‘House of Morgan’ Nurtured by Crisis ‘Mystified’ Senators

JPMorgan Chase & Co. (JPM) Chief Executive Officer Jamie Dimon’s U.S. Senate testimony yesterday underscored how much more complex and government-dependent the bank has become, said historian Ron Chernow.

“What happens today with Jamie Dimon, because of the scale and scope of JPMorgan Chase, is a Main Street story,” said Chernow, who wrote the 1990 book “The House of Morgan.” In 1933, when then-CEO J.P. “Jack” Morgan Jr. testified before Congress, it “was in essence a Wall Street story.”

Dimon, 56, described to the Senate Banking Committee how the New York-based company’s $2 billion loss on credit derivatives stemmed from a unit of the business that helps invest part of the lender’s $1.1 trillion in deposits. In 1933, Jack Morgan’s bank didn’t have retail customers and federal insurance for deposits hadn’t yet been created.

“You can just imagine in this environment if there wasn’t deposit insurance how much money would be left in these banks,” Chernow said in a telephone interview. “The tradeoff was that in exchange for federally insured deposits that bankers would behave in a particularly cautious and responsible manner.”

JPMorgan, now the biggest U.S. bank with $2.3 trillion of assets, grew during the 2008 financial crisis when it acquired Washington Mutual Inc. and Bear Stearns Cos. with the federal government’s support.

“It was quite counterintuitive that, to this day, the government’s response to the crisis was to create yet bigger and more complicated institutions,” Chernow said. “In addition to the deposit insurance and the regulated nature, another reason why the government has a special stake in this firm is because it was partly a creation of the government during the financial crisis.”

‘Very Telling’

In 1933, the company was closely held, unregulated and its business of lending and underwriting was simpler for management and the public to understand, according to Chernow.

“The fact that the senators seemed slightly mystified by what had happened is really very significant and very telling,” Chernow said of yesterday’s hearing. “How can the government exercise oversight when the instruments that federally regulated banks are using and trading in have become so complex, high- risk, and highly leveraged?”

“The senators don’t understand it and unfortunately, as we saw in 2008 and as apparently has now happened again, senior management doesn’t understand it, and sometimes even if they think they do they don’t really understand all of the implications,” Chernow said.

To contact the reporter on this story: Christine Harper in New York at charper@bloomberg.net

To contact the editor responsible for this story: David Scheer at dscheer@bloomberg.net.

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