Harvard Business Review
Friday June 8, 2012
by Edward Conard

Some politicians claim that unsystematic loan losses, like the $2 billion loss JP Morgan recently suffered, significantly increase the risk of another financial crisis. They do not. A 30% drop in real estate prices, which systematically threatened all lenders with upwards of a trillion dollars of losses, caused the financial crisis. Subprime mortgage losses turned out to be much smaller than expected —$300 billion, according to the Federal Crisis Inquiry Commission—and non-bank lenders suffered most of those losses (notwithstanding mark-to-market losses from credit downgrades). Nevertheless, institutional investors withdrew $1.5 trillion of short-term funding from intermediaries—five times more than loan losses—despite $15 trillion of explicit government guarantees made during the crisis. Had the government guarantees been smaller, the withdrawals would have been much larger. Two billion dollars of losses may be eye opening, even for JP Morgan with equity worth $170 billion, but it’s orders of magnitude smaller than risks large enough to spark a financial crisis.