March 18, 2008

JP Morgan’s Jamie Dimon: A Leader Steps Up

In these days when corporate executives are keeping their heads down and trying to stay out of trouble, it is refreshing when one CEO steps up to a challenge and a broader responsibility. In taking over Bear Stearns, the failing investment bank, just hours before it would have been forced into bankruptcy by a proverbial “run on the bank,” JP Morgan CEO Jamie Dimon took on a broad public responsibility to keep financial markets from unraveling and apparently made a very attractive purchase for his institution.

Not that Dimon acted alone. He had a little help from his friends – namely, Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke – who urged Dimon to step to the challenge of taking over Bear and agreed to guarantee up to $30 billion in failing mortgage-backed securities.

Having watched their shares fall from $170 per share a year ago to the $2 settlement outraged Bear´s shareholders. On the other hand, media pundits like CNN´s Lou Dobbs called it a “corporate bailout” and charged the Bush administration with enriching Bear´s executives. Not exactly, Lou. Thirty per cent of Bear Stearns´ shares are held by executives and employees, who saw their value decline by more than 98 per cent in the last year.

The reality is that there are many more legitimate claimants to a firm like Bear than just its shareholders, especially when its equity value is collapsing. Investment firms will heavily leverage their equity – in Bear´s case, more than 30:1 – and the lenders and a wide array of counterparties all have a stake in the financial health of the firm. I believe that Paulson and Bernanke acted wisely to negotiate a settlement that kept Bear from defaulting on its debt obligations while letting the equity holders take the largest financial hit. After all, they were responsible for the position that Bear Stearns got itself into this past week, and they should pay the price. By the way, this responsibility should also mean that Bear Stearns executives like CEO Alan Schwartz and former CEO James Cayne, who held the top slot until this past January, should not receive any termination or change-of-control payments as a result of the sale to JP Morgan.