Who Should Stay At The Graybar Hotel?

A question of fairness.

Whether the financial crisis of 2008 ate a chunk of your liquidity or a goodly portion of the value of your 401(k), or even if you came away relatively unscathed, chances are you’ve been waiting ever since for justice to be served. With the trillions of dollars of wealth that disappeared, with the shady dealings of mortgage-backed securities and bundled sub-prime amortizations, surely there’s a guilty party somewhere who must be made to pay.

Four years later...and we’re still waiting. No major criminal cases have been filed, few fines have been paid, none but a handful of mid-level executives lost their jobs. If there’s a scale somewhere representing this vision of justice, then someone’s thumb must be firmly planted on one side.

So you might take heart to learn that the New York Attorney General’s office, with the blessings of the Justice Department and several other states, has filed a civil fraud suit against JPMorgan Chase & Company, alleging misrepresentation of the values of mortgage securities sold in 2006 and 2007. The case won’t result in anyone spending time in the ol’ Graybar Hotel, but it’s a start, right?

Actually, no.

Looking closer at the suit, we see that JPMorgan isn’t actually accused of any wrongdoing (nor is Chase, for that matter). Who sold the fraudulent securities? That would be the now-defunct investment bank Bear Stearns, which JPMorgan acquired at fire sale prices — $2 per share — in 2008.

But fair is fair. When you buy a company you also buy its liabilities, including responsibility for its criminal wrongdoings. That’s clearly why JPMorgan is on the hook here.

Maybe so. But as long as we’re introducing the concept of fairness, let’s give JPMorgan a fair shake. If you cast your mind back to those dark days of March 2008, you’ll recall the impending failure of Bear Stearns was sending shockwaves throughout the entire financial system, bringing it to the very precipice of collapse. JPMorgan certainly wasn’t looking for acquisitions just then; they were pressured into it by the Federal Reserve and the Treasury Department, with the argument (which still holds up in hindsight), that the economy just might depend on it.

We want justice too, and if justice is served by criminal and/or civil prosecution of the Big Banks, then we’re all for it. We just don’t think justice — or even common sense — is served by going after JPMorgan in this case. Because all JPMorgan is guilty of, in this case at least, is saving our collective necks.

The C4:

1. The financial collapse of 2008, which has been convincingly tied to the housing bubble and the introduction of sub-prime mortgage-backed securities, has to date resulted in very little in the way of criminal prosecutions or civil liability.
2. This has led to an understandable, yet not-always-rational yearning for justice. We get that. We’d also like to see the guilty punished. We just want to make sure the innocent aren’t swept up as well.
3. Is that what’s going on with the civil fraud case against JPMorgan? The suit alleges fraud committed by Bear Stearns, which JPMorgan acquired after the fact. The law is clear: a company is liable for the transgressions of any entities it acquires.
4. But sometimes fairness is more important than the law. Our nation’s financial regulators begged JPMorgan to buy Bear Stearns, and when JPMorgan did, they just might have saved our economy. Should they be punished for it? We don’t think so, but we’d love to hear your opinion. Please log in and let us know.

Is Lehman's off the ropes?

Will the Wall Street cornerstone climb back in the ring?

Looking back, the financial collapse of 2008 seemed to move like a glacier: slowly, inexorably, unstoppably. But in the midst of that slow-mo meltdown, a few memorable events struck with tectonic suddenness, altering forever our financial landscape and leaving us to wonder if there could ever be a recovery from such unprecedented economic shock.

The worst, by far, had to be the September 2008 collapse of Lehman Brothers, a 161-year-old cornerstone of Wall Street investment banking. Like so many bank failures of the time, this one was fueled by twin mistakes: an over-investment in mortgage-backed securities, and an inadequate supply of capital to cover the bets that were destined to go sour. The only unique part of Lehman’s story was the scale: they went down holding nearly $1 trillion in debt, resulting in the largest bankruptcy in U.S. history.

Knowing that, what do you say when Lehman’s emerges from Chapter 11 a mere three and a half years later? “Miraculous,” is what the bankruptcy judge said, and he’s right.

Despite its bankruptcy, Lehman’s was always flush with assets. Their real-estate holdings include some of the world’s most profitable hotels and office space. They’ve got tens of billions in private-equity investments and corporate bonds. They even own a sizable stake of Formula One Racing.

The management of Lehman Brothers has spent the last three years creating a liquidation plan, to turn those assets into a payday for Lehman creditors. The first checks are scheduled to go out in April, and are expected to total about $65 billion, or 17 cents on the dollar.

Not a great return, but certainly better than nothing, and probably much better than most creditors expected. 

So which part is miraculous — that Lehman’s has emerged from bankruptcy, or that they seem to be doing all they can to make things right? Either way it’s a sight to behold, and it’s nice to believe in miracles again.

The C4:

1. Lehman Brothers filed for Chapter 11 bankruptcy on September 15, 2008. It was the largest bankruptcy in U.S. history and one of the defining events of the Great Recession. 
2. Lehman’s is unwinding over $600 billion worth of debt by liquidating approximately $65 billion in assets.
3. After just three and a half years in bankruptcy, Lehman’s is emerging in March 2012 and beginning to repay creditors in April.
4. A concerted effort to do what’s right goes a long way toward fixing past mistakes.