JPMorgan Chase's (JPM) acquisitions of Bear Stearns and Washington Mutual will ultimately be viewed like training for a marathon worth it in the end, but a whole lot more work and pain than ever expected.
Its tentative $13 billion settlement with federal regulators is the latest turn in the ever-changing assessments of the 2008 deals. The current opinion of them has worsened, but many analysts say the additions will prove to be net positives in five or ten years.
"In general, I think JPMorgan would still view these deals as worth it," says David Konrad, an analyst at Macquarie. "Given the purchase prices they got for both, they make sense longer term. They are just not as accretive as we previously thought."
Among the pluses, Bear Stearns gave JPMorgan additional scale in investment banking, which boosted earnings in recent years when commercial banking was soft. WaMu provided a large presence on the West Coast. On the negative side are the cost of the mortgage putback claims and lawsuits it inherited, and the damage to its reputation.
"What is going on now is a brutal reminder that acquisitions, especially those that are done as stock deals, entail contingent liabilities unless they are explicitly excluded," says Jeff K. Davis, a managing director at Mercer Capital. "Contingent liabilities can end up being a hydrogen bomb."
Davis' comments underscore an important distinction made by several analysts: although the deals might be viewed as positive in the long run, the company may regret agreeing to pick up the weak and weary under the hasty terms it agreed to in 2008.
"Forget about the cost for a second. If I was JPMorgan, there's no way I'd do this again," says Chris Mutascio, an analyst at Keefe, Bruyette & Woods. "It ended up looking like a bait and switch."
Several analysts made similar comments to Mutascio's. Others say the company still would have done the deal, but perhaps taken more steps to protect itself.
"These deals are often viewed as if JPMorgan did some huge favor for the nation I don't buy that," says Cornelius Hurley, director of the Boston University Center for Finance, Law & Policy. "They were making a shrewd business deal that was virtually guaranteed against losses by taxpayers at the time. Maybe they are paying some back in penalties, but they are still good deals for JPMorgan. They'd do it again, but they'd lawyer up for sure put in stronger indemnification agreements, [or] maybe acquire it in a separate subsidiary."
JPMorgan paid $1.5 billion for Bear Stearns, in a deal priced at $10 a share, just a fraction of Bear Stearns' book value of $84 a share on the eve of its collapse. JPMorgan had initially offered $2 a share, but later upped the ante to quell angry shareholders.
Later in 2008 the company acquired the $307 billion-asset WaMu from the FDIC for $1.9 billion. The price tag included all of the deposits, assets and qualified financial contracts. WaMu had more than 2,200 branches, including 980 branches in California, Oregon and Washington. JPMorgan previously had three branches in California, zero in Oregon and one in Washington.
JPMorgan's tentative $13 billion settlement with the Justice Department, details of which were leaked last weekend, is an effort to solve several federal claims and probes at once. It includes roughly $4 billion paid to the Federal Housing Finance Agency for loans that were sold to Fannie Mae and Freddie Mac. The settlement equals half of JPM's profit last year and does not include a release from potential criminal prosecution of JPMorgan executives.
A call to JPMorgan was not returned, but Chairman and Chief Executive Jamie Dimon said in the company's third-quarter conference call that he did not expect to be on the hook for losses for either company when the deals were structured.
"We didn't anticipate that we would be paying anything for prior losses for Bear Sterns," Dimon said, adding that he asked the Securities and Exchange Commission for assurances that it wouldn't be punished for problems at Bear Sterns. "We did ask. We weren't completely stupid. They couldn't [give assurances] outright, but they did say they would take into consideration the circumstances in which the transaction took place."
The WaMu situation is different, because that bank failed and JPMorgan bought its operations from the Federal Deposit Insurance Corp. JPMorgan doesn't feel it should be responsible for WaMu's legacy issues.
"We don't believe we're responsible by contract," Dimon says. "But that does not mean that people can't come after you. So that was a little bit of a lesson learned, too."
JPMorgan might not be the only one learning something from this. The perception that the company is being punished for picking up Bear Stearns and WaMu could be a major problem in future downturns, analysts say.
Regulators heavily relied on healthy companies to absorb the weak ones. Besides JPMorgan's deals, there were hundreds of failed banks acquired by others in an effort to keep assets in the industry as opposed to having the government resolve them.
"Next time the government tries to pressure a strong, well-positioned institution to step in and take one for the team, there is going to be a natural resistance to doing so," Davis says. "Or there will be a lot more in-writing carving out of the contingent liabilities."