Jamie Dimon v. Larry Summers

Jamie Dimon has won big.  JP Morgan Chase now stands alone, both in financial position and political clout – including special access to the White House and, as explained in today’s NYT, Rahm Emanuel’s likely attendance at his next board meeting tomorrow. 

Dimon’s semiotics have been brilliant throughout the crisis – it wasn’t his fault, he was forced to take TARP money, and – in phrasing that will make the history books – bankers should not be “vilified”.  But now he has a problem.

Larry Summers forcefully stated Friday that high recent profit levels for big banks (i.e., JPMorgan and Goldman) are based on the support they received and still receive from the government (listen to his answer to the second question, from about the 6:10 to 10:30 mark).  At that level of generality, in a period of financial stabilization and consequent reduction in executive branch discretion, this statement does not threaten Dimon or anyone else.

And Summers’ statement on the dangers of “too big to fail” was “too vague to succeed”.  Dimon saw this one coming and is very much aligned with Tim Geithner on the technocratic fixes that will supposedly take care of this – the mythical “resolution authority”, which will not actually achieve anything because it has no cross-border component, so the next time a major multinational bank (e.g., JP Morgan) fails, the choice again will be “collapse or bailout” (as Summers put it in the same Q&A Friday).  Yes, I know the G20 is supposedly working on this; no, I don’t think they are making progress.

But Summers also drew a line in the sand on consumer protection.

Reformists within the administration really need a new consumer protection agency for financial products – there is little else they will be able to point to as an achievement on banking issues.  Summers did not, for example, on Friday even mention the need for stronger regulation over derivatives; Dimon has likely already prevailed on this.

Consumer protection is easy for people to understand.  If the banking lobby really defeats or defangs it this year – as it almost certainly can – won’t that make meaningful re-regulation of banking a big issue for the midterm elections in 2010 and beyond?

And does Dimon really want to publicly confront and defeat Larry Summers? 

It must be tempting for Dimon to now press home his advantage, including at the White House.  But as JP Morgan Chase stands alone at the top of our banking hierarchy, how far should he push his luck?

Summers has an unparalleled ability to move the consensus.  And if he is now running from the left to become chair of the Fed – which was my impression on Friday – this will shift all candidates, including Ben Bernanke, towards being tougher on banks. 

Why doesn’t Dimon instead seize on greater consumer protection as a way to rebuld legitimacy for finance – and to shape the new rules so as to create barriers to entry and growth for future rivals?

What would John Pierpont Morgan have done?

By Simon Johnson

37 thoughts on “Jamie Dimon v. Larry Summers

  1. “Why doesn’t Dimon instead seize on greater consumer protection?”

    Judging by the obscene amounts of cash pouring into lobbying congress against regulation, I’m assuming it’s because consumer protection hurts profits. Consumers aren’t human-beings with families and dreams, they are numbers on a spreadsheet.


    That’s my question for the experts. The shadow banking system is what our policies have supported. That’s who we rescued last fall. That’s the sector seeing the profits today. (Fab profits for them – really crappy return for the investors who saved the sector, however.)

    And if you look closely, the profits they’re reporting come from the shadows, not from the regulated banking sector.

    What happened to all that toxic debt on their books? Has it vanished? How can profits be declared when the books sag with toxicity?

    We can continue to bleed out money to wealthy bankers and let unemployment rise and consumer spending decrease – or we can initiate real reform that truly answers the needs of the real economy – in ways that get people back to work.

    We seem to favor bleeding over building these days.

  3. I’ve said it before and I’ll say it again–the stock market went up 700 points within an HOUR after word leaked that Obama would name Geithner as his secretary of the treasury. Do you think Wall Street might have been on to something that day?
    Summers will never be appointed as chairman of the Fed because Bernanke has a lock on that job for a second term. He’s been way, way too useful to the powers that be. Although I agree with Paul Krugman that Bernanke has acted more often that Paulson-Obama-Geithner for the common good, he has been uncommonly good to the banking sector.
    Wall Street has something over or “on” Obama. Half of his campaign contributions came from corporate interests who didn’t want deal with tougher players like either Hillary or McCain would have been…and they’re REALLY getting what they paid for in ways that are hard to believe.

  4. While I suspect that the banking industry has some genuine fears and opposition to the proposed regulatory agency, I think this is more of a manufactured controversy to divert attention and support from more substantive measures, namely breaking up the mega-banks.

    Goldman Sachs, JPMorgan, and the others are so large and politically connected at this point, that the proposed regulatory agency would have a very low probability of seriously restraining them. After all, Alan Greenspan/Ben Bernanke and the Federal Reserve (amongst others) were already supposed to be doing this.

    Much better from the banks point of view to have a bitter fight over a regulatory agency that is unlikely to become a threat than a bitter fight over anti-trust measures, a breakup of the giant banks, and an end to “too big to fail”.

    It is worth noting that the mega-banks have become so large that their depredations are having severe macroeconomic effects. Essentially they are diverting trillions of dollars from productive sectors of the “real economy” to mindless financial speculation and manipulation. They are seriously weakening the real US and global economy on which their house of cards stands. They are likely to take a huge hit when China pulls the plug and stops subsidizing the US and shifts to manufacturing goods and services for China’s own population.

    In the long run, the stockholders of Goldman Sachs, JPMorgan, and the others might well be better off to accept stock in several competing “small enough to fail” banks. These banks are likely to be much better managed and make better lending decisions because the boards of directors and senior executives face real consequences if they screw up, much as many smaller banks did not get sucked into housing bubble and mortgage backed securities morass.

    Perhaps Jamie Dimon and Lloyd Blankfein could preempt the entire mess by breaking up their own oversized companies and make even more money. :-)



  5. Not sure about the “vs” in the title. The more likely scenario is Summers and Dimon laughing together over the need to placate the sheeple with a “reform”. They agree on a toothless Consumer Protection Agency as the least bad (for bank interests) of the available options. As agreed, Dimon strenuously objects in public that the CPA will “destroy banking as we know it” as a smokescreen.

    Business goes on as usual. Summers collects millions in “consulting” fees from Wall Street when he leaves Government. Dimon buys a bigger yacht and gets that G5 he’s always wanted.

  6. The whole idea about breaking up banks to become “small-enough-to-fail” seems very misguided. The large banks of Canada are doing well right now, for example. Eleven years ago a tiny firm of a hundred employees(?), LTCM, nearly brought down the world financial system.
    Yes, bring back Glass-Steagal and the other laws that were removed by the DEMOCRAT Bill Clinton in his second administration. But isn’t the larger problem a credulous belief in mathematical models that explain and predict nothing, as Nassim Taleb has spent a career pointing out? These same worthless models that allow firms to leverage themselves at 30 to 1 ratios, for example?

  7. As I read the above article I became overcome by an inordinate amount of sadness, that we cannot seem to move forward and provide a decent remedy or backstop structure to ensure better financial sector management. It truly shows the indignity being served upon the masses when most are only motivated by their own personal self interests. Man is definitely not evolving or even learning from this recent ‘crisis’ and we will be bound to repeat it again.

  8. “Not sure about the “vs” in the title.”

    Well, that offers Simon the opportunity to give the assurance that he’s really non-threatening and that, deep down, believes that the political and economic systems are functioning as advertised, with “public servants” serving the public. That way you get invited back to PBS, a media source that can’t quite bring itself to use the word, “torture”, and requires a certain weasel word quotient of their interviewed experts. I mean how else to match up with rodents like Jim Learer?

  9. “He knew the things that were and the things that would be and the things that had been before.”

    I think you know where I stand on the v. vs. vs.

    As for what JP Morgan would have done? Invite Jamie Dimon and Peter Peterson over, drink ouzo and let them try on his Biretta?

  10. My concern about the TBTF banks in America is that we let them engage in unregulated business activities that lead to disaster and because of their size, they thus must be bailed out at an extreme cost to the country and at exceptionally favorable rates to the banks.

    I don’t think the problem is a credulous belief in the nothingness of certain math models. I find it impossible to accept that all these highly compensated, Harvard educated people did NOT know they had acquired such high debt ratios – but at the time, it was profitable and unregulated and everyone was doing it and in their back pocket, they knew they had the ear of the government, should the need for salvation arise.

  11. I haven’t had time to read through the comments yet. But it seems to me the problem is within the state of American economy itself.

    Power and wealth has been captured by an oligarchy.

    The very tough battle ahead is “rebalancing” the power structure through a political process.


    In the mean time I have just discovered Nassim Taleb and his theory of the Black Swan. Fascinating. Yet at the same time it will take some intense reading to get a real sense of his work.

  12. The administration’s response to the financial crisis has been irresponsible in two respects. One, it has taken the well-being of the biggest institutions as its principal point of reference. Two, its ramshackle approach does little if anything to resolve the structural flaws in the system and their deletorious effects on the general economy (even when it functions on its own distorted terms). The blame should be placed squarely where it belongs: in the Oval Office. Let’s summarize the record. Obama knowingly appointed as his senior officials people who were intimately connected to the old system – professionally and intellectually. That is one. He exiled Paul Volcker because Volcker had convictions and iseas that ran against the grain of Obama’s own thinking. That’s two. Obama gave no support to promoters of bankruptcy law reform or a workable program to aid home debtors in risk of foreclosue. That’s three. Obama has curried favor with the big boys on Wall Street while savaging the managers of GE and Chrysler. The latter were poor executives but neither dishonest nor calculated schemers at the expense of the public interest. He clearly identifies with the former socially and intellectually. That’s four.

    The sad conclusion is that Obama, for all the razamataz, is a conventional thinker, instinctively deferential to the powers that be, and uncomfortable with those who have both his level of intelligence and convictions about dedication to the commonweal that are totally foreign to him.

    Michael Brenner

  13. If I had to hedge my bets Nassim Taleb seems like a good one.

    He has said commercial banking should be nationalized as a public utility. While investment banking should be cut loose, so to speak, with no back stopping from government tax dollars.

    He also says, the business schools should be shamed and descredited. They are — still teaching — portfolio management that brought the world to the brink of Depression.

  14. “Won’t that make meaningful re-regulation of banking a big issue for the midterm elections in 2010 and beyond?”

    In 2012, maybe. The big problem, so far as I can see, is the Senate conservatives. I don’t think significant opposition to the Senate conservatives can emerge in a year and a half. I don’t think there’s time for an organized political response, and without an organized leadership, to disseminate information and promote policy, public response is, per Converse, likely to be uncoordinated.

  15. Well, of course they knew how much they were leveraged, the problem is that the financial economists, quants, and others were using models that allowed them to fool themselves into believing they could manage this risk. I believe that’s Taleb’s view, with which I agree.
    There is a related argument about TBTF, that one should at the least, separate commercial and investment banking, the way things were before the DEMOCRAT Bill Clinton repealed Glass-Steagall. To paraphrase Taleb, finance or financial risk is so poorly understood, it’s better not to mix two very different types(commercial, investment) of banking activity in one organization.

  16. I’ve always admired Warren Buffet for calling portfolio optimization theory “demented”.

  17. Nope.

    Prof. Johnson, I’ve looked around the web a bit but have’t been able to determine where you come from originally? Somewhere in northern England? Where did you go to school before arriving at Oxford? What/who brought you to the states from Engelonde?

    It’s interesting, but your online bio’s don’t mention that you were a “Junior Scholar at the Harvard Academy of International and Area Studies.” That’s a fascinating Academy, btw. Like russian dolls… Weatherhead within AIAS, Olin within Weatherhead. The Olin website hasn’t updated since 2005 and still has a photo of Samuel Huntington and blurb that says he’s still in charge. These are the people that determining our most delicate foreign policy? Attention to detail? Hello.

    Also interesting that both you and Andrew Abel (Collaborated with you on collected Modigliani papers) ended up at the CBO. Is Abel still there? His Penn webpage says he is, but he’s not listed on the CBO site.

  18. Thanks Uncle Billy, flattered anyone reads my blog. As for being tough on Simon. Need the leftwing circle the wagons and start shooting inwards? Very respectfully, class envy will take us nowhere. My option is for a broadly-based middle class.

  19. You see, I am not an economist, nor do I dabble in math very often.

    But I find it absolutely astonishing that they could know the amount of debt on their books, yet push around numbers in a way that made it seem “healthy” – or not risky. That just boggles the mind, quite frankly.

    That we’re seeing such profit still emerging from the “shadow” (unregulated) sector – and such push back from the banks with regard to regulating that sector – makes it seem that they’ve known all along that the risks of being unregulated are quite profitable for them – and that the bigger they get (i.e. the more consolidation the government forces on them), the less likely they’ll ever be held accountable for any “modeling error” that they make.

    No matter what, they’ll be raking in the dough…

  20. Uncle Billy, I have an inquiring mind. But I never knew what Mont Pelerin was until today. (Chalk it up to being Canadian) I used to be confused by your link to that hospital. So I am learning. As for my blog. I added a link to Kiva. How’s that for progressive financing!

  21. Sounds about right to me. And it’s incredibly disappointing for me to say that.

    I’m not looking forward to the similar level of disappointment with health care reform I now expect.

  22. Count me in, guys. I’m beyond disappointment and anger and to the point of resignation. Obama has receded into the Presidential bubble and surrounded himself with his “friends of Barack” never to emerge. This crisis played out so differently from the way it played out in the Roosevelt administration…

    Can we learn anything from our own history?

  23. Whatever Diamon or Blankfein want, they get. It is these two bankers who run America, not the president or anyone else. If these two do not want consumer protections, true regulation of derivatives or an audit of the Fed then these thing will not happen. Or, not happen in any way that will actually accomplish anything but to transfer risk from the banks to the government for failures to act in the future. Everyone already knows that Larry Summers is just another Washington water boy so why listen to, or print anything he has to say?

  24. I got a D on a University exam because I refused to put the textbook answer on how to choose stocks. The textbook answer at that time (paraphrasing) was you should choose 15 stocks from different industries, then after 15 there wasn’t much more advantage you could get out of diversifying. I wrote on my essay answer that I read an iconic investor had written diversification was really “diWORSEification” and that you should only choose stocks based on fundamental analysis and book value. My professor nailed my ass to the wall for about 20% points for that one question on the exam.

  25. I’m not an economist either, and the math used by quants is pretty esoteric, I think based in partial differential equations and stochastic calculus, stats and probability. BUT, the math and economics always have to be justified by the ideas supporting them and there we’ve all got a lot to say. And really, Taleb and others have said for a long time that the math and financial economics are useless anyway. Which the current crisis proves.
    There was a book written about 1995 by an ex-Morgan Stanley lawyer who worked in derivatives and he describes very well the worldview of these idiots. For example, all the traders in MBS and other stuff like that, NEVER invested in what they traded. Their money was always safely tucked away in T-bills, government bonds, etc.

    Anyway, fancy a cup of coffee?

  26. You know, there has been much rhetoric justifying the continuation of “business as usual” in Financial America (e.g. profits, bonuses, etc.). When Larry pretends to talk tough, we all get the idea. He has to feign concern. He has to defuse criticism (from all sides) relating to the result of such massive government intervention. I, of course, don’t buy any of it, UNLESS he puts some teeth in it: make the banks offer top dollar for the now valuable warrants, and, if the old practices continue, threatan to pull all government guarantees (since the industry is now riding on the good faith of the American govenment to profitability — although recent analysis makes those profits look like a one-time financial sleight of hand).

    Tough talk to the Plutarchs seems such a waste of breath. But the tragic ballet is entertaining!!

  27. I agree. I think the Republican party has disintegrated intellectually and demographically. As you say, it’s unlikely that a coherent alternative can emerge either within the GOP or outside it by 2010.

  28. vilify – 1. To make vile; debase; degrade….
    (Webster’s 2nd International)

    No, bankers should not be vilified, yet they have done this to themselves for a long time now and show no sign of stopping, hence the need for external restraints.

  29. And how can the banks be in great shape and still have 2 trillion of toxic assets on their books? This is such a giant scam that it boggles the mind.

    The question I have is why Obama is continuing on with this course. He seems like a very intelligent man, yet these actions just make you wonder.

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