Why JP Morgan Asked for a Fed Exemption

If JP Morgan Chase (JPM) was so confident that it will "remain well capitalized" in the wake of the Bear Stearns (BSC) acquisition, why did it go to the extraordinary length of asking the Fed to exempt it (or at least $400 billion of its newly-acquired assets) from perfectly normal capital-adequacy guidelines? I think maybe part of the answer comes today, with news that Washington Mutual (WM) is getting a $5 billion cash infusion from private equity firm TPG:

WaMu's latest plan would likely eliminate, at least for now, the potential that the thrift will be acquired by J.P. Morgan Chase & Co. or another large financial institution. J.P. Morgan executives have been poring over WaMu's books since March and made a preliminary offer, but discussions between the two firms ground to a halt last week, according to a person familiar with the situation.

Clearly talks between JPM and WaMu have been going on since before JPM was asked to gallop to Bear's rescue - and it would make sense that Jamie Dimon, who held all the aces in the Bear negotiation, would want to be able to have his cake (Bear Stearns) and eat it too (WaMu).

Still, I'm not a fan of this exemption. Probably the Fed had little choice but to grant it, and if you are going to make such exemptions, then the one time you could conceivably justify it is during a time of extreme market stress when you're busy trying to prevent a systemic meltdown. But when you're dealing with one of the three US commercial-banking behemoths (BofA, Citi, JPMC), the capital-adequacy requirements are crucial, because the moral hazard considerations are always front-and-center.

It's more or less inconceivable that the Fed would ever allow any of those institutions to default on their debt - which means that there's trillions of dollars' worth of obligations outstanding from those three banks alone which carry an implicit US government guarantee. In that situation, it makes sense for capital requirements to be policed much more stringently at JPMC than they are normally - rather than happily loosening them, as happened here.

Comments

[venividivici]

Is there any rule that Uncle Ben is not prepared to bend or break to maintain the credibility of the finaancial system?

[deefree]

Last 2 Fed Reserve CMBS for Treasuries indicate rising demand to dump paper for cash--at higher interest rates

Release Date: April 8, 2008
For release at 10:00 a.m. EDT

On April 7, 2008, the Federal Reserve conducted an auction of $50 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:

Stop-out rate: 2.820 percent

Total propositions submitted: $91.569 billion
Total propositions accepted: $50.000 billion
Bid/cover ratio: 1.83

Number of bidders: 79

Bids at the stop-out rate were prorated at 67.70% and resulting awards were rounded to the nearest $10,000 (except that all awards below $10,000 are rounded up to $10,000).

The awarded loans will settle on April 10, 2008, and will mature on May 8, 2008. The stop-out rate shown above will apply to all awarded loans.

Release Date: March 25, 2008
For release at 10:00 a.m. EDT

On March 24, 2008, the Federal Reserve conducted an auction of $50 billion in 28-day credit through its Term Auction Facility. Following are the results of the auction:

Stop-out rate: 2.615 percent

Total propositions submitted: $88.869 billion
Total propositions accepted: $50.000 billion
Bid/cover ratio: 1.78

Number of bidders: 88

Bids at the stop-out rate were prorated at 98.87% and resulting awards were rounded to the nearest $10,000 (except that all awards below $10,000 are rounded up to $10,000).

The awarded loans will settle on March 27, 2008, and will mature on April 24, 2008. The stop-out rate shown above will apply to all awarded loans.