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Well-Positioned JPMorgan Chase Still Stymied

The silliest investigation of JPMorgan Chase leaked by the Justice Department is the selective application of the Foreign Corrupt Practices Act of 1977. DealBook cited unnamed sources in its report on Aug. 19 that reported "Federal authorities have opened a bribery investigation into whether JPMorgan chase hired the children of powerful Chinese officials to help the bank win lucrative business."

According to the report, "in one instance, the bank hired the son of a former Chinese banking regulator who is now the chairman of the China Everbright Group." Following the hiring, JPMorgan "secured multiple coveted assignments from the Chinese conglomerate," the report said.

DealBook was careful to say that "legal experts note that there is nothing inherently illicit about hiring well-connected people"

Well, that's how it's done in all over the world in most industries, so why not in China? JPMorgan would be quite foolish to refuse considering a well-qualified job applicant, just because their parents are well connected.

In reaction to the obvious point that the Foreign Corrupt Practices Act was being selectively applied to JPMorgan Chase, there were subsequent reports that the Justice Department was investigating other banks' foreign hiring practices. But there were no reports of any non-banks being investigated.

Following the reports of the bribery investigation, Shanley wrote in a note to clients on Aug. 19 that her firm was maintaining its "buy" opinion of JPMorgan. "Given its capacity to generate earnings, we continue to believe that JPM will be able to maintain its overall credit strength even considering the ongoing regulatory scrutiny of its activities," she wrote.

A Good Crisis

JPMorgan certainly made the best of the financial crisis, first in March 2008 acquiring Bear Stearns for roughly $10 a share, or roughly $1.2 billion. That was up from its earlier offer of $2 a share, after shareholders of the investment bank cried foul. Bear Stearns had suffered a liquidity crisis, which was the end result of a series of events that began in July 2007, when the bank said two of its subprime mortgage hedge funds had lost nearly all of their value.

Following the collapse of Lehman Brothers and agreement by Bank of America (BAC - Get Report) to acquire Merrill Lynch, Washington Mutual was shuttered by regulators on Sept. 25, 2008. In a deal personally facilitated by Sheila Bair, who then chaired the Federal Deposit Insurance Corp., JPMorgan Chase acquired the banking operations of Washington Mutual for $1.9 billion. Washington Mutual was the largest U.S. bank ever to fail, with total assets of $307 billion and $188 billion in deposits.

This was a beautiful deal for JPMorgan as well as the FDIC. For starters, "Claims by equity, subordinated and senior debt holders were not acquired," to use the FDIC's words, meaning the failed bank's holding company was left with those claims. Meanwhile, JPMorgan acquired over 2,200 branches and expanded its branch presence to 23 states from 17 states, becoming the nation's largest bank by deposits, with the second-largest branch network, after Bank of America.

For the FDIC, the deal worked out very well because there were no losses to any of Washington Mutual's depositors, at a time when the basic FDIC deposit insurance limit was $100,000. Some depositors had lost money from bank failures leading up to Washington Mutual's closure. Another very significant advantage to the FDIC is that it provided no loss-sharing coverage on the assets acquired by JPMorgan.

Following Washington Mutual's failure, it became standard for the FDIC to cover 80% of losses on assets acquired as part of failed-bank purchases. The FDIC also raised the basic deposit insurance coverage to $250,000 and put in place its Temporary Liquidity Guarantee Program, which temporarily removed deposit insurance coverage limits on most business checking accounts, while guaranteeing banks' newly issued senior secured debt.

At the time of the acquisition, JPMorgan estimated it would mark down Washington Mutual's loan portfolio by $31 billion. The company in the third quarter of 2008 raised $11.5 billion in common equity and reported a $1.2 billion charge to increase loan loss reserves as a result of the Washington Mutual acquisition, but also booked a $581 million gain on the acquisition of the failed bank's operations.

For the fourth quarter of 2008, JPMorgan Chase reported a slew of significant items, including a $4.1 billion provision for loan loss reserves, $2.9 billion in markdowns in its investment bank, and $1.1 billion after-tax benefit from "merger related items."

In October 2008, JPMorgan was among the first nine large banks to receive government bailout funds through the Troubled Assets Relief Program, or TARP. The company received $25 billion in bailout money.

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