Weatherstone's Law...
ONTO MY desk flops a stockbroker's note on J.P. Morgan, the bank that bankers most admire. The broker disagrees: 'We do not consider Morgan to be a strong beneficiary of a healthier economy, since loan quality is already about as good as it could be.' Den- nis Weatherstone, Morgan's chairman, accepts the back-handed compliment. It is just as well, he says, that the Olympia & York debacle and the Japanese credit crunch did not hit the American banks ear- lier — last autumn, for example: 'We could have had some nasty shocks' — and quality would have had to tell. Now the economy and the banks have had time to recover. It is not that Morgan avoids risks: 'We like to manage risk, but we need to recognise it — to get it recorded properly, and then to manage it conservatively but actively.' The risks change, and in some ways become harder to manage as Morgan becomes less of a lending bank, and instead supplies its big-business customers with more advanced forms of financial engineering. He presses his engineers to explain how they work: 'If they can't explain it the third time, then maybe they don't understand it, either.' He learned that lesson in the City. A Londoner by birth, he joined the bank at 16 and in time got the make-or-break job of lending to the commodity markets. Asked to finance a contract in lard, he was offered receipts for salad oil, and refused them. 'You don't understand,' snarled his cus- tomer. 'No,' he said, 'I don't.' Next week, all was clear, except for the salad oil, which proved to be cloudy and indeed imaginary. I am delighted to offer the moral as Weath- erstone's Law: Never put your money into something you do not understand. Think of the fortunes that could have been saved by applying his law to Lloyd's of London.
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