Does the Government Owe JP Morgan?
Wednesday, October 1, 2008 | Teeka TiwariRating:
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Talk about a case of mania! How are we down 7% one day and up almost 5% the next? Aren’t emerging markets supposed to act like this? Right now it’s the Wild, Wild West out there. Wall Street is running around like the proverbial chicken without a head.
There are some astute players though that are making moves today that will position their companies for success tomorrow. Citigroup (C) and Bank of America (BOA) are making their play through Wachovia and Merrill Lynch, but the smartest guy in the room appears to be the CEO of JP Morgan Chase (JPM), Jamie Dimon.
Jamie Dimon made his name helping Sandy Weill build the company Commercial Credit into the giant financial supermarket that we know today as Citigroup. After a series of disagreements with his friend and mentor, Jamie was kicked to the curb shortly after the landmark Travelers deal of the late 1990s.
Dimon ended up over at Bank One as their CEO and ultimately became JP Morgan’s CEO after JP Morgan’s buyout of Bank One. Dimon has a unique understanding of the cyclical nature of lending and banking in general. Which is why he stayed away from structured investment vehicles (SIVs), a move that saved the bank tens of billions in potential losses.
In 2006, he largely exited the sub-prime business just as the rest of the countries' banks were doubling down their sub-prime bets. These moves were not applauded by the Wall Street. In fact, the company had to sit and watch as their stock languished while their competitors booked billions and billions in fees. Talk about having the courage of your convictions!
Dimon's Credit Crisis Coups
Coup #1: Bear Stearns. Fast forward to today and we see Jamie Dimon striding across the smoking ruins of America's most storied financial franchises. He essentially bought Bear Stearns for free, his cash outlay was covered by the existing cash in the firm and he received government guarantees on Bear’s bad debt. It was as close as you could get to a risk-free trade.
Putting aside Bear’s sub-prime blunders, it is a very, very sharp crowd over at Bear Stearns. An incredible franchise with a deep pool of talented market professionals that will pay dividends for JP Morgan for many years to come.
Coup #2: Washington Mutual. A big problem for Dimon was how to expand JP Morgan’s retail footprint out West. With their recent purchase of Washington Mutual for $1.9 billion, that problem is solved. The takeover gives JP Morgan 5,400 new branches from California to Florida, and $188 billion in deposits.
Let’s not kid each other though, JPM is going to book at least $30 billion in losses off the inherited WaMu portfolio. But guess what? Jamie is going to dump that bad debt onto the government and be left with a very clean, national retail bank chain. Jamie wins again!
All this lovin’ going the way of JP Morgan begs the question: Does the company have a special relationship with the government? After all JP Morgan is the only bank that secured government debt guarantees. And how is it that JPM got the first shot at WaMu even before WaMu itself knew it was for sale? (The FDIC had been planning to take over WaMu for weeks and worked with JP Morgan ahead of time secretly to take over the company.)
JP Morgan's Government Bailout
Is the creature from Jekyll Island paying back its debts? John Pierpont Morgan is widely credited with twice rescuing the banking system and the federal government itself. In 1895, Morgan put together a private syndicate that loaned the federal government gold to shore up the U.S. Treasury. Then in 1907, Morgan pressured other financiers to inject cash into the failing banking system and crashing stock market. That was before the Federal Reserve existed to provide liquidity.
Many people believe that the Federal Reserve is nothing more than an inside coterie of banks with familial ties that go back for generations. Fact or fiction, is it time to do away with the Fed and try a different approach? If so what should we replace it with? You tell me.
It certainly smells like inside baseball. But you know the old saying: It’s not what you know, it’s who you know. And that other old saying: To the victor go the spoils.
In JPM’s case, we’ve got a company that is seriously well connected and very well run. So, if you are looking for not only one of the survivors, but also one of the winners from this meltdown take a good long look at JP Morgan. When the credit cycle turns, and it will turn, JP Morgan’s earnings could explode to the upside along with its stock price.
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Teeka Tiwari
Chief Investment Officer
ETF Master Trader
