"We know we were sloppy. We know we were stupid. We know there was bad judgment." That was J.P. Morgan Chase CEO Jamie Dimon speaking about the news that the bank's London investment office had lost $2 billion in a derivatives trade.
These admissions are a way to get ahead of the story, express some uncharacteristic humility and try to frame the story — for the public and for regulators. After all, whenever losses of this magnitude occur, the legal authorities are bound to wake from their slumber. On cue comes news that the FBI is investigating JP Morgan over the loss.
Dimon's talking point is that there are no crooks at J.P. Morgan Chase, just idiots making dumb decisions. I sense a new slogan!
This excuse is one we haven't heard in awhile. But in 2008 and 2009, as the financial system melted down, it was a refrain sung in Manhattan with great gusto. When somebody gets a $150,000 loan by forging some papers, that's fraud. But when an investment bank with $600 billion in debt blows up, well that's just stupid bankers doing stupid stuff — no reason for anybody to go to jail.
I wrote a short book on the crisis in 2009, entitled Dumb Money. At the time, I predicted that the most surprising thing about the meltdown would be how little criminal activity was involved and how much of the action was legal, above-board idiocy. Investors, corporate boards, executives and the markets allowed Bear Stearns, Lehman Brothers, Citigroup and AIG to take on absurd amounts of leverage while generally operating within the existing regulatory framework. Sure, there was plenty of mortgage fraud and the big banks have entered a host of settlements with the SEC and other authorizes to settle charges (usually without admitting guilt). But the reckless extension of credit — all across the economy — was overwhelmingly legal. Banks and investors have had to write off hundreds of billions of dollars of corporate loans, bank loans, consumer loans and mortgages — not because they were made fraudulent but because they were extended stupidly.
But as excuses go, stupidity is a pretty poor one — especially for banks. In fact, I'd argue that the relative lack of criminality in the credit bust was one of the factors that made it so devastating to confidence. Criminals are outliers. By definition, they're rogue actors who operate outside of norms and take pains to avoid detection. Their activity comes to a halt once they are caught and charged and prosecuted. Companies, investors and society have certain defenses against criminals. Criminals serve jail time, or pay fines and other penalties. They repay their debts to society.
Stupidity, however, is much more harmful. There is no redress or compensation for someone who has an "oops" moment. Just as happens in sports, people in finance who set billions of dollars on fire believe it's sufficient to hold up their hand and say, "My bad," resign with their bonuses intact and pursue other interests. But banks aren't like baseball games. The stupid defense leads us to conclude that there's something wrong and suspect with the legitimate activities a company is engaged in. It reinforces the notion that the people running these giant vessels at very fast speeds just aren't paying that much attention, and don't really know how their business works. If Dimon didn't have a handle on a unit that could run up such large losses so quickly, what other problems could be lurking out there?
It's completely understandable why executives, even ones who pride themselves on their relative intelligence like Dimon, go for the stupidity defense. (Bonus: here's a video of Dimon talking in early 2011 about how we should let "big dumb banks" fail.) Criminal investigations can be damaging to firms. Nobody wants the FBI rooting around in their business. And the detection of illegal activities can open up the parent company to charges that it tolerated or was complicit in crimes. That's to be avoided at all costs. For many companies, a criminal charge in and of itself, can be something akin to a death sentence. The accounting firm Arthur Andersen crumbled quickly after it was indicted for its involvement with Enron.
In general, bankers have a very high regard for their own intelligence. "If you're so smart," goes a refrain on Wall Street, "why don't you make more money?" But this may be the first time in recorded history that a top banker is touting the presence of stupidity in his own organization.
Daniel Gross is economics editor at Yahoo! Finance.
Follow him on Twitter @grossdm; email him at email@example.com.
His new book, Better, Stronger, Faster: The Myth of American Decline and the Rise of a New Economy, has just been published.