Dear Fellow Shareholders

We're just now starting to receive company 2008 annual reports, and this year the CEO Letter to Shareholders is particularly interesting.  A friend called my attention to this one from JP Morgan's Jamie Dimon.  

Dimon offers a balanced assessment of JPM's 2008 performance and outlook for '09 and beyond. However, most valuable is his fairly concise review of the global financial crisis and his recommendations for change.

He's not shy about spreading blame, from banks and brokers to borrowers, hedge funds, regulators, and even pension plans and universities. 

There are many gems here, but I particularly like his comments about how we got here.  It's fashionable today for some to say I-told-you-so and to accuse regulators, risk managers, and others of being "asleep at the switch," but Dimon says: 

"...many of the main causes, in fact, were known and discussed abundantly before the crisis.  However, no one predicted that all of these issues would come together in the way that they did and create the largest financial and economic crisis of our lifetime."

To those who attempt to predict the markets by drawing historical comparisons, he warns:

"Even the most conservative of us, and I consider myself to be among them, looked at the past major crises (the 1974, 1982, and 1990 recessions; the 1987 and 2001 market crashes) or some mix of them as the worst-case events for which we needed to be prepared.  We even knew that the next one would be different--but we missed the ferocity and magnitude that was lurking beneath."

Keep in mind that I have plucked these quotes from a 28 page letter.  I don't mean to imply that Dimon is offering excuses.  But I think that his comment provide good perspective as our elected representatives investigate How Could This Have Happened?

The meat of the letter lies in two sections which address Causes and Solutions.  Here's an outline; I would encourage you to click through to read the details.

Fundamental Causes And Contributions To The Financial Crisis

The burst of a major housing bubble

Excessive leverage pervaded the system

The dramatic growth of structural risks

Regulatory lapses and mistakes

The pro-cyclical nature of virtually all policies

The impact of huge trade and financing imbalances

The Future Of Our System (solutions)

The need for a systematic regulator with much broader authority

The need to simplify our regulatory sustem

The need to regulate the mortgage business in its entirety

The need to fix securitization

The need to fix Basel II

The need to get accounting under control

The need for appropriate counter-cyclical policies

The need for policies in health care, pensions, energy and the environment, infrastructure and education that will serve us well over time 

In all, a very good review from someone who was an active participant in the drama.