|
Published September 26, 2008 at 2:27 PM
|
Since the beginning of the credit crisis, J.P. Morgan Chase & Co. has been like a bride-to-be at the Filene's Basement Bridal Gown Sale grabbing anything that looks good. First it was Bear Stearns Cos. in March, and now Washington Mutual Inc. Both were snagged at steep discounts, and with the government's blessing. Most experts agree the unions, which will help it vault past Citigroup Inc. to become the second-largest bank, will pay off for the New York-based firm down the road. So, how was J.P. Morgan able to make these transformative marriages possible?
Continue reading below
- Credit worthiness. In 2006, J.P. Morgan began unloading its subprime mortgage portfolio after seeing defaults and late payments rise. Additionally, J.P. Morgan didn't invest as heavily in collaterized debt obligations as its peers. These risk-averse moves put J.P. Morgan in a strong position as its peers began to fall into trouble and gave it a chance to cherry-pick troubled assets essentially at prices it dictated. For example, the firm was able to acquire the investment banking unit of Bear Stearns for a paltry price of $10 a share, or about $1.2 billion, while it acquired WaMu's deposits and branches for $1.9 billion.
- Reducing risk. J.P. Morgan was able to reduce its risk with both the WaMu and the Bear Stearns acquisitions. In the WaMu addition, Charlie Scharf, head of retail financial services for J.P. Morgan, in a conference call explained: "We are not buying the unsecured debt, the subordinated debt and the
preferred, which is a little bit less than $20 billion or so of
liabilities that we will leave behind." Meanwhile, in the Bear Stearns deal, the bank was also able to negotiate that it would guarantee the first $1 billion of losses on Bear Stearns' portfolio of illiquid assets, and the Federal Reserve would be responsible for another $29 billion.
- Capital infusion. To strengthen its balance sheet, J.P. Morgan sold $10 billion of shares at $40.50 a share. The offering exceeded its original $8 billion target for its common stock offering
Friday morning, as strong demand allowed the bank to increase the size
to $10 billion. The capital will be used to most likely offset some of WaMu's bad loans.
- Gerald Magpily
Dealscape: Fleeing WaMu depositors forced regulators' hands
Dealscape: House GOP stymie bailout plan
Corporate Dealmaker: J.P. Morgan-WaMu deal: Another massive integration ahead
|
