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The testimony provided the most extensive account yet by participants in the largest U.S. rescue of a securities firm. Dimon, New York Federal Reserve President Timothy Geithner and Fed Chairman Ben Bernanke defended the bailout while some lawmakers said it only rewarded risky market bets. The officials compared the turmoil they feared that weekend to the Panic of 1907 and the Great Depression-era run on banks."
Dimon Rejected Rescuing Bear Until Geithner Promised FundingBy Peter Robison
April 4, 2008
SourceApril 4 (Bloomberg) -- Hours from a market meltdown, as U.S. regulators pressed him for help in rescuing Bear Stearns Cos., Jamie Dimon said no.
The JPMorgan Chase & Co. chief executive officer was concerned that liabilities on the firm's books would bring along too much risk, Dimon and others involved in the bailout told Congress yesterday. Dimon's refusal prompted the Federal Reserve to step in with a loan, announced minutes before Asian markets opened that Sunday, March 16.
The testimony provided the most extensive account yet by participants in the largest U.S. rescue of a securities firm. Dimon, New York Federal Reserve President Timothy Geithner and Fed Chairman Ben Bernanke defended the bailout while some lawmakers said it only rewarded risky market bets. The officials compared the turmoil they feared that weekend to the Panic of 1907 and the Great Depression-era run on banks.
``Absent a forceful policy response, the consequences would be lower incomes for working families, higher borrowing costs for housing, education and the expenses of everyday life, lower value of retirement savings and rising unemployment,'' Geithner told a U.S. Senate banking committee.
Lawmakers are scrutinizing the deal, concerned the government put taxpayer money at risk and acted more quickly to save a Wall Street firm than it has for homeowners facing foreclosures. New York-based Bear Stearns was the second-largest underwriter of mortgage bonds last year, behind Lehman Brothers Holdings Inc.
`This Is Socialism'
``I want to hear from our witnesses why they thought it was necessary to stop the invisible hand of the market from delivering discipline,'' said Senator Jim Bunning, a Kentucky Republican. ``That is socialism.''
After last month's run on Bear Stearns by customers and trading partners, the Fed is backing $30 billion of the firm's securities and JPMorgan is set to buy the fifth-largest U.S. investment bank for less than an eighth of its value at year end. While the mechanics of the rescue are now known, the testimony revealed Dimon's initial reluctance and the intensity of regulators' fears.
Geithner, 46, a Dartmouth College graduate who served as a Treasury undersecretary in the Clinton administration, took the lead in negotiations with Dimon, the testimony showed. The New York Fed buys and sells Treasury securities almost daily with primary dealers of government bonds. It manages the emergency program put in place March 11 allowing dealers to swap mortgage securities for Treasury notes.
Schwartz's Surprise
Geithner heard on a conference call with the Securities and Exchange Commission on March 13 that 85-year-old Bear Stearns was ready to file for bankruptcy. The firm had appealed for emergency funding to JPMorgan, its clearing bank. Dimon, celebrating his 52nd birthday that day, called the New York Fed.
Bernanke, Treasury Secretary Hank Paulson and Geithner agreed on a 5:30 a.m. conference call the next morning that the Fed would make an emergency loan to Bear through JPMorgan.
Bear Stearns executives thought they had at least 28 days to consider options, including finding a buyer, CEO Alan Schwartz told the committee. By Saturday, the Fed insisted the situation would have to be resolved over the weekend, surprising Schwartz, he said. Officials expected panic selling when Asian markets opened, according to Geithner.
``The sudden failure of Bear Stearns likely would have led to a chaotic unwinding of positions in those markets and would have severely shaken confidence,'' Bernanke said.
No Takers
That weekend, Schwartz discussed a sale of the firm with several institutions and gave Geithner periodic updates, according to the testimony. JPMorgan was the only serious bidder because other companies were concerned by ``apparent risk in its balance sheet and the limited time,'' Geithner said.
On that Sunday morning, New York-based JPMorgan balked too. Dimon told Schwartz, Geithner and Paulson that the risks were too high.
``This wasn't a negotiating posture,'' Dimon said. ``It was the plain truth.''
Geithner urged Dimon to reconsider. The Fed's other options were even less attractive, he said.
The government didn't want to guarantee Bear's assets. If it bought time by loaning more money through JPMorgan, the Fed would have had to keep pouring funds into a company that was bleeding customers and cash, Geithner said. Taking an equity stake in Bear or JPMorgan wouldn't be legal.
The Fed could lend against collateral, Geithner said. That was the option the bank chose, agreeing to loan as much as $30 billion in exchange for Bear securities.
Panic of 1907
In his testimony, Geithner reached back to the Panic of 1907, when a run on the Knickerbocker Trust set off a wave of selling that convulsed the New York Stock Exchange.
``Are there risks here?'' the New York Fed chief said. ``Yes, but the risks are modest in comparison to the substantial damage to the economy.''
Over the following week, the parties would refine the deal, with JPMorgan raising its bid to $10 a share from $2 and agreeing to take on the first $1 billion in Bear's losses.
Belying regulators' fears of a selloff, the Standard & Poor's 500 Index fell less than 1 percent the day after the deal was announced. Since March 10, the index has rallied 7.5 percent.
That Monday, Geithner said, the Fed also got back the $13 billion it had loaned JPMorgan in the emergency funding measure -- with weekend interest of $4 million.
To contact the reporter on this story: Peter Robison in Seattle at
robison@bloomberg.net.
Last Updated: April 4, 2008 00:01 EDT