Bear Stearns: One year later

JPMorgan Chase appears to be digesting the purchase of Bear quite nicely. But Jamie Dimon's bank is not without its own troubles.

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By David Ellis, staff writer

JPMorgan Chase chief Jamie Dimon earned praise following the firm's purchase of Bear Stearns a year ago.
While JPMorgan Chase's stock has fared better than its peers, it has not been immune to market turmoil and investor nervousness about the banking sector.

NEW YORK ( -- How will you mark the anniversary of Bear Stearns' demise? With a quiet celebration if you're JPMorgan Chase.

Monday will mark exactly one year since the New York-based bank, with the backing of federal regulators, announced plans to acquire the 85-year old Bear Stearns for the rock-bottom price of $236 million, or $2 a share.

Chase would later sweeten its offer to $10 a share, only to come under severe scrutiny from both lawmakers and American taxpayers for its role in a deal that many believed at the time represented a bailout for a Wall Street firm that deserved to fail.

Things have hardly slowed down for the banking giant since then. Just six months after agreeing to buy Bear, Chase scooped up the banking assets of the fallen thrift giant Washington Mutual for $1.9 billion immediately after WaMu was seized by federal regulators.

And while peers like Citigroup (C, Fortune 500), Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500) suffered humiliating fourth-quarter losses, JPMorgan managed to stay in the black, reporting a profit of $702 million, or 7 cents a share. The bank's results were helped in large part by a one-time gain of $1.3 billion related to the purchase of WaMu.

Still, few analysts would cite the acquisition of Bear Stearns as the leading reason why the company has quickly emerged as a leading player on Wall Street and Main Street. But it certainly hasn't hurt.

"I think it probably has helped a little bit," said Robert Maneri, managing director at Victory Capital Management, whose firm owns Chase shares. "Between Bear and WaMu, it sure makes them a serious player."

Holding up better than other banks

The purchase of Bear Stearns did help to fill in several key gaps within Chase's business, most notably the hedge-fund servicing prime brokerage business that the bank had long coveted.

At the same time, the Bear deal strengthened many of the Chase's existing divisions, including its commodities and asset management businesses. In fact, JPMorgan Chase (JPM, Fortune 500) chief executive officer Jamie Dimon told investors in January that the combination of those respective units probably helped soften the blow of the credit crunch during the final three months of 2008.

While the message from Chase has been encouraging, analysts note that the company has offered few details about just how beneficial the purchase has been for the firm.

At the time the deal was announced, the banks said it expected Bear to generate roughly $1 billion in after-tax earnings over the next 12 to 18 months.

It's uncertain if Chase will be able to live up to that promise considering that Bear Stearns' appetite for risky assets trailed only that of Lehman Brothers and Merrill Lynch.

But most analysts agree that if the Bear deal were going to lead to massive writedowns for Chase, as was the case with Bank of America (BAC, Fortune 500) after its 11th-hour purchase of Merrill Lynch last September, it would have happened already.

While a more conservative approach, not to mention timing, have worked to Chase's advantage over the past year, the banking giant and its so-called "fortress" balance sheet have still taken some hits.

At its annual investor day last month, the company warned that losses within its home-equity portfolio could climb as high as $1.4 billion per quarter this year.

That news came just days after Chase slashed its quarterly dividend nearly 87% to just 5 cents a share in a bid to preserve capital.

Of course, other issues continue to weigh on the minds of investors as well. There are worries about potential losses within Chase's massive credit card operations and questions as to whether Chase will look to quickly repay the $25 billion in funds it received under the government's Troubled Asset Relief Program, or TARP.

And while shares of the bank have fared better than rivals such as Citi and BofA, who have been hammered due to speculation that they might be nationalized by the government, the stock has still lost approximately 44% of its value since the Bear deal was announced last year.

Dimon not done making deals?

For now, analysts argue that the focus for Chase will be navigating the choppy economic waters. Ongoing deterioration in the housing market and broader economy, which have already put many of the bank's consumer-related portfolios under severe strain, threaten to do even further damage.

The company could also be forced to raise more capital depending on how the bank fares in so-called "stress tests" that regulators are conducting to determine whether big banks need more funding to withstand a drawn-out recession.

During the company's investor day last month, senior executives indicated that they were working to manage some of its trouble spots, including its home equity portfolio and credit card division.

At the same time, the company still faces the tall task of digesting the branches and assets of WaMu.

Dimon said earlier this year he anticipated Chase would make a lot of headway integrating those two firms' operations. But some experts worry that it could be a slow process.

"To integrate a large retail bank with Chase retail branches is certainly no small undertaking," said Tom Kersting, financial services analyst at St. Louis-based Edward Jones. "What you are seeing now is banks taking even more time - they want to make sure they get it done right rather than quickly."

And with his reputation as a dealmaker growing, Dimon continues to field questions from investors and analysts about whether he may consider yet another acquisition sometime soon..

Dimon, like most CEOs, is not one to reveal his hand. But he has typically said that Chase would potentially be interested in other purchases as long as it was a great opportunity at an attractive price.

Still, analysts are hard pressed to name specific targets that the firm would even consider given the concerns about toxic assets at many banks.

It's also not clear if Chase could acquire another big bank without exceeding the cap that limits a bank from controlling more than 10% of the nation's bank deposits.

Others contend that it makes more sense for Chase to hold onto capital and focus on getting its operations into tip-top shape.

But as the financial services industry remains under pressure and more opportunities crop up, it may be hard to look away, especially if government assistance for another deal is on the table as it was with Bear Stearns.

One area that could pique Dimon's interest, notes Nancy Bush, bank analyst and founder of NAB Research LLC, is retail banking business. There are still several areas, most notably the Southeastern part of the country, that is glaringly absent from Chase's nationwide footprint.

And shares of several big regional banks in the South, such as Atlanta-based SunTrust (STI, Fortune 500) and Regions Financial (RF, Fortune 500) of Birmingham, Ala. have been hit particularly hard during the past few months.

"The guy, if nothing else, is opportunistic," said Bush. To top of page

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