The deals were monumental. They transformed the banking landscape and created a handful of financial powerhouses, reinforcing the too-big-to-fail model. But a stream of lawsuits and towering losses have left some of these buyers with remorse.
“We’ve lost $5 billion to $10 billion on various things related to Bear Stearns now. And, yes, I put it in the unfair category,” JPMorgan chief executive Jamie Dimon said at a recent Council on Foreign Relations event. “Would I have done Bear Stearns again knowing what I know today? It’s real close.”
Dimon’s lament came a week after New York’s attorney general filed a civil lawsuit against JPMorgan, alleging Bear Stearns engaged in widespread fraud in the sale of mortgage-backed securities in 2006 and 2007. The actions occurred before JPMorgan even considered buying the foundering securities firm.
Such legal action has become commonplace as investors, shareholders, consumers and government attorneys sift through the wreckage of the financial crisis.
Consider Bank of America, which earlier this month reported a $1.6 billion charge for litigation expenses in its third-quarter earnings. The lion’s share of that expense was tied to a $2.4 billion settlement reached in September with shareholders who accused the bank of misleading them about the health of Merrill Lynch. Wells Fargo is also opening its wallet to resolve hundreds of millions of dollars worth of lawsuits with Wachovia shareholders and investors.
It is a bittersweet sequel to the dramatic rescue scenario of 2008, when the Bush administration called on the titans of Wall Street to shelter their wounded compatriots for the sake of the economy. Strong firms had their pick of multibillion-dollar corporations at fire-sale prices. Deals were sometimes pulled together over the weekend or in a single night.
“The government was intervening in an almost desperate way, so the normal acquisition procedures simply didn’t exist,” said Elizabeth Nowicki, a former attorney for the Securities and Exchange Commission who teaches at Tulane University Law School. “The big concern at the time was that the entire banking industry was going to implode . . . there was that much uncertainty seizing up the market.”
In that frantic environment, the big banks stepped in with an understanding that the long-term benefits of the acquisitions would eventually outweigh the immediate troubles.
But have they?
JPMorgan: Mixed results
As the extent of Bear Stearns’s portfolio of toxic mortgage securities came to light, the Federal Reserve scrambled in March 2008 to prevent the nation’s fifth-largest investment bank from collapsing and dragging down the financial system.