In 2006 you make the decision to expand the CDO team, but do you at that time also reconsider your reticence previously dealing with subprime?

Yeah. As we added new people to those teams from outside of JPMorgan who had experience in some of the asset-backed security markets as well, but also as the salespeople that we added inside -- so the people that were responsible for our relationships with investors -- they were coming and saying: "Look, I'm operating with one hand tied behind my back. If I worked at Merrill Lynch, I can sell a high-yield CDO or a high-grade CDO or an auto loan CDO or a subprime mortgage CDO. I've got all these arrows in my quiver, and I come to JPMorgan, and I can do generic stuff." ...

We were never not in the mortgage-backed securities business. We were in the mortgage-backed securities business if we thought we could do it safely and soundly.

But in terms of subprime?

Including subprime. I think we would always have been happy to do subprime mortgage business if we thought we could do it safely and soundly for ourselves.

Right. But you were relatively out of that market.

We were relatively out of it.

And then with Magnetar that changes.

I think we were still relatively out of it. They were very small.

Right, it was a small deal, but this is where there's legal trouble with JPMorgan facing what other banks have faced with the accusation that you're putting together bad subprime loans and selling credit default swaps on them when people inside the bank knew they were bad.

I didn't review those deals individually myself, but I don't think there was anybody inside JPMorgan that knew they were packaging something bad for our clients. ...

All these things that we've come to understand were really substantially abused at every chain of the mortgage business -- from the borrowers themselves who lied about whether this was their primary residence and in fact they had 15 properties that they were buying to rent out, to the brokers that lied along the way, to the originating banks that didn't do their homework, to the servicer that ended up servicing these loans at every stage along the way -- we now know with the benefit of hindsight.

Of course there was some legitimate business being done, and there was some illegitimate and fraudulent business being done. And did the CDO originators -- which is where JPMorgan came into that transaction -- did the CDO packager do all the work that they could have done if they were the end investor in those products? No, I'm quite sure that the originators didn't do all the work that they could have done.

Did the investors do the work that they should have done? Did they ask the questions that they should have asked? No, absolutely not. They said, "Give me a portfolio of loans that's going to earn me X, because that's what I need in order to make my budget or satisfy my policyholders," or whatever.

So no, I don't think that there were people that were working at JPMorgan that were putting together packages of stuff that they knew were bad in order to flog to unwitting investors.

That allegation is out there.

It's out there.

It's out there with regard to Deutsche Bank. It's out there with regard to JPMorgan. It's out there with regard to Goldman Sachs.Yeah, and I've seen the e-mails where people have used derogatory terms to describe the transaction that they were trying to flog to investors.

It's one thing to know that the company has put together a CDO that's bad, and another person in another part of the company says, "Yeah, I'm going to short that thing, because that's junk; that's crap." It's another thing to build it knowing that it's full of crap and then bet against it, and that's what's being alleged. Do you think that happened?

I don't think that happened at JPMorgan.

Do you think that happened in general?

I don't know. Obviously I've read the transcripts of the Goldman Sachs testimonies. I've seen the settlements. I've seen that ultimately the SEC [Securities and Exchange Commission] allowed Goldman to pay a fine and neither admit nor deny guilt. I'm not sure I have all the facts myself, so I honestly don't know.

Why would Goldman or Deutsche Bank settle with the SEC rather than fight it if in fact they are clean?

We settled with regulators, or for that matter other plaintiffs, routinely. We settled with most of the plaintiffs in Enron. ... We paid out, if memory serves correct, $2 billion in the legal settlements, and knowing those facts inside out, there was not one iota of guilt on the part of my firm. But the risk was that you let that process run through the legal system and you end up paying not $2 billion but $20 billion.

In legal fees?

No, in damages.

But if you believe in your own case, why are you afraid of paying $20 billion?

And the legal system always works out just the way you think it should, right? No, of course not.

It's a calculated risk, you're saying?

It's a calculated risk, but it's asymmetrical, because the $20 billion final result bankrupts you. ... You can't put yourself in that position.