One would think Laura Dimon, the daughter of one James Dimon, would be on familiar terms with such concepts as bonds, capital structure and finance (especially the more arcane substrata thereof). After all the father of the graduate from the Columbia School of Journalism (author of such previous pieces as "The Last Office Taboo for Women: Doing Your Business at Work" which examines "the lengths women go to avoid getting caught in the stall") is none other than the CEO of the largest bank in the US, best-known for such "one-time items" as constantly recurring legal charges associated with financial innovation gone horribly wrong (today's rumor of a $750MM settlement over the bank's London-based prop trading group being a case in point). As it turns out, one may be mistaken...
In a recent article on PolicyMic, young Ms. Dimon pens her stream of consciousness response to last week's record Verizon bond sale. But before he gets to the gist of the matter, she first does an overview of the entire financial arena as follows.
Hedge funds. Derivatives. Treasury bonds. Credit default swaps. Mortgage-backed securities. Fixed-income securities. Even securities in the whole damned first place.
Let’s face it: Finance sounds like a different language to many of us. It’s isolating and frustrating and sometimes sounds pretentious — especially when people in the industry pronounce it “fi-nance” instead of “fi-nance.”
Well, yes. Of course, the fact that fi-nance is so incomprehensible to most people is the reason bankers tend to rake in 7, 8 or more digit compensation every year. Because if mere mortals were to grasp just how detrmental to their health the "fi-nancial innovation" sold by banks like JPM is, or just how deep the rabbit hole dug with money created out of thin air goes, the IRR (funded using other people's money) to the banking industry would be substantially lower. One would imagine the heiress to the Jamie Dimon family fortune would be aware of where at least part of said fortune comes from. Alas no.
This is even more obvious when Ms. Dimon shares her ruminations on the founding block of modern society - debt. Or in this case the appropriately titled bond (a word which when not used in a fi-nancial context means is a synonym for "chains, fetters"). To wit:
First of all, what the hell is a bond?
It’s a private “I owe you.” On a small scale, if you owe your friend $20 on a lost bet, and can’t pay him back right away, your other friend can front you the money and charge you a little bit of interest per day or per week until you pay him back. In the same way, Verizon's $49 billion bond will be broken down into smaller amounts and potentially purchased by thousands of investors — insurance companies, investment companies, institutional buyers, pension funds, and wealth managers, to name a few.
Typically, when you think of a loan, it's issued from a bank to the consumer. A bond, however, is a loan from the consumer to the bank or government. So if you purchase a government bond, for example, you're essentially loaning the government a certain amount of money that they will pay you back with interest.
Factual liberties aside, where Ms. Dimon is going with this analysis is admirable. She take a shot at connecting the dots and piecing together the big picture. She is, in fact, correct in her observation that the recent Verizon bond offering was massively oversubscribed "shows that the capital markets are wide open and companies are getting more aggressive with investing. The market is healthy when big debt offerings like this exist. People are confident enough in companies putting on financing to buy businesses that they're investing in their debt."
However, when Laura gets down and dirty with the macro stuff, things get a little more funny .
On a more macro policy level, it could also signify that the Federal Reserve continues to keep interest rates artificially low (by buying bonds) which will lead to too much debt (too many bonds) existing in the market for the U.S. government and corporations. Imagine if you made no money and every time you wanted to buy something, you had to borrow it. And the U.S. government kept your interest rate at $1 per year per time you borrow. You'd borrow a lot, right? Well, what if they change their minds in the future and allow that $1 to go to market rates of $10, or those one dollars keep adding up faster than you're able to earn money to pay them back.
It would be a problem.
It's funny cause it's true.
Because on the one hand the fact that the Federal Reserve "continues to keep interest rates artificially low" is precisely why one JPMorgan Chase & Co., refuses to issue loans (at last check the bank had $500 billion more in deposits than loans outstanding), and instead uses the cash as "dry powder" to invest directly in risk markets using such peculiar "animals" as the London Whale.
On the other, it is even funnier because when one talks about borrowing a lot, or, in other words, using massive amounts of leverage, one name comes to mind. One name which on its balance sheet, has $71.2 trillion notional in derivatives.
It sure does appear to be "a problem." But maybe not so much for Ms. Dimon's family fortune. After all, if and when the proverbial feces hit the fan, it will be a problem for none other than Joe Q. Public who is dragged in to bail out JPMorgan and its fellow banks. Again. Especially if any minute now the Obama administration puts in charge of the Fed the woman who three years ago admitted to seeing none of the signs that would become the greatest financial crisis the country has seen since the Great Depression.
But what is most interesting about Ms. Dimon's essay is what is not said. At least not in the final version. Luckily, it was the first version that caught our attention, and a version which still happens to be cached in Google, which happens to have the following subsequently redacted bit which is the follow up thought to how a country overrun by debt would look like:
The reality is that where you shake out on this argument has a lot to do with your personal politics, believe it or not. The more the country operates in this world of cheap debt, the higher taxes will be in the future. And since low income people don't make enough to be taxed, it will be the wealthy that get taxed. So do you think the rich should pay higher taxes in the future to allow more job growth and a better economy for the lower socio-economic classes?
One can see why upon reflection, or perhaps parental input, Ms. Dimon decided to remove that paragraph entirely in the revised draft. But had she kept it, perhaps she could have asked none other than her father for advice on the biggest craze gripping not only the USA but the entire world: the "fairness doctrine". It was none other than Jamie Dimon who in May 2012 stated that:
I've gotten disturbed at some of the Democrats' anti-business behavior, the attacks on work ethic and successful people. I think it's very counterproductive. ... It doesn't mean I don't have their values. I want jobs. I want a more equitable society. I don't mind paying higher taxes...
Ironically, what Mr. Dimon is lamenting is the counterfactual: the more debt this country has (incurred in major part as a result of bailing out the financial system and preserving the banking status quo), the less taxes Mr. Dimon pays. Hence he "doesn't mind paying higher taxes." It is just that nobody will ask him to make said payment.
Which is probably for the best... After all, if Mr. Dimon had to really contribute to an equitable society, and not get bailed out, and not risk hard-earned deposit funds for massive prop bets gone wrong, he would never get a chance to utter such legendary soundbites as the following...