In yesterday’s Wall Street Journal, JP Morgan Chase was accused of dealing the blow that drove Lehman Brothers into bankruptcy. Now eyes are turning to Merrill Lynch’s relationship with JP Morgan to ask whether JP Morgan pushed Merrill into the arms of Bank of America. Sources familiar with the matter say that is precisely what happened.
On a weekend when most attention was focused on a last minute attempt to rescue Lehman Brothers—an attempt which ultimately failed—Merrill Lynch’s John Thain and Bank of America’s Ken Lewis reached a surprise agreement for Bank of America to acquire Merrill Lynch. One reason the deal was so surprising is that Bank of America had been regarded as a lead contender for acquiring Lehman Brothers as part of a government orchestrated rescue. Another was that Merrill’s troubles were not regarded as urgent as Lehman’s.
But in the days leading up to the bankruptcy at Lehman, many began to suspect the picture of Merrill’s health was greatly exaggerated, according to sources familiar with how the deal came together over the weekend that the deal with Bank of America was made. JP Morgan Chase, in particular, had grown concerned about Merrill’s financial health, the sources say.
“JP Morgan was making a lot of noise in the market. There was a lot of fear. Merrill had to act preemptively. They were afraid of what would happen on Monday,” one person familiar with the situation said.
Sources disagree over whether JP Morgan put in a formal collateral call that forced Merrill’s hand to pursue the merger with Bank of America.
JP Morgan instructed Merrill Lynch to put up billions in new collateral or risk having its accounts frozen, according to one person. The collateral call was allegedly similar in size to the $10 billion of collateral JP Morgan demanded from Lehman Brothers, which Lehman’s unsecured creditors are now saying sparked a “liquidity crisis” at Lehman, according to the source.
“It’s like the game of Clue: Colonel Mustard, in the library, with the candlestick,” one source said. “But here it was Jamie Dimon, at JP Morgan, with the collateral call.”
Another person says that no formal collateral call was made by JP Morgan, but it became increasingly apparent that that could be the bank’s next move. Executives moved quickly to avert a Lehman-level crisis, the source said.
Such a huge collateral call would have likely sparked a liquidity crisis at Merrill Lynch if a deal to merge with Bank of America had not been worked out.
It is quite suggestive that yesterday Bank of America announced it was raising $10 billion of new capital through an equity offering. That amount would cover the amount of money JP Morgan was set to demand, or perhaps had demanded, from Merrill Lynch.
Merrill Lynch declined to comment on this story. JP Morgan Chase did not return emails making inquiries.
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