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Exclusive: Bear Stearns Employees Already Financially Raped, Now Possibly Enslaved

03/25/2008 12:19 pm ET | Updated May 25, 2011

JP Morgan's CEO Jamie Dimon was able to financially rape Bear Stearns employees with a bargain basement bid sanctioned by the Treasury Department that wiped out years of deferred compensation and now is reportedly trying to enslave them by strong-arming the rest of Wall Street away from hiring refugees.

I have learned that Dimon has called CEOs of investment banks saying that it would be "unpatriotic" to go after Bear Stearns employees until he has had first choice over who to keep and who to fire. While many have argued that the Bear deal was in the best interest of JP Morgan, Dimon appealed to his counterparts that "what he did was in the best interest of the country."

Backing up the force of this logic, Dimon reportedly also threatened to cut counter-party credit lines to firms that poach Bear stars before the transaction is completed. (Counter-party credit lines are used to support trading off exchanges in the opaque and less-regulated over-the-counter markets for everything from stocks and bonds to the rapidly growing zoo of more complex investment tools including exotic derivatives and credit default swaps.)

A CEO of one of the major banks, who requested anonymity, said of Dimon's threats that "this is outrageous. We will hire whoever we want. " A call from a Treasury employee was also reportedly made on Dimon's behalf. Another top Wall Street player, who also requested anonymity said, "It's dirty pool. JP Morgan and the Fed engineered a rescue to stabilize the financial system by putting Bear's portfolio in strong hands. The employees are the carcass of that deal but not essential to the market's stability."

Yesterday, JP Morgan raised the buying price from $2 to $10 following growing outrage at the lowball price offered for Bear Stearns. It was no secret that there were European banks and private equity firms willing to pay more for Bear Stearns. British billionaire Joe Lewis, one of Bear's largest investors, also lobbied for alternatives.

After raising the stock offer, Dimon said, "We believe the amended terms are fair to all sides and reflect the value and risks of the Bear Stearns franchise."

The reason that JP Morgan got this sweet deal is that the bank is the custodian for Bear securities and it was an easy transition. There are 14,000 Bear employees and JP Morgan is unlikely to keep all of them. Dimon is trying to prevent the poaching because the stars will have other outlets and JP Morgan is not a natural fit for those who have worked in the Bear culture.

As one expert explained, JP Morgan is run like a big bank where there are many layers of people required to get credit approval for a deal. Bear was run very much like a small business and was entrepreneurial and far more nimble. A banker could walk into former CEO Jimmy Cayne's office and have a deal approved in a short time. With JP Morgan, a banker would have to schedule many more meetings with the credit committees, the sub committees, etc.

This is not saying that one system is better than the other. One could argue that Bear's culture didn't have enough safeguards on lending since the bank was highly leveraged at a rate of 30-1, leaving a smaller cushion against defaults and losses than at banks that borrowed less.

Some are asking why was Bear the sacrificial lamb on Wall Street? With hundreds of billions in write-offs, somebody was going to go down and as long as one went down, the rest were okay. Since Bear was so leveraged, it was the biggest target, the weakest and the one who would pay for everyone's hubris. But the banks' credit lines are all intertwined since each protects the other with short term credit lines when needed. The fear was that the instability caused by Bear's freefall would cause a run on the banks and people would take their money out and it would cause a domino effect that would impact the whole system. Hence the Fed's involvement and rescue.

But Dimon's rumored threat of pulling the counter party credit lines to banks that hire Bear stars crossed the line of Wall Street etiquette. Indeed, it was pulling of counter party credit lines that brought down Drexel in 1989. Dimon's spokesman, Joe Evangelisti, denied the story.

But I believe my sources and feel that Dimon already got a great deal -- even with the amended $10 stock price. Last week he would have gotten the firm for $236 million vs. now 1.2 billion in stock. By any measure, he already is a big winner. Let the employees choose for themselves what bank or firm they want to work for after many of their savings have evaporated like a Harry Potter spell gone bad. JP Morgan should retain Bear employees by offering the best deal and home for them and not have any extra leverage to keep them handcuffed to a place that already has caused them so much pain.