{"id":181458,"date":"2010-01-14T15:03:19","date_gmt":"2010-01-14T20:03:19","guid":{"rendered":"tag:business.theatlantic.com,2010:\/\/3.33525"},"modified":"2010-01-14T15:21:53","modified_gmt":"2010-01-14T20:21:53","slug":"jpmorgan-ceo-we-didnt-model-house-price-collapse","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/181458","title":{"rendered":"JPMorgan CEO: We Didn’t Model House Price Collapse"},"content":{"rendered":"

Kevin Drum is shocked<\/a> to find Jamie Dimon admitting that they weren’t modeling a total collapse in house prices. I’m shocked to find that Kevin is shocked. That’s pretty much the standard explanation–at least, a partial one–for why lenders became willing to take on so much risk. Massive house price depreciation had pretty much dropped out of their models, which mostly focused on prepayment risk. <\/p>\n

This is not quite as crazy as it sounds. For one thing, Kevin has truncated the quote a little bit; the version I read<\/a>
\nhas Dimon saying “We didn’t stress test housing prices going down by
\n40%.” America had not had a sustained national decline in residential
\nhousing prices since the Great Depression.  So while local banksmight
\nneed to model the risk of substantial price depreciation, banks
\nglomming together national pools of mortgages figured this wasn’t such
\na big problem–as long as you didn’t think we were going to have
\nanother Great Depression.  And most regulators, commentators,
\neconomists, bankers, and ordinary folks thought we weren’t going to
\nhave another Great Depression.<\/p>\n

Indeed, we didn’t.  It turned out to be a sufficient, but not necessary condition for a collapse in housing prices.<\/p>\n

Even
\nif they had put housing price implosion in their models, where would
\nthey have gotten the data to fine-tune their models?  It’s not enough
\nto say, “We should model a broad national decline in house prices”; you
\nneed some values for how many people will default when house prices
\nfall.  The last time we had such a national collapse, mortgages were
\nrelatively short term debt instruments that didn’t self-amortize. 
\nWe’ve had local bubbles since in places like New York and California. 
\nBut New York is definitely a bad model–it’s a city mostly of renters
\nin which co-ops frequently demand downpayments of 25-50%, or even all
\ncash.  California might have been better, but unlike a lot of places,
\nit’s a non-recourse state.  And so on. How well could Dimon have hoped
\nto build a nationwide model off of a few local jurisdictions?<\/p>\n

That’s
\nnot to excuse the bankers for not trying; some allowance for the risk
\nof a broad price decline would have been better than none.  But I’m not
\nsure that it would have done much to alter their lending habits.  Going
\non historical data, the risk of a huge price drop within the average
\nlifetime of a mortgage (which is less than ten years), would normally
\nhave been very small, and would have shown up in any
\nprobability-weighted model as a fairly trivial adjustment compared to
\nthe large risk that the mortgages in the pool would be refinanced. By
\nthe time it was obvious that the risk of a broadly falling market was
\nvery great, the bubble was about to pop of its own accord.  Indeed,
\neven without such a model, Dimon pulled out of subprime, because he
\ndidn’t need a spreadsheet to tell him that it was going to turn into a
\ndisaster.

\n

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\n\"\"<\/a>
\n\"\"<\/p>\n","protected":false},"excerpt":{"rendered":"

Kevin Drum is shocked to find Jamie Dimon admitting that they weren’t modeling a total collapse in house prices. I’m shocked to find that Kevin is shocked. That’s pretty much the standard explanation–at least, a partial one–for why lenders became willing to take on so much risk. Massive house price depreciation had pretty much dropped […]<\/p>\n","protected":false},"author":80,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-181458","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/181458","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/80"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=181458"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/181458\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=181458"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=181458"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=181458"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}