Davos Summit: why banks are very different than aircraft engines
Jamie Dimon is right. Most of us don’t know how an aircraft engine works. But generally speaking, I don’t have to. I do, on the other hand, need to understand how banks work, because banks have recently failed society, and me, more than aircraft engines have. Let me explain.
Speaking in a financial panel at the World Economic Forum in Davos, the JP Morgan Chase CEO told the audience that critics of big banks seem not to understand them very well. Responding to criticism from a fellow panelist and hedge fund manager, Dimon took particular exception to the argument that banks are “opaque” and difficult to understand. Defense of the industry – particularly the U.S. banking industry – is de rigueur for Dimon. Except for a heart-stopping series of massive trading gaffes last year involving someone called the “London Whale,” JP Morgan Chase has generally been seen as the safest and best run of the major banks. The polished and handsome Dimon its de facto spokesperson.
Despite the tarnish of 2012, Dimon retains much of his personal allure. Prior to the trading catastrophe, Dimon’s name had been floated as a potential successor to former U.S. Treasury Secretary Timothy Geithner, though America’s still not far enough removed from the financial crisis of 2008 for that to have been likely. Dimon was, after all, in the very same room at the New York Federal Reserve, with Geithner, Federal Reserve chief Ben Bernanke and then Treasury Secretary Henry Paulson, when the critical decision was made to let Lehman Brothers collapse that triggered the near-complete meltdown of the global financial system. But in the annals of the financial crisis, Dimon is, as the title of his biography states, the “Last Man Standing.”
Dimon has long, and often eloquently, defended the U.S. banking system against its harshest critics. In Davos, he responded to his fellow panelist by saying banks, like other business, “can’t be opaque. They’re complex.” He’s right. It’s what he said next that seemed like an oversimplification at best, and misdirection, at worst: “You don’t know how aircraft engines work, either, and I don’t.”
Huh? Look, maybe it’s our fault; journalists often refer to things in the financial system as the “engine” of this or that. Or the “oil” that keeps this or that running. Or the “fuel” that keeps this or that going. But, in this instance, I’m not sure the comparison works all that well.
Conveniently, I am in Davos with CNN’s Richard Quest, host of Quest Means Business. In the best tradition of journalism, Quest knows enough about a lot of different things, but he has an abiding interest in aviation, and probably a greater understanding of aircraft engines than most people do. When I asked him what he thought about the analogy, he replied “You don’t need to know about aircraft engines until they stop doing what they’re supposed to do; then you have to learn more about them.”
He also points out that you don’t have to understand banks – or aircraft engines – all that well to realize when they’re not operating as they were designed to. Like Quest’s jet engine, the banking system stopped doing what it was supposed to do, and the subsequent damage to the global financial system was far greater than a faulty jet engine, or even a line of faulty jet engines, could wreak.
The fact is, Quest and I both, along with most financial journalists and most global citizens, know more about banks than we do about aircraft engines, and not because we want to. Banks around the world, with special mention of U.S. banks, stopped doing what they were supposed to do, and wrecked a lot of wealth along the way.
To be fair to Dimon, too, his answer was long and detailed; he didn’t throw the aircraft engine out without context. I don’t think we’ll end up getting too caught up on how Dimon said it. His underlying point is correct: Banking has become more complex than deposits and loans. Aircraft engines have become more complex, too. But the advances in aircraft engineering have generally resulted in more power, greater efficiency and lower fuel usage, benefitting the environment, passengers, airlines and engine-makers together.
It’s unclear that the advances in financial engineering in which the banks have engaged have had similar beneficial effects.
By Ali Velshi