Fed Loosens Capital Rules for JPM
Up to $220 billion of Bear Stearns assets can be excluded from J.P.Morgan’s risk-weighted assets.
Up to $400 billion of Bear Stearns assets can be excluded from the denominator of the tier 1 leverage capital ratio.
JPMC also has requested that the Board provide JPMC with relief from the Board’s risk-based and leverage capital guidelines for bank holding companies.
Specifically, JPMC has requested that the Board permit JPMC, for a period of 18 months, to exclude from its total risk-weighted assets (the denominator ofthe risk based capital ratios) any risk-weighted assets associated with the assets and other exposures of Bear Stearns, for purposes of applying the risk-based capital guidelines to the bank holding company. In addition, JPMC has asked the Board to permit JPMC, for a period of 18 months, to exclude from the denominator of its tier 1 leverage capital ratio any balance-sheet assets of Bear Stearns acquired by JPMC, for purposes of applying the leverage capital guidelines to the bank holding company.
The Board has authority to provide exemptions from its risk-based and leverage capital guidelines for bank holding companies.
JPMC has agreed to several conditions that would limit the scope ofthe relief request.
First, JPMC proposes to exclude from its risk-weighted assets, for purposes of applying the Board’s risk-based capital guidelines for bank holding companies, the risk-weighted assets of Bear Steams existing on the date of acquisition of Bear Stearns by JPMC, up to a total amount not to exceed $220 billion.
Second, JPMC proposes to exclude from the denominator of its tier 1 leverage capital ratio, for purposes of applying the Board’s tier 1 leverage capital guidelines for bank holding companies, the assets of Bear Stearns existing on the date of acquisition of Bear Stearns by JPMC, up to an amount not to exceed $400 billion.
These regulatory capital exemptions would assist JPMC in acquiring and stabilizing Bear Stearns and would facilitate the orderly integration of Bear Stearns with and into JPMC. The Board notes that (i) JPMC would be well capitalized upon consummation of the acquisition of Bear Stearns, even without the regulatory capital relief provided by the exemptions; and (ii) JPMC has committed to remain well capitalized during the term of the exemptions, even without the regulatory capital relief provided by the exemptions.
Love letter from the Fed to Dear JPMC
Fed Relaxes Restrictions for J.P. Morgan-Bear Deal
April 4th, 2008 at 5:07 pm
What next? A letter from the Tsy exempting JPM from counterfeiting regulations?
April 4th, 2008 at 5:10 pm
Amazing deal if you can get it, this raises a question, who was desperate for a deal here ?
Not Jamie me thinks…
April 4th, 2008 at 5:37 pm
JPM acts like one of the blackmailers in crime fiction. Once you pay, you keep on paying.
April 5th, 2008 at 12:31 pm
Bank capital or capital accounts include the aggregate of capital stock, notes & debentures, surplus, undivided profits, and all net-worth reserves. The primary function of bank capital is to serve as a cushion/backstop to protect bank creditors (to absorb losses & still maintain bank solvency). This function is not as important as it once was.
The proportion of bank capital, or capital ratio, is of total liabilities and capital accounts has been steadily decreasing since 1875. Capital accounts since then have been augmented by the enactment of the FDIC, expanded discounting powers and privileges by the Reserve Authorities (recently invoked for non-banks), etc. These government safety nets primary purpose is to provide shiftability with respect to the earning assets of the money creating depository institutions.
These regulations have reduced the dependence that used to be placed on the stockholder’s equity. (bank deficits are first charged off against the reserve and undivided profits accounts & then against surplus). Charging off surplus as opposed to the capital-stock account, removes the bank from reorganization.
Capital accounts are low despite the large earnings by the banks, and not low because the banks haven’t retained a large proportion of their earnings, but capital accounts are low because of the expansion of the vast superstructure of money & credit created by the member banks, as made possible by the Central Bank (Federal Reserve).
That is, the lending capacity of the money creating depository institutions is dependent upon monetary policy. It is not restricted by the volume of bank capital. And the trend rate of the ratio of bank capital to bank liabilities will continue to decline. And there is no magic governing ratio.
The liquidity and solvency of the banks should be based credit worthiness of the loan or investment and not the adequacy of bank capital. Contrary to Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, this is the most important determination of the banks soundness.
April 5th, 2008 at 7:43 pm
# 4 flow5 Says:
April 5th, 2008 at 12:31 pm
You make it sound like it is all good and dandy. Then, why are we seeing what we are seeing?
April 6th, 2008 at 2:33 pm
To force credit expansion may require methods incompatible with the tenets of a free-enterprise system. If the situation is such as to create suspicion & reluctance on the part of borrowers and lenders, an extensive use of government guarantees and other underwriting devices may be required if any significant degree of credit expansion is to be achieved.
April 8th, 2008 at 2:10 am
How about exempting me from having a downpayment, income and having to repay the loan for 5 years. Would that be a foolproof way to make money or what?
April 8th, 2008 at 7:55 am
#4 Are you f’ing kidding me?
“The liquidity and solvency of the banks should be based credit worthiness of the loan or investment and not the adequacy of bank capital.”
I would argue that the loans should be based on the bank having enough capital to make that loan, and that the liquidity and solvency should be based on their decisions of whom to lend to and how much to lend.
If they make bad decisions, then they should pay for it, end of story. If they make a loan to me without checking my background and I never pay them back, and as a result of this, they are unable to sell my loan to someone else, the bank should have to eat the loan and it should hurt their solvency and liquidity.
This is nothing more than welfare for the wealthy.
April 8th, 2008 at 1:46 pm
From a systems viewpoint, commercial banks as contrasted to financial intermediaries never loan out, and can’t loan out, existing deposits (saved or otherwise) including existing TRs, or TDs or the owner’s equity or any liability item. When CBs grant loans to or purchase securities from the non-bank public (which includes every institution, the U.S. Treasury, the U.S. Government, state, and other governmental jurisdictions) and every person, except the commercial and the Reserve Banks), they acquire title to earning assets by initially, the creation of an equal volume of new money-TRs.
I.e., CBs don’t loan out their capital. They create new money.
April 9th, 2008 at 2:03 pm
Did you guys read the .PDF? I think all the fancy financial talk and endless acronym speak can be boiled down into this:
“We’ll give you all the free money you want; just please keep all that derivative Bear Stearns crap off your balance sheet until this crap boils over - we’re giving it 18 months (why start accounting for it now!? HA HA). Oh, and please keep pretending like you’ll pay it back. We’ll make sure our little cubicle lemmings keep tabs on all these “obligations” (wink wink).
April 9th, 2008 at 5:30 pm
How utterly corrupt. Bernanke belongs in prison.