On Wednesday, JPMorgan CEO Jamie Dimon published his latest annual letter to shareholders.
And Larry Summers thinks this means JPMorgan’s risk model is sort of useless.
Speaking on CNBC’s Squawk Box on Thursday morning, Summers said, “Whenever I hear someone in finance say a one in a 2 billion year event just happened, I say to myself, ‘You just demonstrated that you had a model for judging tail risks that wasn’t any good.'”
Of course, Dimon sort of hinted as much in his letter, too.
Dimon wrote: “Then on one day, October 15, 2014, Treasury securities moved 40 basis points, statistically 7 to 8 standard deviations — an unprecedented move — an event that is supposed to happen only once in every 3 billion years or so (the Treasury market has only been around for 200 years or so — of course, this should make you question statistics to begin with).”
Summers also spoke about a theme that has gotten a lot of play in markets recently: liquidity.
We highlighted comments from Oaktree’s Howard Marks late last month on the topic, with Marks writing that liquidity isn’t just whether or not you can sell an asset, but how quickly you can sell that asset without taking a huge loss.
And Summers said that the reaction from policy makers to the financial crisis has helped lead to less liquid markets.
Summers said: “I thought that regulators made a mistake when they looked at each institution and they said you’ll be safer if you withdraw from the markets a bit … then forgot that if all institutions withdraw, the markets will be less liquid, the markets themselves will be less safe, and that will in the end hurt all the institutions. So I think there is a real issue there.”
During the interview, Summers also said he likes Phil Mickelson to win The Masters, which starts on Thursday.
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