Wall Street chiefs admit to not stress testing a fall in housing market
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Bosses of some of the biggest Wall Street banks have admitted that their banks did not consider that the US housing market would ever fall before the sub prime crash of 2007.
At a hearing of the Financial Crisis Inquiry Commission in Washington this morning, the heads of JP Morgan, Morgan Stanley, Goldman Sachs and Bank of America have been grilled over the financial crisis that began in the US sub prime mortgage market.
When questioned about risk management, all the chiefs said that their banks had always gone through regular “what if” stress tests in all areas of their business, but all admitted that they failed to test what would happen should house prices fall.
When asked directly whether his bank had stress tested for a house price fall, Morgan Stanley chairman John Mack said: “Erm no, that one we missed”.
JP Morgan Chase chief executive Jamie Dimon also admitted that his bank had “stressed almost everything” but missed testing what would happen should house prices fall.
Bank of America chief executive Brian Moynihan admitted that his bank did not do enough tests as to what would happen should house prices ever fall also.
Goldman Sachs chief executive Lloyd Blankfein said everyone, including his bank, were wrong to assume that “the world had everlasting liquidity” and said there was a lack of rigour when transacting mortgages.
In regard to mortgage lending, Blankfein said: “In all honesty we did know that covenance was getting lighter and leverage was getting bigger but we all rationalised it and we talked ourselves into a place of complacency.”
Dimon said that the sub prime mortgage crash was “no surprise and no mystery” as loan to values rose and affordability became more lax.
He said: “We never saw loses in these products and everyone was making money. But there were bad products and bad actors such as unscrupulous mortgage brokers and salesmen in the market.”
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Readers' comments (3)
Anonymous | 13 Jan 2010 4:42 pm
.. and these financial masterminds are paid how much???
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Anonymous | 15 Jan 2010 11:12 am
It's no accident that these guys missed something so glaringly obvious and fundamental to their business. They were in the jobs they were in precisely because they did not question the potential downside of the trade that was (apparently) making the banks billions of dollars. Those that did (and do) question the wisdom of generating profits out of ever-increasing leverage, generally find themselves kicked out of such organisations.
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Rob Moore | 15 Jan 2010 2:11 pm
I have just written to my MP and the directors of JP Morgan, Morgan Stanley and Goldman Sachs. I recommended that my MP creates an early-day motion to say that any bank paying bonuses in the next five years is, in effect, declaring that they have taken all risk management actions necessary for every contingency, is fully capitalised to survive any economic tsunami and is therefore ineligible for government assistance at any point in the future. Furthermore, if any bank does collapse, it's directors will be held personally criminally liable for the failure. If we had had that in place already, these muppets would be locked away for 50 years each instead of mockingly shrugging their shoulders and walking away with their billions.
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