.

    That seems politically counterproductive from the public interest point of view, since it helps put over the fraud that something like JPMorgan serves some useful social-value purpose.

    But I do see how it might be in the rackets’ political interest.

    (Incidentally, I thought it was interesting how Yves said this is only to prop up zombie auto sales, “cash for clunkers under another brand name”; how it’s not for losses on the existing portfolio, but a bailout to enable further losses. She thus directly contradicted the NYT which lamented GMAC’s losses from subprime mortgages and “other real estate”.)

    It’s just part of the pattern. Most of the stimulus and all of the bailouts are going to prop up the zombie system, right into the pockets of rentiers, not to make the necessary transformational changes.

    It’s 100% reactionary, zero reform.

  3. The continuing saga of financial and economic issues as they seem to snowball will I suspect at some near future time implode with consequences that make what has happened as trivial.

  4. I and my family have been big supporters (not financially but in voting and spirit) of President Obama. Even before it was clear he would be victorious over his Democrat opponents. And I remain so now. BUT if he bails out GMAC he’s on his last straw. I have a business degree and I can make all these longwinded arguments about “moral hazard”, regulatory “capture” and all the deeper economic mumbo-jumbo. You know what my feeling gets down to??? F*#^ GMAC. If NO ONE in the private sector wants to help GMAC F*#^ ‘em

  5. Chase will only step in to replace or buy GMAC if it helps their bottom line (or if your more skeptical would help their executives get bigger bonuses).

    As far as the government giving more money to GMAC ther real concern should be sending good money after bad, rather than controlling interest (Generally Accepted Accounting Pribcipals say that controlling interest is only 20%). If it is very likely that committing more tax payer money will help get the rest back it might be justified, otherwise don’t do it.

    John McGowan has good ideas. I wish there was the political will and courage to make them happen. Big money from China and the US would fight hard tp prevent them.

  6. If we’re going to let GMAC fail, at least make sure that all of the victims that it has created are made whole before the crash and at the expense of GMAC. According to one victim, GMAC locked up their insurance proceeds after one particularly nasty hurricane a few years ago. Mold eventually set in to the victim’s home ultimately making it uninhabitable. Having nowhere else to go, the victim’s family has been living in a STORAGE UNIT on the property.

    As a result of the stress caused by bringing litigation against GMAC pro se, the victim suffered a heart attack, triggered by the judge’s refusal to compel GMAC to produce the victim’s original note as proof that GMAC had legal standing to foreclose per Article 3 of UCC. After recovering from by-pass surgery in the hospital, the victim returned to their storage unit to continue recuperation.

    Mortgage Servicing Fraud has been rampant in the United States for more than a decade now. It appears that none of the larger servicers have refrained from it, possibly due in part to the popularity of software that has become industry standard. Mortgage Servicing Fraud can and does happen to literally anyone with a mortgage.

    There are far too many legitimate foreclosures happening in the U.S. to allow even one fraudulent foreclosure to take place. If state and federal entities would finally begin to enforce regulations already on the books to their fullest extent a fair portion of the current economic “crisis” would not exist – including Mortgage Servicing Fraud.

    Mike Dillon
    Manchester, NH
    http://www.getdshirtz.com

  7. I could understand why with nose held, we had to poor hundreds of billions into financial institutions between last Sept. and this past winter. Sure there are arguments about nationalization vs. TARP but the general theory for giving them money held firm.

    This is not last October. While there is still constraint in the markets, there is no longer any reason for the U.S. Government to prop up anyone. Those institutions with actual long-term prospects even those saddled with debt and poor short-term performance prospects have been able to get capital in the private markets over the last six months or so. If GMAC cannot, then they need to go bankrupt. It would also be a positive for the Obama administrations since it was the “crisis” that required all the former actions (most of which actually occured under the Bush administration) but that “crisis” has passed. A orderly unwind of GMAC will not hurt the overall economy and there should be plenty of banks willing to make car loans.

  8. I thought GMAC was owned by Cerberus? Where is John Snow when we need leadership? Someone please explain why GM (which makes cars, or used to) can go broke, but GMAC (which makes nothing, apparently, except paper losses) is too important to be allowed to fail.

    It appears that thirty years of globalization and deregulation have left America in only one business: usury. That business is too important to be allowed to fail.

    As for all this hoopla about Jamie Daimon, he is just a conference call rapper who used to caddy for Sandy Weil whose major achievement was setting up Bob Rubin as the fall guy at Citi. You need a long memory to understand this stuff.

    If we are so worried about ballplayers on steroids why is it that banks on steroids are just the free market at work?

  9. Why not call a moratorium on mortgage interest rate resets until the mortgage backed securities are unwound? Don’t we need a long term solution to the variable interest mortgage resets? It seems that with every reset we get a new wave of foreclosures.

  10. Bailouts for EVERYONE! That’s my new program! That’s right, you want money? Disappointed that reality asserting itself forces you to live a life of only semi-luxury? Then BFE has a treat for you!

    We’ll just take out a government loan against the lives of the next ten generations of your family, finance your offspring in to debt slavery, and buy you that 100″ LCD you’re pining for just to pass up the Joneses! Who cares, you won’t have to pay for it! Externalities are grand, aren’t they? So sign up for your BFE money today, and let your descendants just how little you care about their lives!

  11. For a guy his age, though, he looks great.

  12. Must stop agreeing with you all the time, Ted. People will start to talk! ;-)

  13. LOL, Dimon is up to his neck in litigation at the moment and losing in court I might add thanks to the antics of Sullivan and Cromwell’s Robert Sacks…oh well, they didn’t need that $4billion anyway ;)

  14. Is it time that we all start to reconsider the totally screwed up system whereby ?% of the country is happily in hock to large corporations so that they can purchase deadly-gas-emitting means of transportation?

  15. No solid answers, but some questions:

    1. Spoze we split GMAC into ten Baby GMACs. All ten of ‘em would also be insolvent, so TBTF is not the issue.

    2. If you were a competitor not worried about incurring the mighty wrath of the US, why would you not have the WTO sue for the US’s subsidy support of GM & Chrysler? GMAC apparently not only supports buyers, but also the thinly capitalized dealerships, too. If GMAC is losing money, it must be because they’re charging a couple of points below-market on floor-inventory sales — again, a subsidy that makes sense if you’re a private firm wanting to keep an active dealership net, but now this is Uncle Sam helping GM reduce prices vis-a-vis Ford, Nissan, …

    3. The suggestion to split GMAC reminds us of the HUGE subsidies we taxpayers give to homeowners — HAVE BEEN giving, for decades. Would the mortgage part of GMAC fail when we’re talking about even more dramatic subsidies than the $8K first-time credit? Where are the anti-big-government ideologues on this? They sneer at RINOs but happily accede to subsidies that are most valuable in dollar terms to the upper braqckets.