Friday, September 26, 2008

A history lesson

"Yes, one day the bottom will drop out." - Bob Marley/Eric Clapton/whatever artist you prefer, "I Shot the Sheriff"

I think we just saw what the bottom may be late last night during a conference call. JPMorgan Chase is snapping up Washington Mutual for pennies on the dollar - $1.9 billion - a far cry from the $7 per share offered by JPM Chase and shot down by WaMu's board.

This time, the bank failed, the Feds seized, and Jamie Dimon got what he wanted and was able to pay far less than anticipated for it. While there is an estimated $31 billion write down coming, JPMorgan Chase has already managed to raise $10 billion in a stock offering this morning. While the assets on WaMu's books probably don't equal $300 billion in true value, I'm pretty sure they're worth a decent amount. With JPM's current position, it's hard to argue against making that sort of move, when a lot of the negative risk is being underwritten or removed.

Not bad, for Jamie Dimon and Chase. I've never been a fan of Washington Mutual, from its advertising to its strange expansion plans, to its horrid customer service, so I'm not really surprised or bothered that it went under. Chase, on the other hand, is one of the few banks around that doesn't inherently piss me off for some reason or another, and Dimon has always seemed to have a knack for swooping in at the right time to take on risk at almost no cost (see Stearns, Bear)

One other big boon for Chase: thanks to acquiring WaMu's retail banking business, it just passed Bank of America in its nationwide branch structure, with more branches across 23 states (for now) than Bank of America has across 30. While some will close, it is not unreasonable to think all major banks will have some sort of branch-closing process - so Chase may emerge in the end with more than BoA after all.


Click through for a quick rundown of how they stack up, because Blogger doesn't want me to add a table right now, formatted or not. One big point you'll see is that, as bad as WaMu's sheet looks on the liabilities, it seems Chase does have the capability to take on that risk given its own reserves - and if they are able to normalize that balance sheet, they will make an absolute killing.

Jamie Dimon's been regarded as a banking golden boy for years, and between this and the Bear acquisition, he's managed to snap up some very good looking assets while having enough in reserve to withstand huge losses with regards to outstanding debt and liabilities.

So, we've managed to "save" a firm in way over its head, with the Feds acting as intermediaries instead of a rich uncle, and other private business stepping to provide the stabilization while also hopefully breaking somewhat even on the deal.

Compared to just tossing $700 billion to firms without any oversight or regulation, and I'd rather take what just happened in the last twenty-four hours rather than a pork-laden bill disguised to look like it's accomplishing something when it will actually do very little. Thankfully, it looks like some Senators have finally grown a set to decide that just tossing money at a problem won't fix it and neither will tossing money at pet projects. They're actually blocking a spending bill, and not the one you think, and it's about damn time they started doing that.

We've seen these sorts of panics every 20-30 years throughout this country's history. The underlying cause may differ but it happens just the same. 1819, 1837, 1857, 1873, 1893, 1907, 1929-32, 1973, 1987, and now 2008.

As a matter of fact, here's a quote...from 1907.

In the wake of the initial business collapses, stock market prices plummeted and
depositors made a massive run on the nation’s banks. The U.S. Treasury pumped
millions of dollars into weak banks in the hope of saving them, but the string
of collapsed institutions lengthened.

In a reprise of his role during the second Cleveland administration when the gold standard was under assault, J.P. Morgan acted to restore order. He summoned the leading bankers and financial experts to his home where they set up shop in his library. Over the course of the next three weeks, Morgan and his associates labored to channel money from the strong institutions to the weaker ones in an effort to keep them afloat.

The joint effort of the government and the business leaders improved conditions markedly over the course of several weeks. While the crisis passed, the finger-pointing began. Reform elements of both political parties believed that the American banking system was fundamentally flawed and needed wholesale change.

Boy, this stuff sounds familiar. Even history doesn't like the idea of full-fledged bailouts sponsored wholly by government. You want government intervention, you get Smoot-Hawley.
Shit happens every so often, and if the response is wrong, it will go for far longer.

Just one more reason to voice opposition to the bailout plan as currently featured. There is absolutely no reason to take Hank Paulson's word at face value when he asks for a blank check with no oversight just days after professing to be caught completely off guard by recent failures.

If even a rag like the New York Times can figure it out, then some smart people should have seen it coming as well. If the government wants to be a LENDER of last resort, that is at least somewhat prudent. But the suggested plan contains no provisions for fiscal prudency or oversight, so for the administration expecting us to be on board with such a plan is ludicrous.

I'm not on board with Sheriff Hank's idea of justice; I'd rather trust Deputy Jamie or Deputy Warren.

Lastly, for Democrats to sneak in pork to such plans is equally as ludicrous.

Hang the whole lot of them.

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