JPMorgan: Structured derivatives vs. aircraft engines
Political, business, and media elites are at the World Economic Forum, a.k.a. "Davos," this week to network and share their wisdom. It's a rare opportunity to hear the considered views of some of the world's "best and brightest." Take this comment from JPMorgan Chase (NYSE:JPM) CEO Jamie Dimon, who tried to refute the notion that large banks are excessively opaque or complex:
Businesses can be opaque. They are complex. You [policymakers] don't know how aircraft engines work, either.
Indeed, Mr. Dimon, it's true that very few people understand how an aircraft engine works, but there are some elementary differences between derivative products and engineering products. Most people understand that:
- There is no such thing as a "notional" aircraft engine. A 30-year-old engineer at GE cannot make $10 billion worth of aircraft engines materialize based on a few telephone calls and a bit of legal documentation.
- Aircraft engines are manufactured solely with an end user in mind. Engineering firms do not manufacture them to speculate on them or to hedge a balance sheet risk by trading them with aircraft-engine-focused hedge funds.
- Aircraft engine manufacturers aren't leveraged 10-to-1. Leverage magnifies the risks associated with complexity.
Jamie Dimon is a talented bank CEO -- arguably even the best in his peer group. He's smart and forthright, which are two important qualities. However, no one is immune to bad thinking, and when he says things that are obviously stupid, the media ought to call him on it.
Fool contributor Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him @longrunreturns. The Motley Fool owns shares of JPMorgan Chase & Co.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.