JP Morgan's Jamie Dimon: A Leader Steps Up
In these days when corporate executives are keeping their heads down and trying to stay out of trouble, it is refreshing when one CEO steps up to a challenge and a broader responsibility. In taking over Bear Stearns, the failing investment bank, just hours before it would have been forced into bankruptcy by a proverbial "run on the bank," JP Morgan CEO Jamie Dimon took on a broad public responsibility to keep financial markets from unraveling and apparently made a very attractive purchase for his institution.
Not that Dimon acted alone. He had a little help from his friends - namely, Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke - who urged Dimon to step to the challenge of taking over Bear and agreed to guarantee up to $30 billion in failing mortgage-backed securities.
Having watched their shares fall from $170 per share a year ago to the $2 settlement outraged Bear's shareholders. On the other hand, media pundits like CNN's Lou Dobbs called it a "corporate bailout" and charged the Bush administration with enriching Bear's executives. Not exactly, Lou. Thirty per cent of Bear Stearns' shares are held by executives and employees, who saw their value decline by more than 98 per cent in the last year.
The reality is that there are many more legitimate claimants to a firm like Bear than just its shareholders, especially when its equity value is collapsing. Investment firms will heavily leverage their equity - in Bear's case, more than 30:1 - and the lenders and a wide array of counterparties all have a stake in the financial health of the firm. I believe that Paulson and Bernanke acted wisely to negotiate a settlement that kept Bear from defaulting on its debt obligations while letting the equity holders take the largest financial hit. After all, they were responsible for the position that Bear Stearns got itself into this past week, and they should pay the price.
By the way, this responsibility should also mean that Bear Stearns executives like CEO Alan Schwartz and former CEO James Cayne, who held the top slot until this past January, should not receive any termination or change-of-control payments as a result of the sale to JP Morgan.
Bill George is the author of best-selling books True North: Discover Your Authentic Leadership and Authentic Leadership: Rediscovering the Secrets to Creating Lasting Value, has been named one of "Top 25 Business Leaders of the Past 25 Years" by PBS, and was CEO and Chairman of Medtronic from 1991 until 2001.
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Jamie Dimon was covering his counterparty risk with Bear Stearns and got Bernanke to throw in 30 billion in tax payer money to boot.
Let's see.
Where to begin?
We have the fruits of the financial services industry, aka, the "investment" banks, reaping what they have sown with their "manufactured" instruments of debt/credit.
We have the natural results of their own design of a "counter-partied", inter-corporate, unregulated structure where the result of one of them failing will be that they will all fail.
And then, when the first domino teeters, we see the entire group, acting through JP, drag in the people's money to guarantee payment of any major losses to these leaders.
There's a bit of irony, if not double-speak, in the claim that what JP took on was a "broad public responsibility." It was really a broad public theft.
First, they set up a financial house of cards where they undermine and subvert the true public responsibility, and then when a few bigwigs get the message that "the jig is up", they call their friends who have control over the public purse and ask for a new structure that can keep the game going for a while longer.
Why should the public's money be used to protect a bunch of fiscal jackals who set up the entire scheme of their own demise?
Volker calls for a government entity to minimally have a position in a proportional reward when the public's money is put at such a risk?
Empower the Congress of the United States to create and control the nation's money supply.
You know, like the U.S. Constitution says.
Create the sovereign United States Central Bank to guide our economic restoration.
Abolish the FED and its illegal cabal of financial cowards.
Said Baron de Rothschild, after we defeated the British in the Revolutionary War: "Allow mw to create the money, and I care not who makes the laws".
As a graduate of my daddy's knee school of finance, I can say confidently that were I also an MBA from Harvard, I would not deign to state such - on these pages, in these times.
spot on ...
the neo-free-marketers' formula is: socialize the costs while privatizing the profits ...
Great post, joe. BTW, is Columbia OK?
What I don't think you guys realize is that its not like this money is coming out of federal coffers and being handed to JP Morgan Chase. The money is being lent by the federal reserve, with interest, 3.25% (http://news.bbc.co.uk/2/hi/business/7299938.stm) . So the fed will still be making some $ on this. And there's a reason they trust JP Morgan Chase... the JP Morgan part. He personally bailed the economy out twice and his company bailed out the British and French governments during WWI. Now sure, things change and that was a long time ago, but they have a track record of getting brilliant minds working for that company.
Here's the thing I'm suspicious of though: how are they getting the company at such a discount. This is a financier's dream, the Bear Sterns 2006 annual report says that at the end of fiscal '06, they had $350 Billion in assets. Does this seem fishy to anyone else? $350 Billion worth of assets for around $250 million. In comparison, Citigroup has about 2.1 trillion in assets, Bank of America 1.7 trillion and JP Morgan Chase 1.3 trillion. This is definitely a suspicious matter to Morgan me, getting a company at 1/1000 of what its worth on paper. Strange indeed...
I wouldn't be surprised if after this whole sub prime mortgage affair is over, JP is the largest financial institution in the world(which would mean it would have to be bigger than citigroup) from buying up these failing banks. Also watch for Canadian banks to swoop in and take their share, they have lots of cash on hand and not much to do with it.
I've had my eye on Goldman-Sachs for a while now! If Harvardmba will front me the money, I will "Boldly" take possession in the name of the continued smooth functioning of the Economy, and the good of all mankind!
you're onto something big ... I've had my eyes on Lehman Brothers. lol
Can we be Masters of the Universe? YES WE CAN! :))
You're right Bill. Don't be deterred by the comments by those here that don't understand business and basic economics. All they see is their own angle, which is selfish at best. Dimon helped avert a real crisis, and that's a hero in my book.
"mbafromharvard" is that you George?
Yes, our angle is totally selfish ... or "enlightened self-interest" -- because its OUR MONEY you people are giving away -- money we coud use to pay bills or send kids to another year in college -- and you're using it to bail out the fools that drove BS over a cliff -- let it go bankrupt! then the BS fat cats would have to return their obscene payouts a couple months ago.
What's amazing to someone like me, who admittedly doesn't have a mbasfromharvard, is how free-marketers champion Adam's Smith's invisible hand and that it requires hands off from the government and minimalst regulation (if any) ... fair enough ... but when the fools like those at Bs can't swim in the free-market, suddenly the need for invisible hand vanishes and is replaced by the big hand of government reaching into the pockets of working Americans to pull out the money and hand it to the sacred cows of harvard mbas...
So Dimon got the bank for almost nothing and taxpayers are responsible for any bad debt and you think he is a hero? It is a corporate bailout because if the company had gone bankrupt then many people in the financial industry would have lost money - much more than the shareholders.
And please tell us SPECIFICALLY how the entire economy in the country would have been destroyed if BS went bankrupt?
Apparently the argument goes that if BS failed, they would take down at least Citi with them and that the dominoes would fall until they all went down. They could be right, but I still think the price was unfair and that the moral hazard lesson here is the wrong one. Also, I can't buy Dimond as a hero for the reasons specified in my earlier post.
And for the mbafromharvard (as was GWB) how is it selfish to want someone other than the freebooters guarding my money? I had no stake in BS, no stock, nothing, but I am still bothered by the spectacle of it. It's disgusting to watch 30Billion of taxpayer money be used to guarantee a private transaction that benefits only the stimulate our way out crowd. Personal responsibility? That's for suckers and taxpayers. This was just another deal, a tool to expand his empire. If that's heroic, I don't know why.
His bold step had to be purchased with $ 32 BILLION in Taxpayers money????????
Bold huh , Hero huh, (this space left blank for you words).
Oh please ... by keeping it from going bankrupt he ensured those obscene payouts to BS fat cats remain in place ... let it go bankrupt ... its called "free markets" ... welcome to the world we little people inhabit ...
America tends to not fix problems until they become apparent. By making this transaction, we set ourselves back from the necessary reform to our economic and political system, at least for a few weeks, possibly for a few months, possibly for another four year term.
Also, I remain uncomfortable with the 2 dollar number instead of a number closer to the 30 bucks the market valued the firm on the Friday before the weekend. With about 2/3 of the speculative debt held by Bear guaranteed by the Feds, the 2 dollar figure seems like a deal done facing the barrel of a gun. And now all the employees, some 14,000 are under threat of job loss. Lehman fixed its own problems with mere resort to the Fed borrowing window. It just looks like a robbery to me. 16 billion of potentially bad paper in a wad of 46 billion? Surely a third of this paper is good or it's worth 16. What kind of a gamble is that? And he gets a shiny new office tower to boot, which he can rent out if he wants once he clears out the current occupants. And NYC real estate is still holding up in price.
I am sorry Bill, but I just can't buy your view of Joe here as savior. You are one of the few CEOs who could run a good company with integrity, but I'm still not buying this judgment.
Did you see that Bear Stearns have leveraged all thier holding at 30 to 1.
That is like betting 300 billion on Red 17 at the Roulette Wheel .
They lost their bet and NOW WE PAY?????? HOW DOES THAT WORK??????????
Well, dad, it all starts out with them standing in a circle....
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