04/20/2010 05:12 am ET | Updated May 25, 2011

Dimon Said His Bear Stearns Sticky Bombs Are Worse Than Geithner's

The Financial Times recently reported more losses on the $30 billion in Bear Stearns's mortgage assets that the Fed took off of Jamie Dimon's hands, when JPMorgan Chase's CEO bought Bear in the spring of 2008. The assets languish in Maiden Lane I, a purchasing vehicle created on the watch of then President of the New York Fed and current Treasury Secretary, Timothy Geithner. At the outset, it looked like a bad deal for taxpayers, and it continues to look lousy.

In Dear Mr. Buffett, my book on the global meltdown, I wrote that Bear Stearns's stock was not worth one penny, even though JPMorgan bid $2 per share at the time and ended up paying $10 per share after the original deal went sideways. I recapped Jamie Dimon's April 2008 testimony to the Senate banking committee:

"We could not and would not have assumed the substantial risks of acquiring Bear Stearns without the $30 billion facility provided by the Fed....We are acquiring some $360 billion of Bear Stearns assets and liabilities. The notion that Bear Stearns' riskiest assets have been placed in the $30 billion Fed facility is simply not true. And if there is ever a loss on the assets pledged to the Fed, the first $1 billion of that loss will be borne by JPMorgan alone."

As part of the deal, the Federal Reserve agreed to take $30 billion of Bear Stearns's securities, and JPMorgan Chase put up only $1 billion as security (less than the margin for the Term Securities Lending Facility), but if the price of the assets declined, JPMorgan Chase could walk away.

So what happened to those assets?

From March to June 2008, [the Fed's assets] lost more than more than $1.1 billion in value; it has already eaten through JPMorgan's $1 billion "cushion" and is now eating into taxpayer dollars. It is a sticky bomb, as dangerous as the makeshift explosives stuck to tanks during World War II. In June 2008, the Fed admitted that it priced the assets as if we were in an "orderly market." But we are not in an orderly market, so the price should be lower, meaning we do not know how much taxpayer money is at risk. Who is helping the Fed price these securities since it cannot price the sticky bomb itself? Blackrock. Blackrock lost money when it invested in the Peloton fund (named after the vee-like bird formation adopted by endurance bicycle riders that lead the pack by taking advantage of drafting to reduce wind friction) that bought overrated and overpriced mortgage backed securities. They should know all about getting taken for a ride.

The assets included financing in the process of being restructured for Hilton Hotels and financing for Extended Stay, a hotel operator that is in bankruptcy. Since June 2008, the Maiden Lane I portfolio deteriorated further, and the Fed's reported value had fallen from the original $30 billion (including JPMorgan's $1 billion "cushion") to $27.1 billion at the end of 2009. If Jamie Dimon didn't give the Fed his riskiest assets, then he must have taken on some interesting risk in that original $360 billion from Bear Stearns.

Taxpayer subsidized cheap funding and looser accounting standards have allowed our largest banks to keep their Dorian Gray financial pictures behind a curtain and out of public sight.

Paul Volcker, Chairman of the President's Economic Advisory Board, urges we break up the big banks and separate risk-based trading from traditional banking, the opposite of the JPMorgan Chase / Bear Stearns merger and the opposite of JPMorgan Chase's brand new deal to purchase RBS's Sempra's metals and energy trading units. So far all the Fed has done is to enable JPMorgan Chase and the country's largest banks to become riskier and larger while providing them with an enormous slush fund. As for the intent of the Volcker Rule, JPMorgan Chase seems to already have found a way around it.