DId JPMorgan Chase Really Take a "Ten Billion Dollar Hit" For Uncle Sam?

Even in these tempestuous times, some things are still predictable. Bank CEOs still plead poverty after receiving billion-dollar favors from the government. And there are apparently still reporters who take their word for it.

Recently a lawsuit was filed against JPMorgan Chase which details massive investor fraud at Bear Stearns, the firm it acquired at the government’s request - and at considerable public expense - during the 2008 crisis. And right on time, JPM CEO Jamie Dimon ran to reporters to claim that his bank really lost money on that extraordinarily cushy deal.

Such is the credulousness of our journalistic class that this well-timed disclaimer didn't raise any red flags at the Washington Post. And when the bank claimed that it lost $10 billion in the Bear Stearns acquisition. This extraordinary assertion is simply repeated, without challenge or investigation.

The figure wasn’t even put in quotes.

The paper's editors punched up the bank-friendly spin by headlining the piece, "JPMorgan remorse on Bear Stearns prompts question: Were crisis mergers worth it? [1]" Let's help readers out with that question.

Yes.

The Ten Billion Dollar Hit

In fact, as we noted yesterday [2], this was one hell of a deal for JPMorgan Chase. And nevertheless the Post unquestioningly asserts today that "JPMorgan took a $10 billion hit on the Bear Stearns portfolio."

Readers are entitled to an explanation for a statement that bold, but none is forthcoming. Instead, the Post wants us to believe -- as do a number of other Washington power players - that Dimon and JPMorgan Chase took one for the team, jeopardizing their profits because ... well, because they love their country. It's already cost 'em ten billion, so let's give them a break, right?

And yet the Post, like most other major news outlets, reported [3] in 2008 that the Federal Reserve agreed to absorb $29 billion in losses to the mortgage securities portfolio after JPM absorbed the first $1 billion. So where did this $10 billion figure come from? Given the deal which the government set up for the bank, a lot of money would have to disappear before a "hit" like this could talke place.

The Math

It was reported in 2008 that JPMorgan Chase paid a $1.2 billion to acquire Bear Stearns, whose Manhattan headquarters alone were valued at somewhere between $1.1 and 1.4 billion at the time. Then there were other properties, corporate jets, automobiles, various holdings, cash on hand ... since the Post didn't do the math, let's do it ourselves:

Published reports stated that Bear Stearns had a total of $370 billion in assets when JPM purchased it. Danielle Douglas, Post reporter whose byline appears in today's article, reports that the sale price as $1.5 billion, which is higher than earlier reports. The difference is not explained. But even if that higher figure is correct, JPMorgan Chase acquired $370 billion in assets for $1.5 billion.

That's a damned good deal.

For $1.5 billion (or less) JPM also bought itself another huge chunk of market share, a whole book of business filled with customers, a new team of employees, and an increase in the priceless leverage you get from being even more "too big to fail." That means you have an even bigger implied guarantee that the government will rescue you from future management mistakes.

All of these intangible assets have genuine value, and they undoubtedly drove up the bank's share prices.

The Half-Trillion Dollar Loss

And yet Ms. Douglas reports that JPM "took a $10 billion hit." Time for a little more arithmetic:

That would have to mean that total losses came to more than $400 billion. Here's why: The total cost to JPM would have to include $1.5 billion purchase price. Then it would be forced to absorb the first billion in losses before the Fed's guarantee kicks in. That makes $2.5 billion.

At this point the bank would still be $367.5 billion ahead on the deal. And that's not counting any of the intangible advantages of the deal, which are immense (and which could be computed with enough time and information.)

In order to take an additional "hit," these unspecified losses would have to burn through the $29 billion guarantee from the Fed. After that, JPMorgan Chase would presumably have to start paying for the losses. But they'd still need to pay out more than $367.5 billion before they even began to "take a hit."

The total would have to exceed $400 billion before JPM could lose anything like the amount cited in the Post article. (I've put the rest of the calculation in a footnote.) Or, if you prefer to round up a bit, something approaching half a trillion dollars.

The Mystery Hit

Unless, that is, the losses didn't come from Bear Stearns' mortgage securities. In that case the losses only have to exceed $367 billion. And "only" should be written in quotes. However you cut it, the idea of a $10 billion "hit" from this book of business is very hard to believe ... at least, not without a lot more information than the Post provides.

One other thing: Douglas also reports, as do many other media outlets, that "the government realized a $765 million profit from the interest earned on the vehicle created to hold the securities." That "profit" is a rounding error compared to the sums given to JPM during the course of the crisis. And if the government earned this profit from its involvement, does that mean the Fed didn't pay out the $29 billion?

If it didn't pay out on those losses, that would only lead us back to our original question: Where did the "$10 billion dollar hit" come from?

Not Even Close

This acquisition gave JPM a lot of good will - both in the accounting sense, and politically. It gave it a huge marketing boost, increased market dominance, and an even greater implied government guarantee against failure as it became even more "too big to fail."

Douglas' piece says that Jamie Dimon was asked whether he'd do this acquisition again today, knowing what he knows now. His answer? "It's real close." I'm going to go out on a limb here and make a statement of my own: If he'd lost ten billion dollars for no good reason on this deal, that question wouldn't be close at all.

One more question: Has Dimon been criticized by anyone on the board for an act of charity toward the US government that cost his shareholders ten billion? Because if that's what it was, he breached his fiduciary responsibility as CEO.

It's very unlikely that he did.

The Manhattan Whale

Until we have some real answers, we have to assume that this $10 billion figure is nothing more than the usual smoke and mirrors we've come to expect from Jamie Dimon. After all, Dimon's the same guy who reassured investors that his bank's new risk model was securely in place -- even as it was being bypassed by the London unit that eventually incurred $6-7 billion in losses.

That unit reported directly to Jamie Dimon, according to reports.

Jamie Dimon's also the same guy who assured investors [4] that reported losses from that unit were just a "tempest in a teapot." And he's the same guy who said [5] those losses, once they were revealed, would be roughly $2 billion. At last report, the bank said total losses amounted to $6.2 billion.

You'd think a track record like that would inspire a little healthy skepticism among our nation's journalists.

Apparently not.
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As promised, here's the arithmetic. Aren't you glad you waited?

$370 billion in hard assets acquired for $1.5 billion: At this point JPM is $368.5 billion ahead.

Let's say, hypothetically, that the bank burns through another billion in losses before the Fed guarantee kicks in. JPM is still $367.5 billion ahead .

The Fed absorbs the next $29 billion before JPM pays out any more in losses. That means that total losses need to reach $396.5 billion before JPM begins to take a "hit" again.

Then it has to lose $10 billion more on the deal, which gets us to $406.5 billion.