Panel II of a Hearing of the Senate Banking, Housing and Urban Affairs Committee-Turmoil in U.S. Credit Markets: Examining the Recent Actions of Federal Financial Regulators

Statement

Panel II of a Hearing of the Senate Banking, Housing and Urban Affairs Committee-Turmoil in U.S. Credit Markets: Examining the Recent Actions of Federal Financial Regulators

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SEN. REED: Thank you very much, Mr. Chairman.

Thank you, gentlemen.

I just want to clarify, Mr. Dimon, that the guarantee that you have mentioned in your testimony, are you -- the loan is at $30 billion, which was extended by the Fed. You're guaranteeing the first billion dollars of that?

MR. DIMON: Yeah, so the $30 billion special facility, Mr. Senator, we are going to take the first billion dollars of loss. The Fed has also lent $25 billion to Bear Stearns under the primary facility; another $25 which exists today, and we've also guaranteed that.

SEN. REED: So, you're guaranteeing the $25 billion total facility -- the first facility, and $1 billion of the second facility.

MR. DIMON: That's correct.

SEN. REED: Thank you very much.

Mr. Schwartz, you know, you've said -- and I think Chairman Cox also said, your capital ratios were adequate, as far as supervisors were concerned. Many things were -- seemed to be in order just several days before this transaction was entered into. But others have raised the issue of your leverage, the fact that you might have been more highly leveraged than other competitive institutions. Can you comment on that leverage issue?

MR. SCHWARTZ: Yes, I can. I think that when people examined our balance sheet -- a lot of people examined it very carefully and got very comfortable with it, there's one measure of leverage, which is total assets to equity, which I don't think that any sophisticated analysis of a balance sheet says that one measure is a sign of leverage. It depends on what kinds of assets, with what kinds of risk.

The way capital cushions are monitored -- as you look at all of the liabilities you have, or all the assets that you have, and you take a haircut based on the risk of those assets. And those are basically across the board -- you know, across the industry, the same. And so, when you looked at our capitol, versus the perception of risk by those measures, compared to other people, our capital looked very adequate for the risk that we had on our balance sheet.

SEN. REED: The other issue that's raised is that a lot of your funding was very short-term funding, and that you left yourself exposed to a sudden seize-up of your -- of the market as it happened. Could you comment on that?

MR. SCHWARTZ: I could. And it's a good question, because I think some of the testimony you've heard today said that this credit problem has been intensifying for many, many many months. Coming into it, we had made a decision to reduce our reliance on unsecured financing at all, and get all of our high-quality collateral out, and as much of it as we could, get it out on longer-term lines.

We also borrowed in the long-term markets when we could. As this credit environment has frozen, it became very, very hard to continue to borrow in the long-term market, and the facilities that one had, against secured collateral that were term, as they termed-out people didn't want to lend for a longer period of time and they started shortening.

Having said that, we worked as hard as we could against that, and we actually had, you know, a bigger liquidity cushion than we've had in a long, long time, you know, from the actions that we took.

SEN. REED: Let me ask you another question. You had two funds that failed, basically -- Morgan Securities were the principal item in the funds, and it caused concern, not only here, but on Wall Street. And your response to the fate of those funds, did that dramatically alter your behavior? Or can you comment about how you reacted to those fund failures?

MR. SCHWARTZ: I'm not sure I understand the question.

SEN. REED: Well, some would suggest that that was a strong wake- up call about the overall condition. Also, it had alerted, to many people in the market, the potential for further disruption at your firm; and raised, I think, in my mind, the obvious question of, how do you not only compensate, but perhaps even overcompensate for that -- not only the economic effect, but the psychological effect?

I mean, --

MR. SCHWARTZ: Right.

SEN. REED: -- you're a major firm, one of the premier firms; you've had two funds that you've backed your reputation with, and they've totally failed.

MR. SCHWARTZ: Correct. Well, there's no question that those funds that had our reputation -- they were not our economic exposure, but they were our reputation and we took a significant reputational hit because of that. We were extremely aware of that.

We did an awful lot of things, and the thing that we could do the most was just put our heads down and perform as we went forward, because we couldn't set the clock back. We also -- we did step in. We had no obligation to make a loan to those funds, but we decided to make a loan to one of those funds in an attempt to try and save investor's money, if we could liquidate the collateral on an orderly basis.

The markets continued to go down. We were unable to accomplish that. And then we did take some losses on that loan.

But we ended up -- you know, we ended up with a loss for the quarter. I think if somebody puts in context the losses that -- context the losses that we took, relative to many, many financial institutions, they actually were not particularly large. And, once again, you know, if you took a look at our balance sheet, as many people did, we had recovered. Our capital ratios were strong; our liquidity was strong; we were back to earning money; and our business was actually moving along at a nice pace.

SEN. REED: Chris, I have one more question.

After the -- your experience with these funds, and I think also with the growing economic situation that all your competitors were facing, there was a need to raise additional capital, even though you might technically be well-capitalized. I think you had attempted to enter into a transaction with China's CTIC Securities in October, and that transaction did not close. Was any particular significance of the failure to close that transaction, or to raise capital by other ways?

MR. SCHWARTZ: No, there's two parts to that question, if I could. First, in terms of raising capital, it's my understanding that -- if you looked at the capital raising that went on in other financial institutions, it was often -- it was always accompanied by a very significant loss that was reported, and that that loss had brought their capital down. And it's my understanding that the capital they raised brought their capital ratios back up to acceptable levels. So that's a different situation than anticipatory.

The transaction with CTIC Securities, the largest securities firm in China, was a transaction that we thought had tremendous strategic value to the firm. And as part of the transaction, we were raising a billion dollars in capital. They did extensive due diligence on us. They agreed to go forward with the transaction.

We needed to get approvals from, you know, the various regulatory authorities in the United States. We had just gotten those approvals. They were about to go and get the same approvals from the CSRC when all of the events of the week we described happened.

SEN. REED: Thank you very much, Mr. Chairman.

Thank you, gentlemen.

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