Macro Economic Trends and Risks
Buying a House on Fire

Related Links
Discussion Boards

By WatchingTheHerd
July 8, 2008

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

The July 7, 2008 edition of Charlie Rose aired an interview with JPMorgan CEO Jamie Dimon at the Aspen Ideas Festival on issues related to the financial services sector meltdown and Bear Stearns in particular. Two quotes jump out of the discussion (paraphrasing a bit from memory):

There's a difference between buying a house and buying a house on fire. -- His introductory comment on the work that went into analyzing the books of Bear Stearns and having JPMorgan shareholders absorb that risk and compressing all of that decision making in one weekend.

The letter to the shareholders (of JPM) will be very clear: mission not accomplished. -- His comment about the uncertainty that still faces JPMorgan as it assimilates the assets and trading systems of Bear Stearns. Would seem to be a pretty up-front caution to shareholders and the larger financial community that the legacy of damage done by Bear Stearns still is not completely quantified and may not be fully understood into 2009.

The interview is fairly entertaining but one discussion point brought out something on which he would appear to be DEAD WRONG.

Dimon spoke about an article written by Bryan Burrough in Vanity Fair (#1) about the collapse of Bear Stearns and the various players who had a role. The article itself talks about concerns floating during the summer of 2007 which the firm managed to ride out even with the scare in August. Though the firm survived that first scare, the rumours about weaknesses in their balance sheet never really went away then began growing into 2008. By March, the concerns mushroomed into fear then outright panic that began tanking the company's stock, eventually leading to press reports that traders had concerns about trading with the firm -- the death blow to any firm operating on trust.

Burrough's article talks about the possibility that traders establishing huge short positions may have played a material, if not dominant, role in tanking a multi-billion dollar firm and risking a global meltdown of the financial system.

Dimon's comment on the Burrough article was essentially that he didn't know all the facts but that he felt the SEC should investigate these rumors with subpoenas and email mining like they research every other Wall Street firm and if perpetrators can be found, they should be punished - severely. Essentially, the comment seems to state that people making short trades who can tank a pillar of the financial community deserve special punishment because of the special risks their manipulations pose to such a complicated, intricate, unstable, worldwide financial system.

Shouldn't the lesson be that any legitimate multi-billion dollar business shouldn't be leveraged so heavily that one nefarious talking head on one cable network or even one entire nefarious cable network can't simply talk a company into the ground? If we're going to fire up the grand jury, there would seem to be no shortage of people with employee badges from Bear Stearns, CitiGroup and yes maybe even JPMorgan who ought to be under the microscope first -- not traders who looked at a firm carrying $13 trillion in derivates and decided a long position on such a firm wasn't a lucrative strategy for them or their clients.

It's pretty amazing to see how a player who literally walked through fire at the very heart of a near-worldwide meltdown could still come away with such a fundamental ethical and strategic blind spot intact.