Everyone now knows that Jamie Dimon is the king of Wall Street. Girls at hedge funds have crushes on him. He’s been on the cover of New York magazine, towering over the city. They’re calling him “King James.”
For the most part, the ascendency of Dimon has been due to the fact that JP Morgan successfully avoided falling into the chasm of subprime mortgages into which so many of his fellow chief executives drove their banks and brokerages. Fortune’s has a long profile that describes Dimon’s management style, and precisely how he pulled JP Morgan back from the subprime brink.
Dimon favors boisterous meetings that delve into detailed analysis of his bank’s business. Fortune’s Shawn Tully reports that people describe these variously as “Italian family dinners” and “the Roman forum.” There not a lot of kow-towing to the big man, apparently. Ideas are debated vigorously and sometimes Dimon backs down. He wanted to get JP Morgan to go “open source” with the financial products it sold, selling clients on products developed by competitors. But one of his lieutenants eventually talked him out of it, convincing Dimon that JP Morgan’s homegrown products were performing as well as anyone else’s.
The subprime call–literally, a call to the head of structured products who was on vacation–came from Dimon after a meeting discussing the performance of the retail bank. In October 2006, the mortgage servicing business was reporting that late payments on subprime mortgages were rising at an alarming rate. Dimon and his team concluded that quality control had slipped at the originator level and decided to slash its holdings of subprime debt. It was this leap from the granular details to the bigger picture that enabled JP Morgan to make the right call on subprime while so many others were still rushing headlong into what was one of the hottest businesses on Wall Street.
We can’t help but wonder if there are, in the Dimon and subprime story, the seeds of an even greater story defending the efficacy of the mega-bank. After all, it was the fact from a retail business that tipped Dimon off to a strategic change at the investment level. A smaller brokerage or investment bank would not have had access to this data. Maybe its not the model of mega-banks that’s broken, after all.
Jamie Dimon’s swat team [Fortune]
JP Morgan Chase estimated that its holdings of Fannie Mae and Freddie Mac preferred stock lost about half of their value the third quarter now underway, according to a regulatory filing with the Securities and Exchange Commission. JP Morgan says it owns preferred shares of Fannie and Freddie with a $1.2 billion par value that has been written down by $600 million.
“The precise amount of losses that may be incurred on these securities for the third quarter is difficult to determine, given the significant volatility being experienced in the market values of these securities,” JP Morgan notes.
This move should also trigger writedowns at other financial firms, including regional banks and insurers, who hold the majority of Fannie and Freddie preferred shares.
JP Morgan 8-K [SEC]
Late Thursday afternoon, long after the markets had closed and many on Wall Street had long since evacuated for the long weekend, the Federal Reserve revealed its estimates for the value the Bear Stearns assets it accepted as collateral for the $28.9 billion loan JP Morgan Chase used to buy the firm and prevent its bankruptcy. That collateral was worth just $28.8 billion, according to the Fed.
What this means is that the decline in the collateral value has already eaten through a good chunk of the $1.15 billion of exposure JP Morgan agreed to take as part of the deal. The collateral has already declined by 3.7% in a couple of months. Much of the collateral consists of mortgage linked securities, so unless that market turns around sharply, it seems likely that taxpayers will be forced to foot the bill for Bear Stearns collapse.
Indeed, The New York Post reported this morning that a hedge fund investor in JP Morgan is predicting further declines in the collateral values. Taxpayers are on the hook for any decline past the $1.5 billion hit JP Morgan agreed to take. The Fed is being criticized for not revealing more about the assets that make up the collateral. JP Morgan says it is bound by a confidentiality agreement not to comment.
Hedge Fund Report: Bear Buyout Could Cost Taxpayers [New York Post]
Bear Stearns private-equity unit, Bear Stearns Merchant Banking, is expected to announce that it will be spun off into an independent company with JPMorgan Chase as its largest investor.
JPMorgan will assume around $1 billion of BSMB’s “investments and commitments.” BSMB manages around $5 billion.
Sadly, it looks like they are planning to drop the name Bear Stearns, even though they aren’t sure what to call themselves.
“Almost every rock, tree, and Greek god has been taken,” said BSMB partner Douglas Korn.
Bear Buyout Arm Ready to Fly Solo [Wall Street Journal]
What was it that prompted JP Morgan cheif Jamie Dimon to call Citigroup’s Vikram Pandit a jerk? Apparently Pandit was asking how the deal to buy Bear Stearns would affect the risk to Bear’s trading partners on certain long-term contracts. This was a crucial issue because many of Bear’s counter-parties had been unwinding contracts for fear the investment bank might collapse. As part of the deal, JP Morgan had put in place a durable guarantee that it hoped send a very strong signal that would stop the run on Bear.
But for some reason the Pandit’s question irked Mr. Dimon. “Stop being such a jerk,” he told Pandit. A little over a week later, JP Morgan would attempt to get out of the guarantee and unnamed sources started saying that JP Morgan never meant to enter into it to begin with.
Probably our favorite part of yesterday’s final installment of the Wall Street Journal’s three-part series on the destruction of Bear Stearns is an exchange that takes place between JP Morgan Chase CEO Jamie Dimon and Citigroup CEO Vikram Pandit.
As you probably know, Dimon was the heir apparent to ascend to the top of Citigroup after serving for years as the right-hand man of banking empire building Sandy Weil. At the last moment, however, he was forced out of the bank and the top spot was handed to Citigroup’s lawyer. Fast forward a few years and Dimon gets to run Citigroup’s rival, JP Morgan, and that uppity lawyer is forced to resign in disgrace. Pandit is summoned up to take over Citi.
And, after the jump, here’s Dimon hazing the new kid on the Wall Street CEO block.
Yesterday we spent quite a bit of time explaining why the loophole legend probably isn’t true. Now it seems that traders connected with the deal are lending support to this argument, saying that the notion that JP Morgan Chase’s strong guarantee of Bear Stearns liabilities was an oversight was concocted ex post facto.
“It was well known by bankers at JPM during that first weekend of negotiating that a guarantee was being baked into the deal,” an anonymous trader tells a Queens based reporter who maintains the GreenFieldsOfTheMind blog. “No idea what the conversations were at the highest levels but from the way it was described to me it did not sound like an oversight/loophole. Only after the fact was it talked about that way.”
The Loophole Legend [GFOTM]
The Loophole Legend: The Strange Life And Death Of JP Morgan’s Guarantee of Bear Stearn’s LiabilitiesBy John Carney
The last chapter of Kate Kelly’s Wall Street Journal epic on the decline and fall of Bear Stearns tells us that the “hurried deal” to keep Bear Stearns out of bankruptcy included a “loophole” that gave Bear Stearns investors leverage to seek a higher price. By now this story of the loophole is well-known, thanks in part to a New York Times front page story that first reported it. In time this story is likely to harden into conventional wisdom, especially now that it’s been endorsed by both the Times and the Journal.
Unfortunately, the story probably isn’t true.
That sure was quick. We’re told the Bear Stearns shareholder meeting is over, and the acquisition by JP Morgan has been approved. The meeting began at 10 am this morning.
Bear Stearns chairman Jimmy Cayne, who has already sold all his shares and so didn’t even get to vote at the meeting, presided over the meeting. We’re told he said something about Bear being “acquired by a first class firm.”
The deal is expected to close before midnight Friday.
Update: From the WSJ’s reporting.
Alan Schwartz, Bear’s CEO,[Turns out it was Cayne who] made a brief statement: “It’s a sad day but we’ll get through it, and we may be better off for it … The company that is taking us over, or is merging with us, is a first-class company. … That which doesn’t kill you makes you stronger. By now we all must be Hercules. … We ran into a hurricane…. There’s no anger; there’s simply remorse.”
Mr. SchwartzMr. Cayne said he “personally” apologized, saying he was “sorry that it happened. Words alone can’t describe the pain that I feel.”
We’re told that layoffs began yesterday in the structured leverage finance group at JP Morgan. Yesterday heads rolled among the senior staff. Today junior people are feeling the axe-man’s blade, according to a source familiar with the matter.