Regulatory Mistakes, Housing Bubble Some of Causes for Crisis

Jamie Dimon, in his 2008 letter to JPMorgan Chase shareholders, had some interesting thoughts as to what caused the economic collapse that we are currently suffering through.

Dimon is the Chairman and CEO of JPMorgan Chase.

On Page 14 of the letter, in a section titled "Fundamental Causes and Contributions to the Financial Crisis", Dimon gives his insight as to the causes of the worst economic downturn since the Great Depression.

Dimon first reveals that he believes that there were a number of factors involved in the crash taking place, and that you can't point to just the collapse of Lehman Brothers as the root cause. He says that something else would have "been the straw that broke the camel's back" if Lehman Brothers hadn't collapsed.

Dimon said that the main causes for the crash were:

1. Burst of the housing bubble.

2. Excessive leverage.

3. "Dramatic growth of structural risks and the unanticipated damage they caused"

4. Regulatory issues.

5. "Pro-cyclical nature of virtually all policies, actions and events"

6. Huge trade and financing imbalances.

It's pretty hard to argue with any of the points that Dimon makes in this section.

He argues that "new and poorly underwritten mortgage products helped fuel asset appreciation and excess speculation". Can't argue with that.

He argues that rating agencies had some culpability in the high ratings that some of these securitized mortgage packages received.

He argues that dishonest brokers and consumers helped to artificially inflate the housing market.

He argues that many different types of companies (hedge funds, private equity firms, banks, etc) were all drunk off of excess leverage.

He argues that there were many regulatory lapses and mistakes.

He argues that money maker funds were unable to properly cope with a flood of outflows.

He argues that "too much longer-term, non-investment grade product was converted into short-term Triple A-rated product".

He argues that investors were wise to protect themselves by withdrawing money from the markets, but that the system couldn't handle the outflows.

He argues that the inadequate regulation of Fannie Mae and Freddie Mac was the "largest regulatory failure of all time".

He argues that "pro-cyclical policies make things worse" in a crisis.

He also argues that the incredibly large trade deficit helped to fuel excessive leverage and speculation, as interest rates and risk premiums were kept artificially low by an influx of foreign dollars into US treasuries and mortgage-backed securities.

He ends by saying that an "expensive war in Iraq, short-selling, high energy prices and irrational pressure on corporations, money managers and hedge funds to show increasingly better returns" likely added to the "storm" as well.

Dimon then goes on to give some of his ideas as to how to fix the system.

Reading through the report, I didn't hear too much in the way of "the actions of JPMorgan were also a contributing factor to the economic collapse, and for that, I apologize". Maybe JPMorgan wasn't to blame?

Interesting comments from Mr. Dimon. You can read the entire letter here (PDF).

Filed under: The Economic Meltdown