Analyzing Jamie Dimon's Bear Stearns "Favor" to the Fed

By Bob English

This Wednesday, an otherwise dull Q&A with Jamie Dimon at a Council on Foreign Relations event turned lively, if ever so briefly, when Justine Underhill, a Capital Account producer for the RT Network, asked the JP Morgan Chase CEO a few tough questions about the firm's 2008 Bear, Stearns & Co. acquisition.  

RT: You mentioned that companies make mistakes, and now that there's a lawsuit related to Bear Stearns for fraud, do you regret participating with the Federal Reserve to buy Bear Stearns in 2008? 

[audience laughter] 

Dimon: We didn't participate with the Federal Reserve, okay... 

RT: And, did you miss something when you told investors that Bear Stearns, the acquisition, would not be material? 

Dimon: I'm not sure I ever said that.  So, we were asked to buy Bear Stearns.  Some have said the Fed did us a favor to finance some of it.  No, no, we did them a favor.  Let's get this one exactly right.  We were asked to do it.  We did it at great risk to ourselves, and we had the capability, capital and people to do extensive due diligence.

The full exchange between Mr. Dimon and Ms. Underhill appears here, along with a bonus MF Global-inspired question,which, alas, went unanswered as Dimon dipped into his limousine.





As to the question of the materiality, Chris Whalen recently wrote:

A couple of years ago, JPMorgan Chase CEO Jamie Dimon told investors that the acquisition of Bear, Stearns & Co. would not be material to investors.  In the years that have followed, a tiny group of analysts and managers have watched as the Bear Stearns transaction has festered into a festival of fraud.  But most supposed Sell Side analysts and Buy Side investors who pretend to follow financials still don’t seem to get the joke.

We'll take the esteemed bank analyst at his word on this, and move on to Mr. Dimon's Fed statement.  Did JP Morgan "participate" with the Fed in the acquisition of Bear Stearns?  Here are the indisputable facts.

Courtesy data aggregated by Bloomberg, we can see just how much financing JP Morgan took from the Fed from the announcement of the takeover on March 17, 2008 to the launch of the primarily Fed-financed Maiden Lane facility in late June, 2008, which was to wind down approximately $30 billion of Bear's "less liquid assets."

Though future post-Lehman borrowing would dwarf the Bear Stearns acquisition period (see the red box, above), JP Morgan's Fed borrowing would peak at $14 billion in early May, 2008.  Just what exactly was it doing with this money?  It would seem the Fed was at least backhandedly financing the Bear takeover with temporary liquidity, primarily through its Term Securities Lending Facility.  We would call that participation.

The New York Fed-created special purpose vehicle, Maiden Lane herself, was financed with a $28.82 billion loan from the New York Fed along with a $1.15 billion loan from JP Morgan, and the latter was first in line to absorb any losses from the toxic Bear Stearns portfolio (which included the Red Roof Inn).  It would behoove Mr. Dimon to take measures to prevent such losses.  As it happened, the House of Morgan was repaid in full:

Not only did Mr. Dimon recoup the $1.15 billion loan plus interest, he was so fond of the portfolio that he would end up the second largest buyer of Maiden Lane assets during its final wind down earlier this year:

Just how did Maiden Lane become profitable?  As we first wrote in June, 2010, Maiden Lane's Fed-appointed investment manager, BlackRock Financial Management, Inc., would aggressively trade the government-backed agency mortgage backed securities (MBS) portion of the portfolio ($10.1 billion of the initial $30.0 billion).  Any profits would be reinvested in investment grade securities, including additional agency MBS.  Conveniently, BlackRock was also trading on behalf of the Fed as part of the $1.25 trillion in QE1 MBS purchases.  Anyone FOIA-minded might make a request to the New York Fed for detailed CUSIP holdings of the initial portfolio (detailed holdings snapshots would be published beginning in 2010).

How did BlackRock get the job?  According to an internal New York Fed email (original here) turned over to Congress at the behest of Daryl Issa, it was a no-bid "sole source" contract award (emphasis and brackets ours):

To Sarah Dahlgren/NY/FRS@FRS 

Re: Sole Source

Spent some time with him [Tom Baxter, Jr., FRBNY GC] tonight. (He doesn't understand ML3, and I can't begin explain it either -- so don't needle him! -- and I am going to have [Paul] Whynott [FRBNY VP] spend some time with him tomorrow, BTW, you might touch base with Joyce [Hansen, FRBNY Deputy GC] about her reaction to Sunday's briefing; I think she had some concerns about how ML3 was presented to Geithner, which she expressed to Paul.) [Geithner] knew that Stephanie [Heller, FRBNY Asst. GC] was handling the Blackrock contract -- he didn't express any concerns -- and I explained that, in contrast to MLI, we had a clear reason to sole source it this time (that they had already modeled, etc.). So, although I have no worries, yes, probably worth reviewing it with him [Geithner] before taking it to Tom."

There appeared to be some consternation at the highest levels of the New York Fed over the sole source award to BlackRock.  Yet, years later, the New York Fed would tell the Government Accountability Office (as part of the mini-Fed audit) that there had been no sole source contract awards to BlackRock, which was confirmed in an email to us:

Why do we harp on this?  Because the $108 million BlackRock contract to trade Maiden Lane was large enough that, had it been designated sole source, it would have to have been approved by the New York Fed's board of directors...which includes Mr. Jamie Dimon.

Wouldn't it have been embarrassing to have to disclose that Mr. Dimon voted to approve a dubious no-bid contract to BlackRock to trade the very portfolio of Bear Stearns assets that his firm, JP Morgan, was first in line to absorb any losses?  Or that there was no reason in particular to select BlackRock for this task (except perhaps that it was already separately trading part of the Fed's QE1 MBS portfolio)?

Better for the New York Fed to throw away the file and lie to the GAO (allegedly).

At least we settled the participate question.  Thank you Capital Account.