January 13, 2010

JPMorgan Chase Testimony before the Financial Crisis Inquiry Commission

Chairman and CEO Jamie Dimon testified in Washington, DC on the causes of the financial crisis and the bank's focus on risk management, responsible lending and disciplined capital and liquidity management

Chairman Angelides, Vice-Chairman Thomas, and Members of the Commission, my name is Jamie Dimon, and I am Chairman and Chief Executive Officer of JPMorgan Chase & Co. I appreciate the invitation to appear before you today. The charge of this Commission, to examine the causes of the financial crisis and the collapse of major financial institutions, is of paramount importance, and it will not be easy. The causes of the crisis and its implications are numerous and complex. If we are to learn from this crisis moving forward, we must be brutally honest about the causes and develop an understanding of them that is realistic, and is not - as we are too often tempted - overly simplistic. The FCIC's contribution to this debate is critical as policymakers seek to modernize our financial regulatory structure, and I hope my participation will further the Commission's mission.

The Commission has asked me to address a number of topics related to how our business performed during the crisis, as well as changes implemented as a result of the crisis. Some of these matters are addressed at greater length in our last two annual reports, which I am attaching to this testimony.

While the last year and a half was one of the most challenging periods in our company's history, it was also one of our most remarkable. Throughout the financial crisis, JPMorgan Chase never posted a quarterly loss, served as a safe haven for depositors, worked closely with the federal government, and remained an active lender to consumers, small and large businesses, government entities and not-for-profit organizations. As a result of our steadfast focus on risk management and prudent lending, and our disciplined approach to capital and liquidity management, we were able to avoid the worst outcomes experienced by others in the industry.

Throughout the crisis, we maintained capital ratios far in excess of "well capitalized standards." We began 2008 with a Tier 1 capital ratio of 8.4% and ended it at 8.9% (10.9% including Troubled Asset Relief Program (TARP) funds). At the end of the third quarter of 2009, following our repayment of TARP, our Tier 1 capital ratio stood at 10.2%. Our Tier 1 common ratio at the beginning of 2008 was 7.0% and stood at 8.2% at the end of the third quarter of 2009. In addition to our strong capital ratios, we maintained a high level of liquidity to prepare for unexpected draws and increased our loan loss reserves to account conservatively for anticipated losses.

To be sure, there are a number of things we could have done better: the underwriting standards in our mortgage business, for example, should have been higher, and we wish we had done an even better job in managing our leveraged lending and mortgage-backed securities exposures, all of which I discuss later in my testimony. But our entire team - including the firm's credit officers, risk officers, and legal, finance, audit and compliance teams - worked diligently to address these issues and minimize the cost to our company and our customers. I would like to outline a few of the actions we took leading up to and during the financial crisis.

  • The mortgage market meltdown occurred for a number of reasons, but new and poorly underwritten mortgage products were a significant contributor that proved costly for consumers, the entire financial system and our economy. Even before I became CEO in 2005, JPMorgan Chase was intently focused on managing cyclical risks. We recognized that credit losses, both consumer and wholesale, were extremely low, and we decided not to offer higher-risk, less-tested loan products. In particular, we did not write payment option ARMs (adjustable rate mortgages that often led to higher principal balances and decreased home equity for borrowers) because we did not think they were appropriate products for consumers. Although we made mistakes in the mortgage business, this was not one of them.

  • We did not build up our structured finance business. While we are a large participant in the asset-backed securities market, we deliberately avoided large, risky positions on structured collateralized debt obligations (CDOs).

  • JPMorgan Chase did not unduly leverage our capital, nor did we rely on low-quality forms of capital. We have always used conservative accounting, built up appropriately strong loan loss reserves (which now exceed $30 billion), and have been acutely focused on maintaining a fortress balance sheet. In addition, we have always maintained a high level of liquidity and have been prepared for unexpected draws on liquidity. We continually stress test our capital and liquidity to ensure that we can withstand a wide range of highly unlikely, but still possible, negative scenarios. High-quality capital, strong loan loss reserves, and strong liquidity helped us to weather the storm and continue to serve our clients by making loans throughout the period.

  • We avoided short-term funding of illiquid assets and did not rely heavily on wholesale funding. In addition, we essentially stayed away from sponsoring structured investment vehicles (SIVs) and minimized our financing of SIVs for the same reasons. We viewed SIVs as arbitrage vehicles with plenty of risk but little business purpose. In 2005, we divested the only small SIV we had sponsored.

Bear Stearns and Washington Mutual
Because of our strong foundation, JPMorgan Chase was called on during the crisis to take actions to help stabilize the financial system: the acquisition of Bear Stearns in March of 2008 and the purchase of Washington Mutual assets in September 2008. While we believed these transactions would produce long-term benefits for our company, each carried - and still carries - substantial risk. We were willing and able to take on these risks as a result of our strong balance sheet and capital base.

Over the weekend of March 15, 2008, the federal government asked us to assist in preventing Bear Stearns from going bankrupt before the opening of the Asian markets on Monday morning. To a person, our Board of Directors felt JPMorgan Chase had a special obligation to do all we could to help, especially knowing that we were among the few companies in a position to do so. However, this deal also had to make sense for our shareholders. We ultimately believed it did. Our first post-acquisition priority was to reduce our risk by consolidating Bear Stearns' approximately $400 billion in assets into our financial and risk systems and quickly reduce them to approximately $200 billion of assets. We asked the government to finance and assume the risk (beyond the first $1 billion of possible losses) on approximately $30 billion of the less risky mortgage assets, as we believed it would have been irresponsible for us to take on the full risk of all of those assets at that time. We knew that most of the common equity we were buying would be used for close-down costs, litigation expenses, severance costs and quickly eliminating the risk on the balance sheet. As it turned out, all of the equity was used up in this process and several billion dollars in losses ran through our income statement in the second half of 2008.

On September 25, 2008, the Federal Deposit Insurance Corporation (FDIC) seized the banking assets of Washington Mutual in the largest bank failure in U.S. history. We acquired the deposits, assets and certain liabilities of Washington Mutual, and later learned we were the only bank that had been prepared to act immediately in response to the FDIC's efforts to find an acquirer. Absent this acquisition, Washington Mutual's failure could well have imposed enormous costs on the FDIC's deposit insurance fund as well as uninsured depositors. With the acquisition, we purchased approximately $240 billion of mortgage and mortgage related assets, with $160 billion in deposits and $38 billion in equity. We immediately wrote down most of the bad or impaired assets (approximately $31 billion) and established proper reserves for the remaining assets, as well as for severance and close-down costs. We also sold $11.5 billion in common stock the morning after the deal announcement to maintain our strong capital base.

TARP Funds
On October 13, 2008, I went to Washington, DC with eight other chief executives of other financial firms. We were asked by the Secretary of the Treasury, the Chairman of the Federal Reserve, the Office of the Comptroller of the Currency, the FDIC and the New York Federal Reserve Bank to agree to accept a package of capital from the government to help fix the collapse in the credit and lending markets.

JPMorgan Chase did not ask for, nor did we need, a capital infusion from the federal government. As I noted earlier, our capital ratios remained well in excess of recommended regulatory levels throughout the crisis, even excluding federal assistance. We continued to lend to customers, invest in the business, hire new employees, and attract substantial deposit flows. However, federal officials asked us to set an example for others by accepting the TARP funds as a sign of support for the government's actions to strengthen the economy. We v