Wait a minute? Could the government possibly have given JP Morgan Chase inside information about the condition of Bear Stearns? Shocking!
Senator Chuck Grassley, the ranking Republican on the Senate Finance Committee, has written a letter to Securities and Exchange Commission chair Chris Cox saying he has “anonymous but specific” information about “inappropriate contact” between the SEC’s enforcement director and JPMorgan’s general counsel—who once served as the SEC enforcement director—while the investment bank was considering its bid for Bear Stearns.
“This inside information, gotten through a personal relationship, would be critical in helping Morgan put together a low-ball bid to Bear and the US government,” Grassley writes. “This could have materially affected the amount of guarantees that Morgan was able to negotiate from the Federal Reserve.”
Maybe our cynicism has overtaken us here but our reaction is: What exactly do you think goes on when the Fed, the Treasury and the SEC gather with banking leaders to discuss bailing out a failing institution, Mr. Senator?
What’s more, the accusation that JP Morgan’s bid for Bear was a “low-ball” doesn’t jive with earlier reports that Hank Paulson demanded a small number in order to diminish the moral hazard costs of the government arranged rescue.
Here’s how the Wall Street Journal’s Kate Kelly described the day Bear Stearns was sold:
The start of the business day in Asia loomed at 6 p.m. New York time. If the firm filed for bankruptcy, it would have to notify its Asian trading desks before markets there opened.
Throughout the weekend, the Fed’s Mr. Geithner had been consulting Mr. Paulson, a former investment banker who had run Goldman Sachs Group Inc. for seven years before becoming Treasury secretary. After they talked on Sunday afternoon, they decided that Mr. Paulson should call J.P. Morgan CEO James Dimon.
He reached Mr. Dimon, who put the call on the speakerphone in his Park Avenue office. The bank was mulling a price of $4 or $5 a share.
“That sounds high to me,” Mr. Paulson said. “I think this should be done at a low price.”
Given the unprecedented level of government involvement in rescuing the troubled firm, the secretary was leery of appearing to bail out Wall Street investors at a time when homeowners were losing their houses to foreclosure in record numbers. He also was concerned about “moral hazard,” the danger that too generous a price would encourage future risky behaviour.
By midafternoon, as Bear Stearns directors hashed out these issues, Mr. Parr took a call from Doug Braunstein, head of investment banking at J.P. Morgan. “The number’s $2,” Mr. Braunstein told him.