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By Root 862 0

security (at 3.3 percent, this is less than the margin the Fed proposed for its lending program). However, if the price of the assets declined, JPMorgan Chase could walk away. Were the assets already overvalued? Who knows? As Dimon himself said: “Buying a house is not the same thing as buying a house on fire.”5253 The Fed did not provide the necessary transparency for anyone on the outside to offer an independent opinion. JPMorgan Chase may have paid $1 billion for the right to put potentially overvalued and deteriorating assets to the Fed. Within three months the Fed admitted that if it used market prices, JPMorgan Chase’s $1 billion would be history and the Fed itself had a loss.54

The deal temporarily went sideways after JPMorgan Chase discovered it had inadvertently given away a valuable option for free. Buried in the 74-page agreement brokered and partially financed by the Fed was a clause putting JPMorgan on the hook to finance Bear Stearns’s trades for a year, whether or not shareholders accepted the deal. In the end, JPMorgan Chase increased its bid from $2 per share to $10 per share (or $2.2 billion—not counting the $1 billion at risk that JPMorgan put up as collateral to the Fed) and the shareholders approved the deal. By the end of May 2008, Bear Stearns was no more.5556

Was the bailout necessary? It is convenient that supporters cannot prove their case, and I cannot prove mine, either. But I can hypothesize. If Bear Stearns failed, the banking system could have bid on Bear Stearns’s derivatives books just as it did when Drexel went under. The system may have purchased cheaper assets if Bear Stearns had gone bankrupt. While temporarily painful, once the system trusted each other’s prices, easier trading might have resumed. I am much more worried about the inflationary consequences of the balooning bailouts.

Was the purchase of Bear Stearns a good idea for JPMorgan Chase? The rushed weekend purchase of a highly leveraged company led to a costly mistake and is the same thing as buying a bag of mystery meat. JPMorgan Chase looked in the bag, and it is still trying to figure out what it is. It seems to me that JPMorgan Chase overpaid, and Jamie Dimon seemed a bit testy afterwards. When Vikram Pandit, Citigroup’s CEO, asked a question about long-term guarantees during a conference call, Jamie said:“Stop being such a jerk.”57 This is when I first realized that Jamie and I graduated from the same charm school.

When Dimon testified before Congress, he might have used more balanced candor about Bear Stearns. Specifically, it might have been better for the financial system to let Bear Stearns fail. Within two months JPMorgan revised its estimates of merger-related costs 50 percent upward to $9 billion. Richard “Dick” Bove of Laden Burg Thalmann & Co. said that Bear Stearns would not add to JPMorgan’s profits and Bear “should have gone bankrupt,” noting it has a nice office building in Manhattan—”big deal.”58

On June 16, 2008, JPMorgan stated that Bear Stearns is worth more than the $10 per share it paid.59 But financial firms can trade at single digits during recessions. Salomon Brothers had a saying: “Our assets ride down the elevator at night,” meaning the people that generate the fees, make the trades, and attract the customers. Bear Stearns lost customers (in addition to employees). Given the opacity of investment banking products, there is no reason to accept JPMorgan’s claim at face value. Suppose it were true that Bear Stearns was worth more than $10 per share (and I can fly).That is all the more reason the Fed should not bail out an investment bank. In bankruptcy, everyone has a chance to bid on the assets and the net result may net shareholders more.

If, however, Bear Stearns’ stock was worth zero, it still doesn’t make sense to bail it out. Bear Stearns would go into bankruptcy and JPMorgan Chase could have cherry picked the assets and paid less. If Dimon were after Bear Stearns’ employees, they would have been ripe for hire.

I find my theories more plausible than the Apocalypse Now story the Fed told