I questioned Assistant Treasury Secretary for Economic Policy under Henry Paulson, Phillip Swagel, about any capital gains that JPMorgan Chase may have enjoyed as a result of the acquisition of WAMU. He said he hadn't seen any numbers on it.
Now some of the numbers are being released publicly. In a story titled, JPMorgan’s WaMu Windfall Turns Bad Loans Into Income, Bloomberg writers Ari Levy and Elizabeth Hester report:
JPMorgan Chase & Co. stands to reap a $29 billion windfall thanks to an accounting rule that lets the second-biggest U.S. bank transform bad loans it purchased from Washington Mutual Inc. into income.There's your answer to why JPMorgan Chase was not required to raise any additional capital by the government following the stress tests.
Just as I suspected the WAMU acquisition had a lot to do with it. Remember, future income was used as part of the formula, and counted as incoming capital, during the stress tests. Of course, $29 billion can relieve a lot of stress. There's a bit of hocus pocus to the accounting going on here. You write down the loans dramatically, then you recognize the money coming in on what you wrote down as income which then increases your future capital for stress test purposes and viola, who needs to raise additional capital? Not JPMorgan Chase.
In truth, as John Hempton points out, the loans should never have been written down in the first place. Thus, based on the way banks are measured these days (which I believe is inaccurate, but still the way they are all measured) WAMU was not in any worse shape than most other banks. Or as Hempton puts it:
Washington Mutual was never insolvent and should never have been confiscated.The $29 billon was a gift to Jamie Dimon.
There's more to know about any WAMU assets JPMorgan sold off and what they received for those. The same goes for the Bear Stears takeover by JPMorgan, another billion dollar gifting to Dimon.
If Dimon doesn't have Hank Paulson, Timothy Geithner and FDIC chairman Sheila Bair in some group photo doing some very unnatural acts, I will be very surprised.
UPDATE: As I continue to think about how outrageous this entire picture is, what I see that went on is that $29 billion in loans were written off as bad, and they were not. However, this justified the supposed fact that WAMU was in serious trouble (more so than other banks).
Because these loans were not bad, these loans are going to be paid off. They go on the books as profit and further, given the way the government calculated capital, the poorer quality loan asset was turned into stream of income first tier capital.