JPMorgan Chase & Co. (NYSE:JPM) chief executive Jamie Dimon has revealed that the company lost up to $10 billion on its 2008 acquisition of Bear Stearns. The firm has often been credited with expert navigation of the financial crisis, coming out with strong assets, including those from the failed investment bank.
In recent months, several members of Dimon’s so called “Operating Committee“, which led the company through the crisis and orchestrated the acquisition of Bear Stearns, have left the company. The firm was recently sued by New York State in a case about Mortgage Backed Securities. Those assets were held by Bear Stearns.
Dimon revealed the losses today at a Council on Foreign Affairs event. Dimon said that the losses incurred by JPMorgan Chase & Co. (NYSE:JPM) from the deal amounted to between $5 and $10 billion. The deal was put together by both JPMorgan and the Federal Government.
In March of 2008, when Wall Street and the government were desperately trying to prevent a catastrophe, a deal was made to allow JPMorgan Chase & Co. (NYSE:JPM) to acquire Bear Stearns. The New York Federal Reserve agreed to loan $30 billion to the investment bank in order for it to purchase Bear for $10 a share.
The losses mentioned by Jamie Dimon today, arose from legal costs, and write downs. JPMorgan has been involved in several law suits relating to assets held by Bear Stearns since their acquisition of the company, including the one filed recently by the NY Federal Reserve.
At the same time JPMorgan was issued with a $29 billion non-recourse loan by the NY Federal reserve. A non-recourse loan is structured so that in the event of default, the lender may only claim the collateral put up for the loan. This means the collateral offered is usually worth less than the value of the loan, and the loan is beneficial to the borrower.
Jimmy Dimon, who was approached by governing bodies in 2008 and asked to make the deal, no longer thinks that the deal was worth it. At today’s meeting, he suggested the deal was “unfair”. Reflecting on the time, he could not be certain whether or not he would make the same deal again today.
The loss of $10 billion is one that JPMorgan Chase & Co. (NYSE:JPM) can afford to absorb, but not one its shareholders will be happy with. Over the Summer, the company revealed multi-billion dollar losses from risky trades at its London office.
If JPMorgan refused to acquire Bear Stearns in 2008, it is impossible to know what the economy would look like now. If efforts by the New York Federal Reserve to find an alternative method of saving the company failed, there may have been a Lehman moment earlier in the crisis.
Those who write speculative fiction and alternate histories might find such a thought experiment fascinating, but it matters little now, and it is likely of any use to economists or analysts. JPMorgan Chase & Co. (NYSE:JPM) made the deal in 2008, and now the firm kind of regrets it.
There is time left for the assets held by Bear Stearns to come into their own and create a return for JPMorgan, despite the fact that a loss making asset is rarely held for such a long period of time. The billions lost by the company are sunk costs, not ongoing losses on the assets.
JPMorgan Chase & Co. (NYSE:JPM) is still performing well to date, despite the losses from the Bear Stearns acquisition. The company’s stock stands at $41.76 at the time of writing. In March of 2008, when the firm acquired Bear Stearns, stock reached a high of around $45.50.
