There are many who see the large banks (Goldman Sachs, JP Morgan Chase) and quasi-government agencies (FDIC, OTS, Federal Reserve Bank of New York) as an operating cartel within our country. There has always been a wary eye towards the relationship between these institutions and their secrecy but the events of 2008 shed light on not only the cronyism that creates a network of insiders (creating obvious conflicts of interest), the light revealed favoritism and what some would say was outright collusion between the organizations to ensure that selected bankers remained in business.
That introductory is quite damning and statements such as those had better be backed with deductive and logical evidence. To that point I will say this; “It’s best to see who benefited from the hidden and secretive decisions of the Fed, the FDIC and the OTS and back track…”
In March, 2008, JP Morgan Chase, in conjunction with the Federal Reserve Bank of New York, agreed to provide a (up to) 28-day emergency loan to Bear Stearns in order to prevent the potential market crash that would result from Bear Stearns becoming insolvent. Despite, or because of, this, belief in Bear's ability to repay its obligations rapidly diminished among counterparties and traders. Seeing that the terms of the emergency loan was not enough to bolster Bear Stearns, and worried that a still-floundering Bear would result in systemic losses if allowed to open in the markets on the following Monday, Federal Reserve Chairman Ben Bernake and Treasury Secretary Henry Paulson Jr. told CEO Alan Schwartz that he had to sell the firm over the weekend, in time for the opening of the Asian market. Two days later, on March 16, 2008, Bear Stearns signed a merger agreement with JP Morgan Chase in a stock swap worth $2 a share or less than 10 percent of Bear Stearns' market value just two days before. This sale price represented a staggering loss as its stock had traded at $172 a share as late as January 2007 and $93 a share as late as February 2008. In addition, the Federal Reserve agreed to issue a non-recourse loan of $29 billion to JP Morgan Chase, thereby assuming the risk of Bear Stearns's less liquid assets.
The Fed, Bear Stearns and JPM deal netted JP Morgan Chase all of the assets of Bear Stearns and an additional $29 Billion in a non-recourse loan (meaning that the lender, the Fed, would take the loss if the collateral wasn’t good). I brought up the Bear Stearns deal to show deductive evidence that Mr. Paulson was heavy handed in his approach to this deal which is a direct conflict of interest because Bear Stearns was the major competitor of Goldman Sachs which Mr. Paulson was once CEO. In addition, the Fed will not allow itself to be audited so we’ll never know if JP Morgan took on a loss or passed the loss to the Fed (or taxpayer).
The Bear Stearns deal was only the start of what proves to be phenomenal positioning by JP Morgan to rid itself of bad debt/collateral with (once competitive) banks while, in turn, gaining their assets, the next to fall to JPM was Lehman Brothers. True, JPM did not buy Lehman’s but allow me to assign benefit to JP Morgan.
Deal of the Century
Simply put, the Lehman Brothers deal with Barclays was the deal of the century for JP Morgan. The events that lead up to the deal are astounding when one considers the other institutions that were in trouble (AIG) and how they were being handled by Mr. Paulson and Mr. Bernanke. Why was Lehman Brothers treated differently? Could be and it’s true that JP Morgan was Lehman's bank. For the benefit of JPM, Lehman’s could not be saved by TARP nor could it be allowed to go into traditional bankruptcy as any of these options exposed JP Morgan to a possible loss of $69 Billion. TARP or a liquidated bankruptcy would place JP Morgan as a creditor along with everyone else - there are 69 billion reasons why this could not happen.
The only option that would benefit JP Morgan was to somehow package up the bad collateral that existed between Lehman’s Financial Services division and JP Morgan and pass it onto a buyer. While it’s true the Lehman’s did file for Bankruptcy, it was only for one day, and then sold to Barclays in a deal that closed five days later. What many in the public don’t know is that along with the deal being brokered at the Fed, JP Morgan was allowed to package bad collateral in the deal. In fact the deal almost didn’t go through because JP Morgan felt slighted in that it wasn’t allowed to package even more bad collateral. There is a great article on the Lehman/JP Morgan on the internet – link: http://www.esquire.com/features/barclays-deal-of-the-century-1009, so I will not go into great detail but suffice it to say that JP Morgan having been greatly exposed by the failure of Lehman’s came out on top – passing off untold amounts of bad collateral while removing an exposure to a 69 Billion dollar loan. And we shouldn’t forget the claim that JP Morgan actually contributed to making Lehman’s insolvent by withholding $17 Billion in deposits.
Between March and September of 2008, JP Morgan accomplished the impossible - benefitting repeatedly and handsomely from the financial crisis. Three major financial institutions failed, two of which should have had a ripple effect to the very core of JP Morgan – yet JPM came out smelling like a rose, packaging and removing billions in bad debt/collateral and gaining nearly $550 billion in assets - prompting record percentage gains for the second and third quarter of 09 and with the purchase of WaMu, JPM gained a solid footprint into the West Coast banking system.
Gift from the FDIC
JP Morgan’s luck continues with a gift from the FDIC. Thus far, JP Morgan has ballet its way through the carcasses of banks all over Wall Street.
Every financial institution was hit and hit hard by the crisis of 2008 (except two well connected banks, GS and JPM), but just as the Troubled Asset Relief Program (TARP) is about to be passed – Washington Mutual Bank and its sub (Washington Mutual Bank fsb) was closed by the Office of Thrift Supervision, named the FDIC as receiver for the 100 year old institution, and then sold assets of $307 billion and total deposits of $188 billion to JPM for the conspicuously lowball price tag of $1.88 billion.
Deductive evidence or at a minimum logical evidence in the form of abductive reasoning* indicates cronyism and possible coercion/collusion for and to the benefit of JP Morgan. It’s widely known that the ‘boys of high finance’ float in and out of CEO positions and Federal Reserve positions (in fact James Dimon is the CEO of JP Morgan and sits on the Board of Directors of the New York Federal Reserve Bank) but no one seems to point out this obvious conflict of interest.
Recent revelations tend to indicate that the case of Washington Mutual, Inc. may be more than just a tragic case of a failed banking icon.
For instance, it was recently revealed that former Treasury Secretary Hank Paulson admitted to New York Attorney General Andrew Cuomo that he coerced CEO Ken Lewis by threat of ouster if Bank of America invoked a Material Adverse Change (MAC) clause to block the acquisition of troubled Merril Lynch. Paulson also added, however, that he made this threat at the request of Fed Chairman Ben Bernanke. In addition, it is suggested that such action by the Fed and Treasury amount to coercing CEO Ken Lewis to withhold disclosure of materially significant information from shareholders regarding the deal. Source: Wall Street Journal.
As a further example, documents recently released as part of a Judicial Watch Freedom of Information Act request details further coercion by the government regarding TARP funds distribution. "If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance," Paulson's one-page list of talking points for a meeting with nine U.S. banks' chief executives said. "We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed." Accompanying Paulson were Federal Reserve Chairman Ben Bernanke, Federal Deposit Insurance Corporation Chairman Sheila Bair and New York Federal Reserve Bank President Timothy Geithner (now current Treasury Secretary). Three and a half hours after the meeting was scheduled to begin, Paulson had obtained the bankers’ signatures on half-page forms along with the handwritten amount of the federal government’s investment, according to the documents. Source: Bloomberg.
“…you should have sold to JP Morgan Chase…”
Two months before Washington Mutual was seized, Treasury Secretary Henry Paulson warned then-CEO Kerry Killinger, "you should have sold to JP Morgan Chase in the spring, and you should do so now. Things could get a lot more difficult for you." Source: Seattle Times
In July of 2008, two months before the seizure Washington Mutual, Inc. was denied protection from illegal short-selling by the SECs naked short-sale ban that protected 19 financial institutions (eight of which were at Paulson's TARP meeting). Data through June 2008 shows that at one point that month "failures to deliver" (an indicator of illegal or naked short-selling) of Washington Mutual’s stock reached 9 million shares. From June 5 to June 19 there were, on any given day, at least 1 million WaMu shares that had "failed to deliver."
According to the OTS fact sheet released after the seizure, Washington Mutual was considered to meet OTS capitalization requirements and was in fact a solvent bank. In forward looking third quarter forecasts to the media, CEO Alan Fishman related that Washington Mutual, Inc. had access to over $50 billion in capital and enough liquidity to meet fixed obligations through 2010. According to some reports, the OTS seized Washington Mutual at the behest of the FDIC. The subsequent sale to JP Morgan Chase & Co. was conducted hastily on a Thursday evening, in a highly irregular auction that typically is designed to take place 180 to 360 days after seizure. The price paid was $1.88 Billion for a company with over $300 Billion in assets, over $20 Billion in book value, and over 2200 branches.
While all these revelations can suggest that Washington Mutual, Inc. was not a failed institution, and they can support speculation that Washington Mutual was improperly seized, recent court filings in Federal District Court in Texas and U.S. Bankruptcy Court in Delaware suggest something more sinister.
For example, the filing in U.S. Bankruptcy Court in Delaware, referring to a Texas State Court action - it is alleged that wrongful conduct of JP Morgan Chase & Co. includes:
(i) entering into false negotiations with the Washington Mutual, Inc. under the guise of a good-faith bidder during the summer of 2008;
(ii) gaining access to Washington Mutual's confidential and proprietary information through a variety of deceptive practices; and
(iii) disclosing Washington Mutual's confidential information as well as false information to the media and investors in an effort to drive down WMI's credit rating and stock price, cause depositors to withdraw deposits as a result of fear, and hamper efforts of Washington Mutual, Inc. to find a purchaser for itself.
The filing suggests that additional claims that could arise in the bankruptcy proceeding might include, without limitation, unfair competition, tortious interference, interference with prospective economic advantage, breach of contract, misappropriation of confidential information and trade secrets, and conversion. The filing further suggest that by way of these claims, JPMC may be held responsible for the destruction of Washington Mutual, Inc. and the total losses suffered by its creditors and shareholders.
In addition, the underlying Texas action alleges that JP Morgan Chase & Co. used plants or moles (e.g., the Rotella allegations) inside of Washington Mutual, Inc. for the purposes of gaining insider information and exploiting that information for economic gain. Recent news reports have stated that in 2005, a small group of senior risk managers drew up a plan to limit risky lending practices, but a new executive team at the bank nixed the plan. Thus, it is conceivable that if the allegations of insider plants are true, these same plants could have knowingly undertaken or encouraged risky or fraudulent lending practices in an effort to destroy Washington Mutual's reputation and shareholder value.
Under Federal Rule of Civil Procedure 11(b), the above-identified filings are subject to the requirement of certification "that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances . . . ." Thus, whereas previous revelations in the news or government papers regarding Washington Mutual's situation might command a relatively lower level of trust, the allegations in the above-identified filings demand the additional respect that the Federal Rules of Civil Procedure are designed to command.
For JPM, Timing is Everything
I’m of the opinion that JP Morgan was highly ‘ticked’ at WMI’s refusal to accept the $8.00 a share offer in April of 2008. WMI/WaMu instead announced a $7 billion infusion of new capital by new outside investors led by TPG Capital. WMI’s refusal placed WaMu in the cross-hairs of a well connected enemy in JPM and JPM still wanted and even needed those assets. The window to seize WaMu was quickly closing in September of 08, even though WaMu had a "base deposit withdrawl" of 16 Billion, it was announced by Alan Fishman (in June) that WaMu had 50 Billion available with the Discount Window at the Fed and everyone knew that TARP was just around the corner.
Basically, if there was to be a seizure of WaMu that benefitted JPM it had to happen that fourth week of September and it had to happen quickly – and you’ve likely already guessed – that’s exactly what happened.
WMI nor WaMu never received a letter from the OTS to raise additional capital, in fact the OTS, even when placing WaMu into the hands of the FDIC, even stated that WaMu was well capitalized but stated that WaMu was “systemically risky” and that’s why it was placed into receivership. Also, there was a Memorandum of Understanding (MOU) active and in-place between WMI and the OTS.
Worth pointing out again - the OTS said WaMu was "systemically risky" while Mr. Paulson did not add WaMu to the "Do Not Short List" which included 19 instituions Mr. Paulson considered "systemically important" - Which was it? Was WaMu systemically important or not? Within the tiniest of timeframes - the Office of Thrift Supervision, named the FDIC as receiver for the 100 year old institution, and then sold assets of $307 billion and total deposits of $188 billion to JPM within hours for 1.888 Billion. It’s absolutely amazing the timing behind the receivership and it’s even more amazing the ability of JPM to be right there, ready with slides and research - ready to make an offer that conformed to the FDIC’s requirements.
Even more amazing than the receivership's timing was JPM's incredible fortune-to be at the ready with bid in hand. JPM managed to navigate the moral hazard involved in participation in a limited auction and low-ball bid for a coveted rival with nary a whisper of populist rage is either a testament to the chaos of the period or the desensitived nature of the common citizen and all of this was done within hours...
To be clear, if the OTS had attempted to close WaMu a week earlier (and the OTS would've notified WMI of the need to raise additional capital) - WMI would have been able to obtain additional funds through TPG or the Discount Window. And if the OTS waited just a couple of days, WaMu would have been able to access TARP if needed. When I say the tiniest of windows - I mean there was less than a 72 hour window for WaMu to be sold to JP Morgan without WaMu being able to put up a fight and 'in' the necessary enviornment where other banks could not bid. WaMu was blind sided for the benefit of JP Morgan.
"The 16 Billion Dollar Bank Run"
There has yet to be a clear definition of “bank run”. While many in media (notably CNBC) damaged WaMu with reports of a 16 Billion dollar bank run, no one seems to put that statement or those numbers into context – 16 Billion of the 300 Billion deposit base is equivalent to 5%. Is 5% a bank run? Or is the term ‘bank run’ just an ill- coined and oft misused term in the media to incite fear and make stories news worthy. In addition, CNBC mistakenly reported a bank run/closwure at WaMu branches that became a self-fulfilling prophecy. CNBC's mistaken reporting may have actually started the 'bank run'. At any rate, 5% or 16 Billion is small when compared to the entire removal of private and corporate deposits during the summer of 08 – by most accounts, some $550 Billion moved in the market during that time frame. Finally, while the media favored the term ‘bank run’, the regulatory organizations “FDIC/OTS” downplayed that phrase and used variations of “systemic risk” instead.
"Why JP Morgan?"
And why all this effort to bolster JP Morgan? Pure speculation on my part but I believe that JP Morgan was in dire straits and if JP Morgan’s true state came to light (if the curtain dropped) – then its (JPM’s) exposure to 77.2 Trillion in the derivative market would be exposed and devastate the dollar. The shame is that the deal may have/could have been done on the up-and-up, WMI was looking for a buyer for WMB (not WMBfsb which by all accounts was well funded) and the deal would've still protected JP Morgan and the US Dollar but for reasons unknown to me – the FDIC/OTS and JP Morgan decided it best to murder WaMu among the carcasses in hopes that no one would notice another dead body. Who really notices one more body in the killing fields?
WMI saw the offensive onslaught coming and what JP Mogan and the FDIC did not see was, WMI prepariing for the battle (as best if could be). WMI was already in talks with Law Firm Weil, Gotshal & Manges and immediately filed for Bankruptcy protection.
By all accounts, JP Morgan Chase purchased the whole bank assets of Washington Mutual for $1.88 billion in September of 2008. Anyone would agree that 1.88B for a 110 year old organization that had 270 billion on deposit, 29 billion in liquid cash, 2200 banks, 8000 ATM's, and a credit card company is an unjust deal that deserves scrutiny.
The deal becomes even more unjust when one considers the impact it has to JP Morgan - - the deal creates the nation's second-largest branch network. A combined network reaching 42% of the U.S. population, with strong positions in attractive markets such as California, Florida, New York, Texas, Arizona, Illinois and Washington. With the assumption of WaMu’s assets, JP Morgan will have $900 billion in deposits, 5,400 branches and 14,000 ATMs in 23 states.
The FDIC, according to its own rule book, could have changed the deal but seems reluctant to do so - instead choosing to defend JP Morgan when its (FDIC) mandate is to defend WMI and obtain fair value. This relationship raises additional questions of collusion and has created confusion in the court system.
Where is the investigation by the U.S. Attorney General?
The sum of these allegations is that, if any number of the allegations are true, the activities of JP Morgan Chase & Co.'s leading up to the seizure and sale of Washington Mutual, Inc. assets have the capacity of implicating the laws of unfair competition, unjust enrichment, fraud, securities violations at the expense of Washington resident investors, breach of contract (confidentiality agreement), breach of fiduciary duty, and conversion. The mere fact that these allegations have been levied in Federal court and against a systemically important financial institution requires that the U.S. Attorney General Office immediately start an investigation for the purpose of ‘finding of facts’.
*Abductive reasoning is a method of logical inference introduced by Charles Peirce prior to induction and deduction for which the colloquial name is to have a "hunch". Abductive reasoning starts when an inquirer considers of a set of seemingly unrelated facts, armed with an intuition that they are somehow connected. My abduction is quite clear – JP Morgan had either extraordinary luck during the financial crisis of 08 or had the ability (as a someone once said) “to create its own luck.” The question is – did anyone help in creating that luck and if so, was it legal.