I was unable to watch J.P. Morgan Chase CEO Jamie Dimon’s Senate testimony live the other day, so I had to get up yesterday morning and check it out on the Banking Committee’s web site. I had an inkling, from the generally slavish news reports about the hearing that started to come out Wednesday night, that it would be a hard thing to watch.
But I wasn’t prepared for just how bad it was. If not for Oregon’s Jeff Merkley, who was the only senator who understood the importance of taking the right tone with Dimon, the hearing would have been a total fiasco. Most of the rest of the senators not only supplicated before the blowdried banker like love-struck schoolgirls or hotel bellhops, they also almost all revealed themselves to be total ignoramuses with no grasp of the material they were supposed to be investigating.
That most of them had absolutely no conception of even the basics of the derivatives market was obvious. But what was even more amazing was that several of them had serious trouble even reading aloud the questions their more learned staffers prepared for them. Many seemed to be reading their own questions for the first time.
It would be one thing if this had been a bunch of hick congressmen from the plains asking a panel of MIT professors about, say, ozone depletion, or the potential dangers of nuclear fallout. But these were members of the Senate Banking Committee, asking Dimon questions as though he were an alien from another world: "Tell us, Mr. CEO, what is this ‘derivative trading’ to which you refer? How long has it been in use on your planet?" The whole tenor of the proceeding was incredibly embarrassing, and showed just how unlikely it is that you’ll ever get anything like real questioning in a Senate hearing when a) the level of general expertise among the members is so shamefully low, and b) the witness is a man who controls millions of dollars of campaign contributions.
The senators could have used the hearing as an opportunity to grill Dimon in detail about the entire history of the Chief Investment Office, the unit of Chase that recently copped to unexpected multibillion-dollar derivative trading losses. This was an opportunity to show Americans how a too-big-to-fail commercial bank like Chase – supported by vast amounts of public treasure, from Fed loans to bailouts to less obvious subsidies like GSE purchases of mortgages and implicit guarantees of bank debt – uses the crutch of government support to gamble recklessly in search of huge profits, with the public on the hook for any potential downside.
The senators should have interrogated Dimon about his role in moving toward that reckless gambling strategy. Instead, they mostly cowered and cringed and sat mute with thumbs in their mouths, while Dimon evaded, patted himself on the back, and blew the whole derivative losses episode off as an irrelevant accident caused by moron subordinates.
Some of the weirder moments of the hearing:
43:27 In Dimon’s prepared statement, he notes that the "original intent" of his firm’s Chief Investment Office was to hedge the company against a "systemic event." This turns out to be the first sortie in what would become an hours-long campaign to blur the lines between hedging and betting.
After explaining the "original intent" of the unit, he never quite comes out and says, "Of course, there came a point in time where we stopped worrying about hedging Chase’s portfolio and just decided to use all of our excess federally-insured money to turn CIO into the world’s hugest and most dangerous hedge fund."
Instead, what he says is that Chase "embarked on a complex strategy that entailed adding positions that it believed would offset the existing ones."
Then, when he gets to the part of his presentation where he has to sell this con to the Senators – the idea that his "safe" hedging department somehow accidentally "morphed" into a giant gambling operation – he begins slurring his words and stammering.
Dimon’s performance was oddly nervous, grating, and maladroit throughout. He didn’t look like an experienced public speaker and one of the most powerful men in the world, but more like a traveling salesman stammering and rambling in an attempt to talk a night judge out of a pandering bust.
He particularly kept swallowing the word "granular," which repeatedly came out as "granyer." The phrase, "CIO, particularly the synthetic credit portfolio, should have gotten more scrutiny," came out like CIO partick-ler the synth-por-shoulda more scrooney. I don’t mention this to pick on the guy’s public presentation, but more because it seemed like Dimon’s speech got more manic and incoherent the more he dissembled and covered up.
54:30 Republican Richard Shelby of Alabama, where the town of Birmingham was raped by Dimon's company and will be in bankruptcy for a generation thanks to Chase’s criminal Jefferson County swap deals, leads off his questioning by tossing Dimon a softball, asking him what risk CIO was managing.
"You were managing risk, what were you managing?" he asks, quickly reassuring Dimon that he won't be asked to divulge any trade secrets that might hurt his business. "Without divulging your proprietary interests, we don’t want you to do that!" he gushes.
To Shelby’s credit, he does go on to ask Dimon a real question, asking him whether the losses in CIO resulted from a genuine hedge, or from a bet. He presses Dimon on whether the portfolio was designed to offset other investments, or designed to make money on its own. Dimon, as he would all day, answers by taking the rhetorical fork in the road.
"What they were meant to do was, in benign environments, maybe make a little bit of money," he says. "But if there was a crisis, like Lehman, like Eurozone, it would actually reduce risk dramatically by making money."
Huh? Dimon continually tried this cup-and-ball trick, where he’d first call something a hedge and then two seconds later say it was a directional bet that made money. A lot of Wall Street hotshots will try this with non-financial audiences, puffing out jargon-rich clouds of contradictory verbiage ("benign environments?") in the hope that the intimidated listener stands down and accepts it all as true and correct and not what it is, i.e. incoherent bullshit.
But Shelby, again to his credit, doesn’t let him get away with it, not yet anyway. "So were you investing, or hedging?" he asks.
"No, I would call this hedging at this time," Dimon says. "This was hedging the risk of the company. It would protect the company in the event things got really bad …. If credit went bad, this would do really well."
I’m no expert, but this doesn’t sound like a hedge to me, it sounds like a massive short on corporate credit. But Shelby finally lets it pass. Then he gets down to the bowing and supplicating, asking Dimon if he wouldn’t rather talk about this in a closed hearing, so he could get more specific. Or, Shelby offers, there is a third option – Dimon could give no information at all! "Or would you prefer not to divulge things?" Shelby asks.
"No I would prefer not to divulge things," Dimon says.
59:00 So after a little more back-and-forth about whether this was a hedge or not, Shelby wraps up the tough questions, and moves straight to the inevitable "You know, I learned something today!" part of the program, asking Dimon "what he’s learned" from Chase's near-disaster.
Dimon, not kidding, answers: "No matter how good you are, never get complacent." It doesn’t matter how naturally handsome you are, you still have to eat right, if you want to look good!
59:15 Dimon: "You need very very granyer limits when you’re taking risk."
69:13 Midway through the hearing, there’s a long stretch where everybody’s basically asking Dimon’s advice on how to run the economy, and how to design the Volcker rule. Republican Mike Crapo of Idaho’s penetrating question is, "What is a proper hedge in the context of the Volcker rule?"
This is a guy who just committed a massive blunder with federally-insured money, a guy who is here answering questions because his company, at his direction, clearly and intentionally violated the spirit of the Volcker rule, and these clowns on the Banking Committee are asking Dimon for advice on how to write the rule! It was incredible. Can you imagine senators asking the captain of the Exxon Valdez what his ideas are for new shipping safety regulations – and taking him seriously when he says he doesn’t think they’re a good idea?
81:29 Tennessee’s Bob Corker gets into the "We’re not worthy!" act: "You’re obviously renowned, rightfully so I think, for being one of the best CEOs in the country."
Dimon, graciously it would seem, says nothing. Corker then invites Dimon to explain in his own words what societal good too-big-to-fail companies like his offer.
Dimon’s response is to spend several minutes explaining to the committee how awesomely well-endowed Chase is, financially speaking of course. "We can bank companies in 40 different countries … We can do five billion-dollar revolvers … Or raise money for America’s Fortune 100 companies in a day or two, if they need it to do something … We are the largest banker, to banks…."
Then, again with humility, Dimon concedes: "There are some negatives to size." The negatives turn out to be "greed arrogance, hubris …. But if you do a good job, your clients are being served, and you win their business."
112:54 Finally there are some tough questions. Jon Tester starts asking Dimon why he accepted collateral from MF Global, even though Chase’s own risk management people were concerned that these might have been customer-segregated funds. In other words, Chase knew something was up at MF Global, but it still allowed Jon Corzine’s firm to trade off-limits customer money for cash, essentially helping Corzine rob his own customers.
This is an interesting line of questioning, but watch the sequence from minute 112 on – Dimon grows visibly annoyed by Tester’s inquiry, to the point where Tester sort of ends up apologizing for even asking these questions. The big crew-cutted Midwesterner throws his hands up a little and basically says, "Hey, man, I’m sorry, I’m just looking out for the farmers who got wiped out by MF Global, with your help. It’s nothing personal."
"That’s all," says Tester in a conciliatory voice. "Just lookin’ out for my folks."
"I hope they get their money back," sniffs Dimon halfheartedly. "I still believe they will, by the way," he adds, staring off into the distance with undisguised boredom. He’s not quite rolling his eyes at all this nonsense about wounded farmers, but almost. If he was my child pulling that face at the dinner table, I would have grabbed him by the ear and sent him straight to bed without ice cream. But the senators bent to his annoyance like it was legitimate. It was disgusting.
136:17 Finally, someone restores order.
Oregon's Merkley leads off his questions by asking Dimon if his company would have gone out of business in 2008 without TARP and other forms of federal assistance, including monies from the AIG bailout.
Dimon snaps: "You are misinformed, and that misinformation is causing a lot of the problems we're having today." He then trots out the well-worn rhetorical line, often used by TBTF companies, that Chase never needed aid, and never took aid from the Fed except when it was asked to. "They said, 'Please use these facilities, because it makes it easier for other people...'"
Note: if you include TARP, the Fed subsidies for Chase's acquisitions of Bear Stearns and Washington Mutual, the AIG bailout, and the Fed's emergency lending program, that would mean that Chase has been "asked" to accept, against its will, nearly $600 billion since the beginning of 2008. Merkley begins to note, sarcastically: "We would all like to be 'asked ....'"
But Dimon doesn't let him finish. "And we were not bailed out by AIG," he snaps, feverishly jotting notes in between sharp phrases. "We would have had a direct loss of about a billion or two billion dollars if AIG went down. And we would have been okay."
"Well, then," Merkley begins to say, "you have a difference of opinion with many analysts of the situation who thought the AIG bailout did benefit you enormously. And I'm not going to argue –"
"They're wrong," snaps Dimon, who wants to finish his point, and tries to talk over Merkley’s question."They're factually wrong. They're –"
Merkley, God bless him, points at Dimon and says, "Sir, this is not your hearing. You’re here to answer questions. And I only have five minutes."
Right on! It’s taken over two hours for someone to explain to Dimon that this is the floor of the senate, not a cocktail reception at Davos. That he's a witness here, not the boss.
From there, Merkley gets right to the heart of the problem with the hearing. Dimon had been allowed to come to the Hill and rail against the Volcker rule, arguing to one wide-eyed, gushing senator after another that putting up firewalls would prevent good bankers like himself from stoking the engine of the American economy by vigorously participating in the capital markets.
Merkley, who offered the key Volcker rule amendment in the Dodd-Frank negotiations, was the only member who pointed out the lunacy of this argument. Nobody is saying participation in the capital markets should be cut back; nobody’s trying to ban investment banking or hedge funds. The only thing anyone is suggesting is that you shouldn’t be able to bankroll a risky hedge fund with federally-insured money.
You can either be a commercial bank, with all the federal support that entails, or you can be a high-risk gambler. But you shouldn't be allowed to be both. We could have Chase Commercial Bank, and Chase Investments Inc., and they can each be as big as they want, but those companies should be separate. Why do we need companies like Chase that are both things, under one tent?
The real answer, from Jamie Dimon’s point of view, is simple – there’s no way he could have a $350 billion hedge fund if he didn’t have mountains of federally-insured money to play with, and a steady stream of low-interest loans from the Fed. Merkley points this out:
"How many companies on the planet have been offered half a trillion dollars in low-interest loans? Not many," he says. "But the basic concept of the Volcker rule is that banks are in the lending business, not the hedge fund business. Would you agree?"
Dimon, taking his time with this dangerous question, answers: "We’re not in the hedge fund business."
This is an obvious lie – that’s exactly what Chase’s CIO unit is, a giant hedge fund. Merkley goes on to point this out, noting that executives at CIO had already admitted that they were told to change their strategy and accumulate high-yield assets, and specifically risky credit derivatives, instead of safer, government-backed securities. Moreover, this was all at Dimon’s specific direction.
"That sounds like operating a hedge fund," says Merkley, "and doing so at your direction, with government-insured deposits."
Dimon tries to dismiss this observation by pointing out how safe CIO supposedly is. "Here are the facts," he says haughtily (as if what Merkley was talking about were not "the facts"). "We have $350 billion … the average rating is double-A plus. The average maturity is two or three years, not twenty or thirty …" Etc. etc. In other words, CIO isn’t a risky fund, except of course when it unexpectedly loses many billions of dollars overnight. Dimon seemed very put out that he had to explain this to Merkley.
Again, what was most disturbing was the tone of the hearing. The senators treated Dimon like a visiting dignitary and a teacher of great wisdom, not like a man who, after growing very rich off of public money, had put the whole economy at risk by engaging in wildly unsafe financial sex on a grand scale. Senators are like judges – the way they comport themselves in public is important, and it's important that they work at maintaining the dignity of their offices. You don’t get to snort and roll your eyes in front of a judge, and you shouldn’t get to do on the floor of the senate, especially when you’re there because you violated the public trust. Somebody has to remind these legislators who it is they work for, and it’s not Jamie Dimon.