This is not quite as crazy as it sounds. For one thing, Kevin has truncated the quote a little bit; the version I read has Dimon saying "We didn't stress test housing prices going down by 40%." America had not had a sustained national decline in residential housing prices since the Great Depression. So while local banks might need to model the risk of substantial price depreciation, banks glomming together national pools of mortgages figured this wasn't such a big problem--as long as you didn't think we were going to have another Great Depression. And most regulators, commentators, economists, bankers, and ordinary folks thought we weren't going to have another Great Depression. Indeed, we didn't. It turned out to be a sufficient, but not necessary condition for a collapse in housing prices.