Rafferty Capital Markets' Vice President Richard X. Bove considers the ramifications of John Paulson exiting from his position in JPMorgan Chase & Co. (NYSE:JPM). He examines JPMorgan's strategy of appeasement versus confrontation, eventually taking the position that by giving in to government 'bullying,' the company is doing nothing more than encouraging further attacks.
John Paulson exits JPMorgan
The Wall Street Journal is reporting that Paulson & Co. sold its WMI HOLDINGS (OTCMKTS:WMIH) bank bonds last week. The Journal Reports ”The giant hedge fund run by the billionaire John Paulson exited after JPMorgan Chase & Co. (NYSE:JPM), which bought the banking operations of Washington Mutual, filed the suit last week against the Federal Deposit Insurance Corp.”
The Paulson sales, if they occurred, are in keeping with the themes that I have been arguing for the past few years. The banking industry’s policy of appeasement, which included shoveling tons of stock holder money to anyone who brought a major lawsuit made/makes no sense.
JPMorgan needs to stop getting bullied by the government
How many times have parents told their children if you do not fight back against a bully, the bully will make your life miserable forever? Your kid knows this and Neville Chamberlain learned about it at Munich.
JPMorgan Chase & Co. (NYSE:JPM) never understood this rule. It tried to appease the government and others and inappropriately paid tens of billions in shareholder money in litigation. This did not stop the government from seeking more and more ways to attack the company. It is spawning thousands of lawsuits from the private sector.
JPMorgan and the FDIC suit
The only rational way to deal with the government is to fight back as hard as possible. JPMorgan Chase & Co. (NYSE:JPM) is starting along this path with the FDIC suit. It needs to file hundreds of lawsuits against those attacking the organization.
Faced with the need to defend lawsuits that can cost millions and last for 5 or more years it is very likely that many entities will take the “Paulson Option” and walk away.
They will run rather than fight. This will save investors tens of billions. Therefore, the FDIC action and the Paulson reaction is something that investors should consider. It is beneficial to JPMorgan Chase & Co. (NYSE:JPM) shareholders.