JP Morgan Chase 2009 Annual Report Download - page 28

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The heart of the problem – across all sectors
– was bad risk management. Many market
participants improperly used value-at-risk
(VaR) measurements; they did not run stress
tests to be prepared for the possibility of a
highly stressed environment; they excessively
relied on rating agencies; they stretched too
much for current earnings; and they didn’t
react quickly when markets got bad.
At JPMorgan Chase, we never overly relied on
VaR, and we regularly ran stress tests to make
sure we were prepared for bad environments.
Our goal was and is to remain profitable
every quarter.
While it is tempting to identify a scape-
goat – banks, businesses, the government or
consumers – it is pretty obvious that no one
was solely to blame and that no one should be
completely absolved from blame.
Yes, we made mistakes …
… and we have identified and described them
in great detail in prior years’ chairman’s letters.
Our two largest mistakes were making too
many leveraged loans and lowering our mort-
gage underwriting standards. While our mort-
gage underwriting was considerably better
than many others’, we did underwrite some
high loan-to-value mortgages based on stated,
not verified, income. We accept complete
responsibility for any and all mistakes we
made or may have made.
There also are many mistakes that we did not
make, among them: structured investment
vehicles (SIVs), extreme leverage, excessive
reliance on short-term funding, collateralized
debt obligations and improper management of
our derivatives book.
Some of the mistakes we made may have
contributed to the crisis. For those, of course,
we are sorry – to both the public and our
shareholders. However, it would be a huge
stretch to say that these mistakes caused the
crisis. In fact, at the height of the crisis, we
aggressively took actions that we believed
helped mitigate some of the fallout from the
crisis and contributed to the stabilization and
recovery (e.g., our purchase of Bear Stearns
and WaMu and our interbank lending; that is,
loans that banks make directly to each other).
Yes, we should thank the government for its
extraordinary actions
As noted in last year’s letter, we think the
government acted boldly and urgently in
dealing with a complex and rapidly changing
situation. Without many of these actions, we
believe the outcome could have been much
worse. A great number of the actions that the
Treasury and the Federal Reserve took, directly
and indirectly, benefited a number of institu-
tions and may have saved many from failure
and bankruptcy.
Without these actions, however, not all banks
would have failed
The premise that all banks would have failed
had it not been for the government’s actions
is incorrect. This premise is behind much of
the anger toward banks and some of the policy
recommendations that are meant to punish
banks. We should acknowledge that the worst
oenders among financial companies no
longer are in existence. And while it is true
that some of the surviving banks would not, or
might not, have survived, not all banks would
have failed. I know I speak for a number of
banks when I say that some of us accepted
the Troubled Asset Relief Program (TARP)
capital not because we needed it to survive but
because we believed we were doing the right
thing to help the country and the economy.
We were told the government wanted even
the healthy banks to take TARP to set an
example for all banks and to make it easier for
the weaker institutions to accept the capital
without being stigmatized. JPMorgan Chase
and many other banks were in a position to try
to help, and that is what we did.