New York State Attorney General Eric Schneiderman’s fraud lawsuit against JPMorgan Chase & Co. for the misdeeds that occurred at Bear Stearns Cos. has sent exactly the wrong message to Wall Street: Don’t worry, you can get away with seemingly criminal behavior.
And yet JPMorgan -- the bank that bought the stock of Bear Stearns in March 2008 with a $30 billion assist from the U.S. government -- is offended. The suit alleges that Bear Stearns’s bankers and traders manufactured and sold about $20 billion of mortgage-backed securities containing home loans they knew were fraudulent. What JPMorgan objects to is that the government asked it to buy Bear Stearns “over the course of a weekend” to help keep the financial system from collapsing, and now, more than four years later, it has the temerity to sue.
I can imagine Jamie Dimon, JPMorgan (JPM)’s chief executive officer, saying: If this is the thanks we get, you can pretty much be assured that next time you ask us to save a failing systemically important institution, we’ll just walk away.
Methinks the bank doth protest too much. JPMorgan didn’t buy Bear Stearns as a favor to Treasury Secretary Henry Paulson, New York Fed President Timothy Geithner and Federal Reserve Chairman Ben Bernanke; it bought Bear Stearns because it saw an opportunity to acquire on the cheap a company with assets it coveted. JPMorgan admired Bear Stearns’s clearing business, its commodities trading, a few of its bankers and traders and, most of all, its sleek, new skyscraper at 383 Madison Avenue, across the street from JPMorgan headquarters at 270 Park Avenue.
Pretty much from the start of that fateful weekend in March, JPMorgan knew that there was no serious competition for Bear Stearns. And that wasn’t because the government had handpicked Dimon to save the company. Dimon’s first offer was $8 to $12 a share, a two-thirds discount to Bear Stearns’s closing price of about $30 a share that Friday. Bear Stearns’s management was incredulous that Dimon would make such a low offer. So the JPMorgan CEO lowered it even further. Then, on Sunday morning, Dimon’s representatives told Bear Stearns’s executives that he was walking away from the deal altogether.
That’s when panic erupted and Paulson, working behind the scenes, got Dimon to agree to buy Bear Stearns for $2 a share if the government took $30 billion of squirrelly assets that JPMorgan didn’t want. The $2-a-share deal was announced Sunday night. Dimon had paid less for the equity of Bear Stearns than the market value of the building at 383 Madison. JPMorgan soon scrapped plans to erect a new building downtown for its investment-banking operations, which were moved instead across the street to the former Bear Stearns digs. (The purchase price for Bear Stearns was later increased to $10 a share supposedly because of a legal drafting error; who precisely was to blame for that mess or how it happened has never been made clear.)
In doing a stock-for-stock deal for Bear Stearns, JPMorgan not only bought all of the bank’s assets -- except for the $30 billion taken by the New York Fed -- but it also took over its liabilities, including its debt and its lawsuits, both the known ones and those to come. JPMorgan knew that it would be held responsible for the bad behavior that led Bear Stearns to the brink of disaster and viewed that potential liability as just another cost of the deal. (Bank of America Corp. faced the same predicament -- only much worse -- in its acquisitions of Countrywide Financial Corp. and Merrill Lynch & Co.)
For JPMorgan to complain about Schneiderman’s suit, even though this was one of the risks it agreed to take in the March 2008 merger agreement with Bear Stearns, is beyond ridiculous; it’s simply spin.
That isn’t the worst of it. What makes Schneiderman’s suit against JPMorgan a total yawner on Wall Street is that the attorney general failed to bring criminal charges against JPMorgan for the doings at Bear Stearns. How Schneiderman could let the bank off so easily when the complaint itself claims that Bear Stearns “committed multiple fraudulent and deceptive acts in promoting and selling its” mortgage-backed securities is an utter mystery. If those aren’t criminal offenses under securities law, could someone please tell me what is?
The complaint describes repeated bad behavior at Bear Stearns, including a now-infamous e-mail that describes one securitization deal in the most vulgar of scatological terms. Those e-mails alone make clear that Bear Stearns executives knew that they were packaging and selling a load of junk to investors.
It’s also clear that after March 15, 2008, JPMorgan knew it would be legally responsible for that bad behavior. The lawsuit will probably be settled shortly -- I would guess for about $100 million -- and Schneiderman will no doubt sue other Wall Street firms for similar reasons. He will extract fines out of them, too, and fill New York state’s coffers.
Yet he missed a chance to change the behavior on Wall Street by his decision not to make the criminal case against Bear Stearns and its owner, JPMorgan. A $100 million fine? That’s a joke for JPMorgan and an unneeded cost for the bank’s shareholders and its insurance carrier. Bear Stearns was picked up for a song, in what still ranks as one of the savviest business deals of the past decade. Schneiderman blew it.
(William D. Cohan, the author of “Money and Power: How Goldman Sachs Came to Rule the World,” is a Bloomberg View columnist. He was formerly an investment banker at Lazard Freres, Merrill Lynch and JPMorgan Chase, against which he lost an arbitration case over his dismissal. His sister-in-law, Ellen Futter, is on JPMorgan Chase’s board of directors. The opinions expressed are his own.)
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