JPMorgan Kept Riskiest of Bear\'s Assets, Dimon Says

Date: Friday, April 4, 2008
Author: Ian Katz and Yalman Onaran, Bloomberg

The Bear Stearns Cos. assets provided to the Federal Reserve as collateral in the securities firm's sale weren't its ``riskiest,'' JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said.

``The notion that Bear Stearns's riskiest assets have been placed in the $30 billion Fed facility is simply not true,'' Dimon told the Senate Banking Committee. ``And if there is ever a loss on the assets pledged to the Fed, the first $1 billion of that loss will be borne by JPMorgan alone.''

The central bank agreed to provide $29 billion of financing as part of JPMorgan's takeover. Bear Stearns, formerly the fifth- largest U.S. securities firm, was close to bankruptcy last month after a run wiped out its cash reserves. The Fed provided emergency funding and then helped arrange JPMorgan's purchase.

JPMorgan ``could not and would not have assumed the substantial risks of acquiring Bear Stearns'' without the Fed facility, Dimon said.

After striking a deal to buy Bear Stearns for less than 10 percent of its market value March 16, JPMorgan increased its offer a week later amid a revolt by the smaller firm's shareholders. The new bid was a third of Bear Stearns's stock price on March 14 and less than a tenth of its value in December.

Bear Stearns Assets

The Fed is placing the Bear Stearns assets in a portfolio managed by BlackRock Financial Management. The assets consist of ``performing'' residential and commercial mortgages, along with various bonds carrying at least investment grades, according to a statement today by the New York Federal Reserve. The portfolio was valued at $30 billion by Bear Stearns on March 14, the Fed said.

The assets also include asset-backed securities, bonds backed by commercial mortgages and collateralized bond obligations, according to the Fed. The assets were reviewed by the Fed and weren't individually selected by JPMorgan Chase or Bear Stearns, the New York Fed said.

The assets taken by the Fed are current and domestic securities rated as investment-grade, Dimon said.

``We kept the riskier and more-complex securities in the Bear Stearns portfolio for our own account,'' he said. ``We did not cherry-pick the assets in the collateral pool.''

`Disastrous' Consequences

Without the Fed-engineered deal, Bear Stearns would have failed, and ``the consequences could have been disastrous,'' Dimon said. ``People all over America -- union members, retirees, small-business owners, and our parents and children -- are now invested in the financial system through pensions, 401(k)s, mutual funds and the like.''

Bear Stearns's demise was hastened by ``rumors and conjecture'' that made customers and lenders hesitant to do business with the company, the firm's CEO, Alan Schwartz, told the committee.

``Customers, counterparties and lenders began exercising caution in their dealings with us'' and later ``outright refused to do business with Bear Stearns,'' Schwartz said.

``Even if these counterparties and institutional investors believed -- as we did -- that we were stable, it appears that these parties were faced with the dilemma that if the rumors proved true, they could be in the difficult position of having to explain to their clients and others why they continued to do business with Bear Stearns,'' he said.

A group of shareholders has asked a Delaware judge to halt the Bear Stearns sale, while another group sued the company's executives for misleading them prior to the collapse.

Bear Stearns's financial troubles began in July, when two hedge funds that invested in securities tied to U.S. subprime mortgages collapsed. The firm had to bail out the funds and take possession of many of their holdings.

Bear Stearns fell 14 cents, or 1.3 percent, to $10.72 at 4:15 p.m. in New York Stock Exchange composite trading. JPMorgan gained 4 cents to $46.28.

To contact the reporter on this story: Ian Katz in Washington at ikatz2@bloomberg.net; Yalman Onaran in New York at yonaran@bloomberg.net.