We interrupt this recent spate of college teaching applications to bring you the following, jaw-dropping testimony from Jamie Dimon, CEO of JP Morgan Chase. Dimon was one of the Four Horsemen of the Apocalypse four Wall Street CEOs testifying before the Financial Crisis Inquiry Commission this morning, attempting to explain what the hell they were doing while all the money in the world broke. He said plenty of stuff, but here’s what had me scraping myself off the floor.
“Somehow we just missed that home prices don’t go up forever, and that it’s not sufficient to have stated income…”
That bit starts at 16:06 in this audio file, run this morning on WNYC:
“Somehow we just missed that home prices don’t go up forever, and that it’s not sufficient to have stated income…”
That bit starts at 16:06 in this audio file, run this morning on WNYC:
“Somehow we missed that home prices don’t go up forever”
Brian Lehrer rightly pounces on this part (listening to his own slackjawedness about JPMC’s failure to stress-test falling housing prices is pretty great), but I’d add this:
Uh… really, Jamie? There are two reasons I could have told you that:
One: Disclosures
For every single product a financial services firm markets, there is a disclosure that says, in one form or another, “Listen, just because we’re telling you to invest in these products doesn’t mean that at some point they’re not going to drop in value. We make no guarantee that this thing is going to go up forever, because that just doesn’t happen. If you stick it out long enough, over the long haul we’re betting you’ll do okay, but frankly we’re not even allowed to say that much, because honestly? We don’t know that that’s true. No one does. And in the meantime, you could lose your shirt.” At the bottom of every piece of marketing literature I worked on at BigAnonymous was something they called a Bank Box, which looks like this:
This language is required by financial regulators to keep those poor silly Joe Schmo average investors from getting confused by all those super shiny dollar signs they’re chasing into thinking that their investments are guaranteed to go up forever. Financial services marketers aren’t even allowed to put graphics that show an arrow going upward in case the poor investor gets hornswoggled into naively thinking from the arrow alone that up is the only direction the market goes. (At least, in the United States. What firms are and aren’t allowed to put on their marketing literature varies from region to region, country to country, etc. – in Taiwan, for instance, you can’t show a picture of Buddha or you’re considered to be claiming that your investments are buoyed by divine intervention.)
“Look,” says the Bank Box. “What a bunch of ninnies those average investors are! We have to remind them at every turn that the market is not guaranteed, and that things don’t go up forever. After all, they don’t have specialized knowledge of market history or super-magical money powers -- like our expert finance people, who we have to pay exorbitant salaries and bonuses to in order to keep them in our company because they know so much more than we do, clearly have -- and might not remember things like the tech bubble, or the Panic of 1907, or 1987’s Black Monday, or a whole host of other times when the market took a tumble and gave itself a big fat concussion. So we have to protect them from themselves and remind them of the single most basic rule of investing EVERY TIME WE TALK TO THEM. Otherwise who knows what might happen?”
Executive gift suggestion for Jamie Dimon: a plaque engraved with a bank box.
Two: Isaac Newton
Even if Jamie Dimon had never heard of a bank box, or FINRA, or the crash of ’29, he’s heard of Isaac Newton, right? Any self-respecting 12-year-old who’s heard the story about the apple could tell you that housing prices, like apples, must someday fall.
But the real showstopper is the second phrase:
“...it’s not sufficient to have stated income...”
A stated income loan is just that: you tell somebody how much you make, and if they think it’s enough, there’s no other proof necessary. In other words, at a certain point in mortgage-backed security feeding frenzy, this is pretty much what it took to get a loan from a lot of places:
Applicant: Hi, can I have $250,000?
Lender: Depends. What do you do, and how much money do you make?
Applicant: I’m a master plumber, I make $65,000 per year.
Lender: (makes note) Well, let me check something. Hang on a sec.
Accountant: Acme Accounting, can I help you?
Lender: Yeah, I got a guy in my office wants two hundred and fifty grand. Says he’s a master plumber and makes $65,000 a year. Can you check that for me?
Accountant: Sure. What’s the name?
Lender: Why do you need his name?
Accountant: Well, don’t you want to see his income statement so you can verify he really makes that?
Lender: No no no, I don’t care about that. I mean seriously, why would I bother with that? I just wanna know from you, is it possible, in theory, that a master plumber living where this guy lives (or says he lives, since I haven’t verified that either) could possibly make that amount per year. I don’t need to know if this particular guy does, mind you. I just need to know if someone like him could.
Accountant: Sure. But I can also check on this guy specifically, if you want.
Lender: Hah! You’re a card, my friend. And, may I say, what a hardass! But seriously, don’t worry about it. Just the vague idea that someone sort of like this guy could probably bring home the dosh he’s claiming – well, hey, that’s enough for me. I mean come on, what could go wrong?
(Obviously this is fictionalized -- but barely.)
And apparently Jamie Dimon was shocked, just shocked, to find that this method of lending resulted in some people not actually having the money that they said they did, which resulted in lots and lots of defaults on mortgage payments, which resulted in... well, I don't need to tell you what that resulted in. So here’s what I suggest: let’s all go to Jamie Dimon’s office, right now, and say this:
Cause apparently, the answer is going to be “OKAY!” Excellent! Financial crisis solved. You’re welcome.
One: Disclosures
For every single product a financial services firm markets, there is a disclosure that says, in one form or another, “Listen, just because we’re telling you to invest in these products doesn’t mean that at some point they’re not going to drop in value. We make no guarantee that this thing is going to go up forever, because that just doesn’t happen. If you stick it out long enough, over the long haul we’re betting you’ll do okay, but frankly we’re not even allowed to say that much, because honestly? We don’t know that that’s true. No one does. And in the meantime, you could lose your shirt.” At the bottom of every piece of marketing literature I worked on at BigAnonymous was something they called a Bank Box, which looks like this:
This language is required by financial regulators to keep those poor silly Joe Schmo average investors from getting confused by all those super shiny dollar signs they’re chasing into thinking that their investments are guaranteed to go up forever. Financial services marketers aren’t even allowed to put graphics that show an arrow going upward in case the poor investor gets hornswoggled into naively thinking from the arrow alone that up is the only direction the market goes. (At least, in the United States. What firms are and aren’t allowed to put on their marketing literature varies from region to region, country to country, etc. – in Taiwan, for instance, you can’t show a picture of Buddha or you’re considered to be claiming that your investments are buoyed by divine intervention.)
“Look,” says the Bank Box. “What a bunch of ninnies those average investors are! We have to remind them at every turn that the market is not guaranteed, and that things don’t go up forever. After all, they don’t have specialized knowledge of market history or super-magical money powers -- like our expert finance people, who we have to pay exorbitant salaries and bonuses to in order to keep them in our company because they know so much more than we do, clearly have -- and might not remember things like the tech bubble, or the Panic of 1907, or 1987’s Black Monday, or a whole host of other times when the market took a tumble and gave itself a big fat concussion. So we have to protect them from themselves and remind them of the single most basic rule of investing EVERY TIME WE TALK TO THEM. Otherwise who knows what might happen?”
Executive gift suggestion for Jamie Dimon: a plaque engraved with a bank box.
Two: Isaac Newton
Even if Jamie Dimon had never heard of a bank box, or FINRA, or the crash of ’29, he’s heard of Isaac Newton, right? Any self-respecting 12-year-old who’s heard the story about the apple could tell you that housing prices, like apples, must someday fall.
But the real showstopper is the second phrase:
“...it’s not sufficient to have stated income...”
A stated income loan is just that: you tell somebody how much you make, and if they think it’s enough, there’s no other proof necessary. In other words, at a certain point in mortgage-backed security feeding frenzy, this is pretty much what it took to get a loan from a lot of places:
Babe in Cashland presents
HEY GIMME: A Very Very Short Play (TM)
Applicant: Hi, can I have $250,000?
Lender: Depends. What do you do, and how much money do you make?
Applicant: I’m a master plumber, I make $65,000 per year.
Lender: (makes note) Well, let me check something. Hang on a sec.
Lender picks up phone.
Accountant: Acme Accounting, can I help you?
Lender: Yeah, I got a guy in my office wants two hundred and fifty grand. Says he’s a master plumber and makes $65,000 a year. Can you check that for me?
Accountant: Sure. What’s the name?
Lender: Why do you need his name?
Accountant: Well, don’t you want to see his income statement so you can verify he really makes that?
Lender: No no no, I don’t care about that. I mean seriously, why would I bother with that? I just wanna know from you, is it possible, in theory, that a master plumber living where this guy lives (or says he lives, since I haven’t verified that either) could possibly make that amount per year. I don’t need to know if this particular guy does, mind you. I just need to know if someone like him could.
Accountant: Sure. But I can also check on this guy specifically, if you want.
Lender: Hah! You’re a card, my friend. And, may I say, what a hardass! But seriously, don’t worry about it. Just the vague idea that someone sort of like this guy could probably bring home the dosh he’s claiming – well, hey, that’s enough for me. I mean come on, what could go wrong?
Accountant stares at phone, shrugs, hangs up.
THE END
(Obviously this is fictionalized -- but barely.)
And apparently Jamie Dimon was shocked, just shocked, to find that this method of lending resulted in some people not actually having the money that they said they did, which resulted in lots and lots of defaults on mortgage payments, which resulted in... well, I don't need to tell you what that resulted in. So here’s what I suggest: let’s all go to Jamie Dimon’s office, right now, and say this:
Cause apparently, the answer is going to be “OKAY!” Excellent! Financial crisis solved. You’re welcome.
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