Thursday, June 6, 2013

More Trouble for JPM; Alabama to Cost $1.6 Billion


I am always thankful that my intellect directed me to work for a private company and has stopped me to seek out a career at the best-known financial institutions. Sure, there are benefits to work for a company like JPMorgan Chase & Company, but over the past decade firms like JPM and Goldman Sachs or Morgan Stanley have failed to attract top talent. They do attract interest from those who did not quite cut it for the true elite, but are still much better than the average.

During the financial crisis Jamie Dimon, CEO and Chairman of JPM, made it through to be hailed as the top CEO in the financial world. The golden boy who did not disregard risk management and navigated his firm to record profits enjoyed a nice run until the London Whale disaster shook his magic cage. Almost $7 Billion were wiped off the books by a trading loss caused by the London Whale.

Jamie Dimon did survive a vote of confidence and was allowed to keep both titles as some shareholders wanted to separate the two roles which would have essential caused Dimon to resign. A resignation by Dimon may have caused the share price to collapse and that would cause bigger losses than to allow Dimon to be happy keeping both roles.

Just as the London Whale disaster is receding from the news and JPM tries to rebuild it name it is being hit with another $1.6 Billion loss, this time much closer to home. Jamie Dimon decided to flush $1.6 Billion down the toiled in Jefferson County, Alabama as the bank forgave $842 Million in debt owed by Jefferson County to JPM in 2011 as it took the lead to arrange some risky security deals which may have been designed to safe Jefferson County, but related into the U.S. biggest municipal bankruptcy filing in history.

In 2009 JPM settled an SEC investigation into financing for Jefferson County for $722 Million. In total the costs are close to $1.6 Billion, but at least they are only one-quarter of the losses caused by the London Whale. At least Dimon helps to write history and his name can appear in the books, some CEO’s think it is better to make negative history than no history at all.

Let’s be fair, Jamie Dimon did not run JPM at that time and was employed by One Corporation which was purchased by JPM. So, it is not Dimon’s fault here. The exotic financing deal resulted in a prison sentence for County Commission and Birmingham Mayor Larry Langford on bribery charges.  The total debt tied to the sewer system is $3.1 Billion and Jefferson County announced that it made a deal with companies holding $2.4 Billion of the debt.

JPM will take a 70% while hedge funds will take roughly 20% of a hit. This shows that hedge funds came out on top, if that is what you would like to call it. Deals with municipalities under water are always popular as you are dealing with entities in distress and seeking to stay afloat by any means possible. Sure, the JPM case shows how it can backfire and it is nice for the media to gag over.

Trust me, for every one JPM like case there are a few dozen success stories nobody writes about as all parties involved try to keep it a secret and for good reasons. 

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