“I was just shown the results for our first quarter. They were excellent. When mortals go through a prosperous period, it seems to be human nature for expenses to balloon. We are going to be the exception. I have just informed the purchasing department that they should no longer purchase paper clips. All of us receive documents every day with paper clips on them. If we save these paper clips, not only will we have enough for our own use, but we will also, in a short time, be awash in the little critters. Periodically, we will collect excess paper clips and sell them (since the cost to us is zero the Arbitrage Department tells me the return on capital will be above average). This action may seem a little petty, but anything we can do to make our people conscious of expenses is worthwhile…Bear Stearns is probably going to sell stock to the public, and there is one guarantee that I would like to give the potential buyers of our stock – they are going to get the fairest shake from us that management can give any public shareholder. This place is going to be run tight, and the reasons are not all altruistic. We are not going public for the perks. We are going public for a number of reasons, and one is that we want the stock to appreciate.” [BI, earlier]
A while back Bear Stearns sold some mortgage-backed securities to a thing called FSAM, which was basically a subsidiary of Franco-Belgian monstrosité Dexia, and FSAM sold the RMBS on to Dexia, and the mortgages were all terrible, and their value dropped, and Dexia sued JPMorgan, currently the proud owner of Bear Stearns, and today JPMorgan won:
JPMorgan Chase & Co has won the dismissal of the vast majority of a lawsuit accusing it of misleading the Belgian-French bank Dexia SA into buying more than $1.6 billion of troubled mortgage debt.
The decision, made public Wednesday by U.S. District Judge Jed Rakoff in Manhattan, is a victory for the largest U.S. bank, in a case that gained notoriety after emails and other materials were disclosed that suggested the bank and its affiliates knew the debt was toxic, but sold it anyway.
Despite the notoriety this is kind of a boring case: it’s a garden-variety RMBS fraud case; Bear said various things in the offering documents that maybe weren’t so true, and the market crashed and the investors lost a lot of money, and now they’re mad. There’s like a zillion of those cases; actually there’s like a zillion of those cases just against Bear Stearns (here are two).
But the fact that the bank won is pretty interesting? Like, if JPMorgan can win a garden-variety RMBS case then so can anyone? I guess? So I suppose it’s worth spending a minute figuring out what this means for other banks.
We run into immediate problems because it’s hard to know exactly why JPMorgan won; the judge’s order is two pages of “opinion to follow.” But reading JPMorgan’s submissions you can get behind CNBC’s interpretation: Read more »
Let this be a lesson to anyone hoping to avoid a couple centuries in prison– nobody fucks with Jimmy Cayne’s roach clip and gets away with it! Read more »
Today the Federal Reserve released transcripts of its 2007 FOMC meetings. The Fed has a policy of releasing these transcripts with a five-year lag. This has various advantages in terms of encouraging candor and allowing the FOMC members to discuss material nonpublic information, etc., but it has the singular disadvantage of making them look like idiots, because everyone else is five years smarter than they are. “Hahaha William Dudley thinks that Bear Stearns is fine! Bear disappeared like four years ago! Has he been living under a rock? What a moron!”
Still I think the advantages of delay outweigh the disadvantages, for the Fed. Here is Dudley in August 2007 on Bear, etc.:
As far as the issue of material nonpublic information that shows worse problems than are in the newspapers, I’m not sure exactly how to characterize that because I guess I wouldn’t know how to characterize how bad the newspapers think these problems are. [Laughter] We’ve done quite a bit of work trying to identify some of the funding questions surrounding Bear Stearns, Countrywide, and some of the commercial paper programs. There is some strain, but so far it looks as though nothing is really imminent in those areas. Now, could that change quickly? Absolutely. For example, one question that we’re following with Bear Stearns is what their clients do in terms of continuing to want to do business with them. Obviously, if people start to pull back in their willingness to do business with Bear Stearns, the franchise value of the company goes down, and that exacerbates the problem. One thing that we have heard about Bear Stearns is that they have approached a number of major commercial banks about a secured line of credit. We don’t know what the outcome will be, but they are clearly trying to get even better liquidity backstops than those they have in place today. But as far as we know, they have enough liquidity—and Countrywide as well at this moment.
Laugh if you want, but that’s sort of the thing about banks and liquidity: it’s there one day, and gone the next, and its disappearance is never predictable because as soon as it becomes predictable that your liquidity will disappear, it has already disappeared. However good may be your arguments. Bear, at the time, really was drowning in liquidity.1 Dudley just looks a little wrong in hindsight; the guys at Bear who were working to bail their sinking ship had no choice but to make contemporaneous public statements about their liquidity that were true until they weren’t. And that looked, by virtue of the quick flip between “drowning in liquidity” and just “drowning,” like they weren’t true – in a liability-incurring way – even when they were.
The transcripts don’t seem particularly laughable to me2; the FOMC members seem serious and sensible and earnest and informed and reasonably on top of current events without being all that on top of the future.3 This is called the efficient markets hypothesis. Here is Ryan Avent: Read more »
The SEC settled cases today with JPMorgan and Credit Suisse over “misleading investors in offerings of residential mortgage-backed securities” for a total of about $400 million, which the SEC plans to hand out to those misled investors. There’s been a lot of this sort of thing recently, so here’s a quick cheat sheet on who is suing whom over what mortgages:
- Everyone is suing every bank over all of their mortgages.
So fine but is that not weird? Two things to notice about big banks is that they are (1) big and (2) banks, both attributes that tend to accrue lawyers. And a thing that lawyers are supposed to do is stop stupid cowboy bankers from doing stupid illegal things. If you told me that one or two banks decided to go without lawyers for cost-cutting and/or risk-increasing reasons, I would be skeptical but perhaps willing to play along, but all of them? I am certain that JPMorgan has lawyers.1
The mystery is resolved and/or deepened if you look at most of what is being settled in these cases, which in highly schematic outline was:
- banks wanted to hose investors,
- they asked their lawyers if that was okay,
- the lawyers checked the documents and said “yes,”
- so they did.
In ever so slightly less schematic outline: Read more »