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Lending

Banks should avoid bailing out other banks

But if they must, the due diligence performed upfront should be show stopping

November 21, 2013

If you revisit old HW coverage of the Bear Stearns meltdown back in 2008, it is obvious that while JPMorgan Chase (JPM) voluntarily entered the deal to buy the beleaguered investment bank, it did so at a time when federal regulators were on the prowl to stop the bleeding.

JPM’s Bear Stearns-buy did in fact stop the bleeding for a while at least. Past coverage suggests a ‘historic arrangement’ was made between the Fed and JPM, with Jamie Dimon’s company paying a low amount per share for the failing Bear Stearns. No doubt it kept the government from sweating it out at the time.

But after witnessing JPM’s $13 billion settlement with the Justice Department and other regulators—mostly over mortgage issues tied to Bear Stearns and WaMu—it seems unlikely it's a good business decision for banks to bailout other struggling banks. Yet, the truth is the government doesn't mind these bailouts when they're happening.

But after seeing very little sympathy in the form of evaluating successor liability from the standpoint of which firm did what, it seems banks should just let their brethen fail even if it means letting down financial regulators. After all, acts of chivalry are for humans not banks, so don't expect applause thereafter.

Bank analyst Nancy Bush with NAB Research LLC describes JPMorgan at the time of its Bear Stearns acquisition as a firm “trying to be a good corporate citizen.”

And truth be told, it’s not unusual for banks in crisis to require a strategic acquisition spearheaded by another bank. The financial crisis also proved that regulatory types are not above sitting in back rooms trying to pressure these deals. But the JPM legal issues over mortgages, which surmounted to a big chunk of change in payouts, could make banks think twice about bailing anyone out in the future.

Bush admits the whole issue of successor liability has been a tough one for JPMorgan. But she notes, “Bear Stearns and WaMU brought over 75% of these problems.” Even though she says JPM’s takeover was voluntary, there was a strong sense at the time that “this is a good thing for the financial system to do," she says. Bush remembers JPM having to raise its price after Bear Stearns shareholders fought back at the time.

She believes the FDIC-assisted WaMu deal was something JPM got more out of, but most of the bank's mortgage litigation risk ties back to both of those purchases.

This is not the first time the market has questioned hostility toward the mega banks that took over stumbling giants. The Bank of America-Countrywide buy remains a point of contention for industry insiders who view the deal as one essentially encouraged by the government, although the risk landed squarely in BofA’s lap. Yes, the Fed played matchmaker, but matchmakers never take credit for the divorce that follows.

Just last year, when BofA started taking additional heat over legacy mortgage issues, Rick Sharga, executive vice president with Auction.com, noted that: “The irony here, which I hope is not escaping anyone, is that both JPMorgan and Bank of America were pressured by the government to buy these financial institutions. So the government that pressured them to buy these institutions is now punishing them."

However the JPM acquisitions are viewed, there’s enough in recent settlements to confirm one thing: it’s senseless for banks to bail out other banks even if the government wants them to.

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