Jamie Dimon, who is CEO of JPMorgan Chase & Co, told the Financial Crisis Inquiry Commission last fall that Fannie Mae and Freddie Mac were “the biggest disasters of all time.” However, according to an article on InvestmentNews.com, the role Fannie and Freddie played in the financial crisis is greatly exaggerated because the FCIC’s report on the financial crisis makes it clear that it was the “private sector that led us into the financial crisis by making massive subprime bets and then using complex derivatives deals to magnify the downside risks.”
There is no doubt that Fannie and Freddie became “too powerful politically, had too little equity relative to their debt levels and took on reckless amounts of risk.” The problem is that there are still banks and investment firms, such as JPMorgan and Bank of America, that fall under the label of “too-big-to-fail.” While the Dodd-Frank Act was enacted to tighten regulations on the banks, it does nothing to address how to deal with the collapse of one of our big banks or investment firms. According to the article, the only choices we will have in such a crisis will be between allowing the meltdown to continue or to provide a bailout.
Because of the “too-big-to-fail guarantee”, large banks and investment firms have an incentive to increase leverage to increase their return on equity. Even large shareholders may “welcome the arrival of additional leverage as the economy improves” because they are protected from “being wiped out.” However, the recent trouble in Ireland should be a warning against the “we’ll-do-a-bailout-when-needed approach.”
Dimon told the FCIC in October that Fannie and Freddie “was an accident waiting to happen,” and “we all knew about it, we all worried about, no one did anything about it.” If action is not taken to correct the mistakes leading up to the recent financial collapse then we might hear the same thing after the next time a major institution takes on too much risk.
Page Perry, is an Atlanta-based law firm with over 125 years of collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have assisted dozens of investors in recovering over $130 million from brokerage firms since 2005. Page Perry’s attorneys are actively involved in counseling institutional and individual investors regarding their investment problems. For further information, please contact us.