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The Heist

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But here’s the most important thing. Despite its problems, the bank remains on solid financial footing. While many of his peers have gone hat in hand to so-called sovereign funds in places like Dubai and China, Dimon hasn’t needed to raise a dime. “Not having to raise capital from foreign investors says a lot about them at this particular juncture,” says Richard Bove, an analyst at Punk, Ziegel & Company. More to the point: In contrast to the chatter about Citigroup, no one is talking about breaking up JPMorgan Chase. While the cross-selling synergies have proved more elusive than originally anticipated, one clear benefit of a financial conglomerate is the sheer size of its balance sheet—JP Morgan has $1.56 trillion in assets, the kind of heft that allows it to absorb, say, an imploding investment bank with only a couple of days’ notice.

When Bernanke was looking for a financial company with the wherewithal to take over Bear Stearns, there really wasn’t much of a choice. “If not us, I don’t know who else,” Dimon stated matter-of-factly.

While Bear Stearns was, until recently, the fifth-largest pure investment bank, it was relatively small fry among the giants of the financial sector, as well as something of a self-styled outsider outfit. Bear didn’t aspire to the august reputations of Morgan Stanley or Goldman Sachs. They were, by and large, traders, and they suffered from the same credit-market problems that everybody else did. The difference was the fear that began to spread on the Street that the firm was undercapitalized, a situation in which perceptions quickly solidify into reality. Major clients began to pull their accounts, threatening a collapse of the firm.

The rescue mission began on Friday, March 14, when the Federal Reserve and JPMorgan agreed to provide emergency funding to Bear. Dimon had one very good reason to get involved—JPMorgan stood to lose millions itself if Bear went belly-up. But the Fed’s announcement failed to stop Bear’s stock from plummeting as more business partners ran for the exits. Bankruptcy loomed as a frighteningly real possibility. A more intensive bailout appeared necessary, and JPMorgan started quizzing Bear executives and studying their books to assess what they had. Given the state of the credit market, it was hard to place a value on many of the securities. On such a tight time frame, JPMorgan could only guess. The numbers batted around Saturday night were reportedly considerably greater than the $2-a-share figure, but no agreement was at hand, and when JPMorgan executives woke up Sunday, they were determined to go lower. The Fed, too, reportedly pushed for a lower price, to ensure that Bear shareholders, not the government nor JPMorgan’s shareholders, bore the brunt of the losses. That was the Fed’s way of averting the moral hazard of bailing out reckless bankers. Dimon’s inner circle—CFO Mike Cavanagh, investment-banking co-heads Bill Winters and Steve Black, and general counsel Stephen Cutler—put the screws to Bear Stearns’ negotiating team, which reportedly included chairman James Cayne. “It was clearly not the easiest transaction,” says Dimon. “And until the boards voted, there was no deal at all.”

In the end, $2 a share amounted to a token payment. So if that’s the level they were operating at, I asked Dimon, why not $1 a share? “There were a lot of factors involved,” he said cryptically.

The attractions for Dimon were obvious. The Fed has guaranteed some $30 billion of Bear’s less-liquid assets, leaving JPMorgan free to feast on the attractive ones, such as the firm’s prime-brokerage desk (which provides trading and other services to hedge funds), a business that JPMorgan barely competes in. Bank of America is reportedly shopping its own prime-brokerage business for $1 billion. Dimon got Bear Stearns’—the third largest in the industry—for less than a quarter of that, and that’s if you ignore the rest of the business entirely. I ask him what else he likes about the acquisition. “Their securities-clearing operations are excellent,” he said, and went on to mention Bear’s equities and commodities businesses. As if that’s not enough of a haul, Dimon added, “They also have a great building.”

The deal is not yet settled. Bear Stearns employees and shareholders have mutinied against it. Last Wednesday, Dimon and his team tried to present a compassionate face at a meeting with more than 400 outraged Bear Stearns executives. “I don’t think Bear did anything to deserve this,” he said. “Our hearts go out to you.” The crowd refused to be mollified by his remarks. Many in the room had surely lost the bulk of their life savings, but the irony is hard to ignore: Investment bankers, whose actions regularly force drastic cost-cutting and job loss on companies across the world, were reeling from a taste of their own medicine. “You’re acting like it’s our fault, and it’s not,” Dimon argued when one forlorn banker suggested, ridiculously, that JPMorgan should compensate Bear Stearns employees for their losses.


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