- Reuters
The $13 billion preliminary agreement is over mortgage securities, many of which were underwritten and securitized by those two banks before J.P. Morgan acquired them. J.P. Morgan is now on the hook for the potential legal issues of the assumed banks.
The two deals, struck in the midst of the financial crisis, form much of the basis of
Jamie Dimon‘s legend on Wall Street. While many peers were struggling under bad loans and a mortgage crisis, Mr. Dimon and J.P. Morgan had the confidence and balance sheet to buy up two failing rivals. The purchases helped spur an aggressive expansion at J.P. Morgan as it became the nation’s biggest bank by assets and deposits.
But facing a $13 billion black eye and recording the first quarterly loss in Mr. Dimon’s tenure, do the deals still look good? MoneyBeat went to the numbers.
The upfront costs: $3.4 billion
Bear Stearns: $1.5 billion – Though J.P. Morgan first agreed to buy Bear at the stunning price of $2 a share, it was forced to up the bid to over $10 a share in the face of shareholder rebellion. The stock deal ultimately cost around $1.5 billion.
That was viewed as a steal by most. Bear Stearns had a book value of $84 a share just before it failed and its CEO
Alan Schwartz told people he felt he had been “mugged” by his rival.
Bloomberg News said the value of Bear’s brand new skyscraper, across the street from J.P. Morgan in midtown Manhattan, was worth $1.2 billion alone.
Washington Mutual: $1.9 billion – J.P. Morgan had attempted to buy WaMu in April 2008, WSJ had reported, offering up to $8 a share, which would have valued the thrift at about $9 billion. WaMu rejected that for a capital injection of about $7 billion from private-equity firm TPG. Instead, J.P. Morgan got it for the low price of $1.9 billion as the FDIC seized control.
By comparison, Wells Fargo a week later paid $15.4 billion for Wachovia without any government assistance.
Legal – About $19 billion
J.P. Morgan said a large portion of its $23 billion legal reserves is for mortgage-backed securities litigations, which would include the $13 billion settlement. The bank said 80% of its liabilities to mortgage-backed securities is from either Bear Stearns or Washington Mutual.
Meanwhile, J.P. Morgan has announced another $6 billion in legal settlements and fines that can loosely be traced back to either Bear or WaMu.
For instance, J.P. Morgan was responsible for $5.3 billion of 2012′s $25 billion nationwide foreclosure settlement. As part of that $5.3 billion, the bank spent more than $3 billion in borrower assistance in California and Florida, two markets it had little presence in before WaMu.
And year ago, the bank reached a $297 million settlement with the SEC over mortgage-backed securities it said were mostly created by Bear Stearns.
Meanwhile, this year’s $410 million settlement with FERC, or the Federal Energy Regulatory Commission, over alleged manipulation of energy prices, came from a commodities-trading business that had been largely built on the back of Bear’s operations.
Writedowns
In the years after buying WaMu and Bear, J.P. Morgan was forced to writedown billions in loans that it no longer expected to collect on, charges that sap its bottom line. In total since the start of 2008, the bank has taken more than $80 billion in total loan-loss provisions, money it puts aside for soured loans. More than $46 billion of that has come from the retail operations, and much of the pain was from soured loans at WaMu, which the bank had to clean up. Every bank in the county was marking down loans of every type during the financial crisis.
Business growth:
J.P. Morgan’s reach has expanded dramatically since 2008, helping the bank and its investors stomach the charges. The benefits of the two deals to J.P. Morgan can most clearly be seen in its bulging investment bank and retail operations.
Investment bank – The bulk of Bear Stearns was added to J.P. Morgan’s investment banking arm, including Bear’s lucrative prime brokerage unit, which helped boost J.P. Morgan’s assets under management. Since 2008, J.P. Morgan’s investment bank has grown in size and stature, ranking either No. 1 or No. 2 in the league tables across the globe in every meaningful category, where it used to largely only top the debt rankings.
In terms of money the investment bank manages for top clients, the average daily assets the investment bank held in the quarter before Bear Stearns were $755.8 billion. In the first full quarter that included Bear, that figure leapt 18% to $890 billion, a level it has never gotten back to.
Revenue and profit have surged ever since. In the quarter before owning Bear, J.P. Morgan’s investment bank generated $3 billion in revenue and posted a net loss of $87 million. The first full quarter it owned Bear, it earned $4 billion in revenue and $882 million in profits. In the completed third quarter, the investment bank had $8.2 billion in revenue and $2.2 billion in profits.
Retail – Mr. Dimon had been hot to get a toehold in Florida and California, telling investors the year before that, “Believe me, we would love to be much bigger in Florida and we’ll find some way to do it. You will see us there.” WaMu was that way: the bank now has the third most deposits in California and fifth most in Florida, according to FDIC data.
In the third quarter of 2008, J.P. Morgan’s retail operations had a daily average of $222.2 billion in deposits and 3,157 branches. After adding WaMu it had $358.5 billion in deposits and 5,474 branches. Today it has $457 billion in deposits and 5,652 branches.
Before owning WaMu, J.P. Morgan’s retail arm earned $247 million in the 2008 third quarter profits. In the quarter it first added WaMu it earned $624 million. It earned $2.7 billion in the just-reported third quarter.
In sum, the bank has paid in treasure and in reputation since acquiring these two banks, and the flood of legal issues has only intensified the magnifying glass on the nation’s biggest bank. But it wouldn’t have been in the position to become the nation’s largest bank without those deals. Mr. Dimon is likely to see new calls for him to lose one of his titles of Chairman and CEO, but the deals that made him the toast of Wall Street won’t be his undoing.
