Did JPMorgan Pop The Student Loan Bubble?
by Tyler Durden
Back in 2006, contrary to conventional wisdom, many financial professionals were well aware of the subprime bubble, and that the trajectory of home prices was unsustainable. However, because there was no way to know just when it would pop, few if any dared to bet against the herd (those who did, and did so early despite all odds, made greater than 100-1 returns). Fast forward to today, when the most comparable to subprime, cheap credit-induced bubble, is that of student loans (for extended literature on why the non-dischargeable student loan bubble will “create a generation of wage slavery” read this and much of the easily accessible literature on the topic elsewhere) which have now surpassed $1 trillion in notional. Yet oddly enough, just like in the case of the subprime bubble, so in the ongoing expansion of the credit bubble manifested in this case by student loans, we have an early warning that the party is almost over, coming from the most unexpected of sources: JPMorgan
.Recall that in October 2006, 5 months before New Century started the March 2007 collapsing dominoes that ultimately translated to the bursting of both the housing and credit bubbles several short months later, culminating with the failure of Bear, Lehman, AIG, The Reserve Fund, and the near end of capitalism ‘we know it’, it was JPMorgan who sounded a red alert, and proceeded to pull entirely out of the Subprime space. From Fortune, two weeks before the Lehman failure: “It was the second week of October 2006. William King, then J.P. Morgan’s chief of securitized products, was vacationing in Rwanda. One evening CEO Jamie Dimon tracked him down to fire a red alert. “Billy, I really want you to watch out for subprime!” Dimon’s voice crackled over King’s hotel phone. “We need to sell a lot of our positions. I’ve seen it before. This stuff could go up in smoke!” Dimon was right (as was Goldman, but that’s another story), while most of his competitors piled on into this latest ponzi scheme of epic greed, whose only resolution would be a wholesale taxpayer bailout. We all know how that chapter ended (or hasn’t – after all everyone is still demanding another $1 trillion from the Fed at least to get their S&P limit up fix, and then another, and another). And now, over 5 years later, history repeats itself: JPM is officially getting out of student loans. If history serves, what happens next will not be pretty.