“It’s virtually assured” that markets would react that way, Dimon said today in Washington at an event held by the Council on Foreign Relations. “The question is when and how.”
Dimon, 56, has urged lawmakers to resolve the so-called fiscal cliff before the start of next year, when automatic tax increases and budget cuts are set to pull billions of dollars of purchasing power out of the economy. He told a Senate panel in June that the government risks a financial crisis as lawmakers remain deadlocked on taxes and the budget. He was asked today whether bond markets would turn against the U.S., which has been able to borrow at near-record-low rates.
“I can’t honestly tell you I know it’s going to be two years or five years, but it will happen,” Dimon said. “It is a matter of time and the United States can’t borrow indefinitely.”
Dimon joins Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., in raising alarms about the effects of government debt on bond rates. Gross has reduced holdings of Treasuries for three straight months in his Total Return Fund. Gross wrote in his monthly investment commentary last week that the U.S. will no longer be the first destination of global capital in search of safe returns unless fiscal spending and debt growth slows.
Dimon said New York-based JPMorgan has assigned staff to prepare the bank for the possibility that lawmakers remain deadlocked through the beginning of 2013.
“JPMorgan will survive the fiscal cliff,” he said. “I just think it’s terrible policy to allow us to get close.”
He also affirmed his faith in the U.S., saying the economy remains “fundamentally stronger than people might think.”
Dimon built JPMorgan into the largest U.S. bank partly through acquisitions during the financial crisis when he added Bear Stearns Cos. and took on assets from Washington Mutual Inc. He said JPMorgan did the U.S. a favor by buying Bear Stearns in 2008 and he might not go through with it again because of how much the deal ultimately cost.
“Would I have done Bear Stearns again knowing what I know today?” Dimon asked today. “It’s really close. Knowing what I know today, if they called me again to do something again like that, I couldn’t do it.”
The board of his bank probably would veto the idea because of all the financial obligations that followed, he said. “We’ve lost five to 10 billion dollars on various things related to Bear Stearns,” Dimon said.
Eric Schneiderman, New York state’s attorney general, sued JPMorgan this month, claiming that Bear Stearns businesses had deceived mortgage-bond investors about defective loans backing securities they bought. The result was “monumental losses” that haven’t been fully identified, he said.
JPMorgan completed its rescue of New York-based Bear Stearns after the Federal Reserve agreed to take control of a $30 billion portfolio of mortgage-linked Bear Stearns assets. Dimon has told shareholders he needed government guarantees to salvage the securities firm, which was facing an exodus of clients and lenders. Dimon has said the purchase price was about $1.5 billion.
“We were asked to buy Bear Stearns,” Dimon said today. “We did them a favor. Let’s get this one exactly right. We were asked to do it, we did it at great risk to ourselves.”