Andrew Ross Sorkin has a remarkable piece of hogwash masquerading as a story today. His new piece, “Nowadays, Wall Street Saviors May Wish They Weren’t,” blatantly rewrites crisis history claiming that buyers of failed firms were “pressured” by the government do transactions during the crisis and the Big Bad Government got the better of them.
His article starts with PR from Jamie Dimon on the JP Morgan acquisition of Bear Stearns. Now that JP Morgan is facing a milquetoast suit from the New York attorney general over some particularly heinous conduct by Bear (we’ve argued this suit is sure to be settled for very little down the road), Jamie is shamelessly using the bit of negative media coverage to whine that next time, maybe
you won’t have Dick Nixon to kick around he won’t be there to rescue failed banks.
For some context, Dimon is far and away the most experienced dealmaker of any Wall Street CEO. Acting along side Sandy Weill, he built a financial conglomerate based on a series of acquisitions, over 1100. They were such successful buyers that their integration program was envied throughout the industry.
Jamie’s little problem is that he did a sloppy acquisition, period. If you don’t get a waiver of liability that you should have, shame on you. (Update/clarification: When word of the Bear lawsuit broke, many observers assumed that the liability would have been included in the Fed’s $29 billion backstop of the deal and were surprised to find it didn’t). There was already evidence of questionable dealmaking on Bear by JP Morgan. The deal was retraded due to a major error in the contract, leading JP Morgan to have to increase its price for Bear. This isn’t the first time that Sorkin has run the JP Morgan flattering line that it was abused by the Fed; we shredded Sorkin’s claims in March 2008, but he’s back at it again. This part is particularly suspect:
The same Bear Stearns that the United States government practically begged JPMorgan Chase to buy to help avoid a financial panic. The same Bear Stearns in which the initial $2 a share price of the transaction was dictated — literally — by Henry M. Paulson Jr., then the Treasury secretary.
First, there is a school of though that the party that was most at risk to a Bear failure was JP Morgan, since Bear was a major credit default swaps market participant and JP Morgan is a major derivatives clearer. As we’ve pointed our, Bear originally had a loan from the Fed which was 28 days, and would have tided it over to the opening of a new Fed facility on March 17. Bear might or might not have made it, but 28 days would have allowed a lot more parties to see if it was worth buying or investing in. But the Fed mysteriously changed the loan from 28 days to overnight, pretty much assuring that the ONLY party that could buy it was JP Morgan, since it had the best view of its books by being its clearer on many trades. The Fed decision to change the maturity of the loan has never been satisfactorially explained.
Second, there was enormous unhappiness on behalf of the Bear employees with the initial $2 per share payout (Bear had high levels of employee stock ownership). While Paulson wanted to punish Bear with a low share price (why was the price not zero, or $0.01 a share? why was failure rewarded at all?), many commentators at the time, including yours truly, thought Dimon CHOSE to pay more to reduce employee upset at Bear. From our March 2008 post:
Sorkin also makes clear that Dimon was unhappy paying so little for Bear and was concerned about a revolt among those employees he wanted to keep. That then raises the question of whether the supposed fits thrown by Dimon over the trading guarantees really were a bad case of buyer’s regret. After all, at a price of $2, JPM was paying more than a billion less than than it eventually offered. Was that exposure really so awful that the economic value of getting out of it was worth a billion plus?
It thus seems more plausible that the alleged contract defects gave Dimon the excuse to pay the price he wanted to pay to keep peace in the family. And I will go further: knowing a bit about one of the attorneys involved (Rodgin Cohen of Sullivan & Cromwell, who represented Bear), I consider it quite possible that the lawyers contrived to have glitches in the deal to allow it to be reopened. (On a deal I was involved in, Cohen pulled a huge ruse with the Fed that my client to this day is unaware of, according to Gene Ludwig, who was later my attorney). Their loyalties are to the Street, not the Fed or the public at large.
The idea that Dimon was a victim is bollocks. As one of my investor buddies says, “Whenever the government is selling, I want to be on the other side of that trade.” Dimon was the only player in a position to buy Bear on the bizarre timetable the Fed imposed via shortening the term of the loan so the deal had to be done over the weekend. He had all the leverage in the world. And the Bear lawsuit he is complaining about is noise. This public kvetching is merely Dimon shamelessly turning a lemon into lemonade via using media attention to his advantage, and Sorkin happily acting as his mouthpiece.
Sorkin similarly tries to make Wells Fargo sound like a victim of regulatory pressure to make a rescue in its purchase of Wachovia:
Some of the strongest firms during the crisis that acquired failing banks at the behest of the government — JPMorgan Chase, Wells Fargo and Bank of America, among them — have found themselves in the cross hairs of lawsuits brought by the government for activities related to deals they made under pressure from the authorities.
This is completely and utterly false as far as Wells and Bank of America are concerned. As anyone who read the media at the time knows, the government (as in Treasury) had orchestrated a deal for Citigroup, not Wells, to buy Wachovia, with considerable government subsidies. As we and others wrote, it was clearly a backdoor bailout for Citi.
As Sheila Bair recounts at length in her new book, Bull by the Horns, Wachovia voluntarily made a no-subsidy offer. And the only reason it was able to put its deal together was that Citi was bizarrely slow to consummate the deal that Treasury had cooked up and Bair was not exactly keen to do (but at the time, had no better alternative). Moreover, Geithner was outraged and tried pressuring Bair into sticking with the deal with Citi, even though it was clearly worse for the taxpayer. The idea that there was pressure on Wells to enter when there was already a done deal with Citi is a flat out misrepresentation.
Similarly, Bank of America was not pressured to buy Countrywide. It may seem insane now, but Bank of America had coveted Countrywide for years and as only a mid sized mortgage player, was eager to bulk up. Country (again this sounds astonishing but it was the prevailing view at the time) was considered a prize for its servicing operations. Ken Lewis acquired Countrywide in a two step process, and so had plenty of time to kick the tires. Even so, we were in a minority in flagging the legal liabilities as a reason to hate the deal (see here and here). CEO Ken Lewis not only did the deal eagerly, he paid a hefty premium to the market prices that many observers thought was far too rich. (Lewis might have had some 11th hour regrets, or his due diligence team might have gotten insistent about the warts, but Countrywide was not systemically important. Plus the real tell of how gung ho Lewis was was the failure to adjust the juicy purchase price). Indymac failed and the world did not end, and Countrywide was just a bigger version of Indymac. Lewis has apparently tried arguing that he thought he was owed one for buying Countrywide, but that’s inconsistent with his actions at the time, and his later willingness to threaten to break up a deal that really was systemically important, the Merrill acquisition.
As Sheila Bair has pointed out in her interviews on her book, Sorkin in his supposedly landmark account Too Big to Fail did a one-sided job of reporting on regulatory jousting, savaging Bair without ever contacting her or anyone from the FDIC to see if her detractors were giving the straight scoop. So it should not be surprising to see a more obviously skewed account in today’s article.
While Sorkin’s favored sources no doubt have their own view of reality, the job of a reporter is to at least endeavor to get to the bottom of things, rather than write dictation. Well, except in our best of all possible worlds per the New York Times where bankers are just selfless citizens doing their best to serve communities despite the heartless and short sighted actions of government bullies. But Sorkin manages, despite himself, to signal that we aren’t supposed to take him seriously. He closes the piece:
Fraud isn’t something a company does; it is something people do.
By that logic, Dimon and pretty much every Wall Street CEO, as we’ve recounted, is liable, as in criminally liable, for false Sarbanes Oxley certifications. Charles Ferguson has written an entire book setting forth other legal theories and supporting evidence for criminal prosecutions of top executives of major financial firms. But for Sorkin, use of the “F” word is a mere rhetorical device, something for to pin the blame on Other People (in this case, executives of Bear) rather than the real prime suspects.