Today’s blog focuses on the U.S. dollar funding shortfall that took place at JPMorgan Chase, Bear Stearns and Washington Mutual during the period from February 8, 2008 to March 16, 2009. Today’s blog confirms a result that will be surprising to many: in combination with Bear Stearns and Washington Mutual, JPMorgan Chase was the most significant borrower from the Federal Reserve after AIG. JPMorgan’s peak borrowings, on a consolidated basis, were $101.1 billion, nearly four times the $28 billion that the Federal Reserve was willing to lend to Lehman Brothers only after Lehman declared bankruptcy on September 14, 2008.
This is the thirteenth Kamakura case study in liquidity risk, following earlier blogs on AIG, Bank of America, Countrywide Financial, Merrill Lynch, a consolidation of the latter three firms, Lehman Brothers, Morgan Stanley, Citigroup, Dexia SA, Depfa Bank plc, Barclays, and Goldman Sachs.
Under the Dodd-Frank Act of 2010, the Board of Governors of the Federal Reserve was required to disclose the identities and relevant amounts for borrowers under various credit facilities during the 2007-2010 financial crisis. These credit facilities provide perhaps the best source of data about liquidity risk and funding shortfalls of the last century. This data is available for purchase from Kamakura Corporation and is taken from the Kamakura Risk Information Services Credit Crisis Liquidity Risk data base. We use this data to determine to what extent there was a funding shortfall at JPMorgan Chase, Bear Stearns, and Washington Mutual during the credit crisis.
The data used for all three firms in this analysis is described in more detail below. The data consists of every transaction reported by the Federal Reserve as constituting a “primary, secondary, or other extension of credit” by the Fed. Included in this definition are normal borrowings from the Fed, the primary dealer credit facility, and the asset backed commercial paper program. Capital injections under the Troubled Asset Relief Program and purchases of commercial paper under the Commercial Paper Funding Facility are not included in this definition put forth by the Federal Reserve.
A detailed chronology of the 2007-2009 credit crisis is given in these two recent blog posts:
van Deventer, Donald R. “A Credit Crisis Chronology Part 1 Through February 2008: This Time Isn’t Different,” Kamakura blog, www.kamakuraco.com, May 13, 2011.
van Deventer, Donald R. “A Credit Crisis Chronology Part 2 March 2008 Through March 2009: This Time Isn’t Different,” Kamakura blog, www.kamakuraco.com, May 14, 2011.
The key dates in the chronology relevant to JPMorgan and the two firms it acquired are summarized below. We call your attention to the references to deposit run off at Washington Mutual, which total $27 billion. Wamu’s borrowings from the Federal Reserve were only $2 billion for 8 days, so deposit run-offs were met largely via Federal Home Loan Bank borrowings and asset sales. The Levin report referred to below is the report entitled “Wall Street and the Financial Crisis: Anatomy of a Financial Collapse,” Majority and Minority Staff Report, Permanent Committee on Investigations (Senator Carl Levin, Chairman), U.S. Senate, April 13, 2011.
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September 2, 2004
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Washington Mutual chief risk officer Jim Vanasek sends internal Washington Mutual memo stating “At this point in the mortgage cycle with prices having increased far beyond the rate of increase in personal incomes, there clearly comes a time when prices must slow down or perhaps even decline.” (Source: Levin report, page 66)
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August, 2006
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Internal Washington Mutual presentation on Option ARM credit risk reported that from 1999 to 2006 Option ARM borrowers selected the minimum payment more than 95% of the time. (Source: Levin report, page 59)
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October 31, 2006
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Federal banking regulators caution banks to use fully indexed rate when qualifying borrowers for a loan, including loans with lower initial teaser rates. Washington Mutual delays implementation for six months (Source: Levin report, page 94-5).
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2006
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Washington Mutual moves its holding company subsidiary Long Beach Mortgage Corporation into its banking subsidiary (Source: Levin report, page 55).
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December 22, 2006
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FDIC dedicated examiner at Washington Mutual Steve Funaro raises questions of senior management about unexpected increases in “early payment defaults” and demands from Wall Street firms doing securitizations to repurchase the loans. (Source: Levin report, page 82)
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December 31, 2006
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Washington Mutual’s high risk loans begin incurring record rates of delinquency and default (Source: Levin report, page 48).
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January 31, 2007
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Wamu chief risk officer Ron Cathcart identifies 5 top priority risk issues “in light of the slowdown and decline in home prices in some areas.” (Source: Levin report, page 82).
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January 31, 2007
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The OTS found that, as of January 31, 2007, Washington Mutual had $62 billion in outstanding Option ARMS in its investment portfolio, of which 80% were negatively amortizing. (Source: Levin report, page 220).
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February 18, 2007
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Wamu chief risk officer for mortgage lending notes in a memo “There is a meltdown in the subprime market” and that “many submarkets within California actually have declining home prices…” (Source: Levin report, page 128).
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February 28, 2007
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David Beck, Wamu head of Wall Street securitizations, writes that securitizing second lien loans is “not a viable exit strategy” and that a Wamu May 2006 securitization had already experienced 7% foreclosures. (Source: Levin report, page 83).
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June 7, 2007
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Bear Stearns suspends redemption rights for hedge fund heavily invested in subprime debt market after losing 19% of value in April alone (Source: www.businessweek.com)
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June 17, 2007
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Two Bear Stearns subprime hedge funds collapse (Source: Levin report, page 47)
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June 21, 2007
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“Bear Stearns Fund Collapse Send Shock Through CDOs” article on Bloomberg details losses on mortgage-backed securities-related CDOs
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June, 2007
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Washington Mutual shuts down Long Beach Mortgage Corporation as a separate entity (Source: Levin report, page 55).
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July 17, 2007
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Bear Stearns sends letter to investors stating that two Bear Stearns hedge funds specializing in subprime debt have lost at least 90% of their value. The funds invested only in AAA tranches of subprime-related debt. (Source: investopedia.com)
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August 1, 2007
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Bear Stearns’ two troubled funds file for bankruptcy protection and the company freezes assets in a third fund. (Source: www.investopedia.com)
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September 30, 2007
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Washington Mutual halts subprime lending completely. (Source: Levin report, page 55).
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November 29, 2007
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Bear Stearns cuts 650 more jobs, bringing total job cuts to 1,500, 10% of its total work force. (Source: www.ft.com)
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December 20, 2007
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Bear Stearns reports its first quarterly loss in 84 years, $854 million, after write downs of $1.9 billion on mortgage holdings (Source: www.ft.com)
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December 31, 2007
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At the end of 2007, 84% of the total value of Washington Mutual Option ARMS were negatively amortizing, meaning that the borrowers were going deeper into debt rather than paying off their balances. (Source: Levin report, page 59)
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January 16, 2008
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JPMorgan Chase says it has cut the value of its investments in the US subprime market by $1.3 billion (Source: http://news.bbc.co.uk)
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March 10, 2008
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Rumors of liquidity problems at Bear Sterns arise, and people begin selling financial stocks (Source: Financial Times).
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March 12, 2008
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Bear Stearns CEO Schwartz states that, despite rumors, there is no threat to the bank’s liquidity (Source: CNBC).
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March 12, 2008
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The U.S. Federal Reserve offers to lend primary dealers up to $200 billion in Treasury securities for 28 day intervals, taking AAA rated mortgage backed securities as collateral, in order to boost liquidity of MBS market (Source: Financial Times).
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March 13, 2008
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Bear Stearns reports a $15 billion loss in cash and cash equivalents in two days. Liquid assets also dropped $2 billion mainly as a result of the loss of investor confidence (Source: Wall Street Journal).
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March 14, 2008
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Federal Reserve and JPMorgan Chase agree to provide emergency funding for Bear Stearns. Under the agreement, JPMorgan would borrow from the Federal Reserve discount window and funnel the borrowings to Bear Stearns (Source: Forbes and www.datacenterknowledge.com).
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March 16, 2008
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JPMorgan Chase agrees to pay $2 per share for Bear Stearns on Sunday, March 16, a 93% discount to the closing price on Friday March 14. JPMorgan agreed to guarantee the trading liabilities of Bear Stearns, effective immediately (Source: New York Times).
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March 16, 2008
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Federal Reserve agrees to provide up to $30 billion of financing to support Bear Stearns’ “less liquid” assets (Source: New York Times).
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March 24, 2008
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JPMorgan Chase raises bid for Bear Stearns from $2 per share to $10 per share. JPMorgan also agreed to bear the first $1 billion of losses on Bear Stearns assets, with the Federal Reserve bearing the next $29 billion of losses. (Source: The Times of London).
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March 24, 2008
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Federal Reserve Bank of New York forms Maiden Lane I to help JPMorgan Chase acquire Bear Stearns (Source: Levin report, page 47).
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April 8, 2008
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Washington Mutual, the largest savings and loan association, receives a $7 billion capital injection (Source: Reuters).
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May 29, 2008
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Bear Stearns shareholders approve sale and the acquisition by JPMorgan Chase is completed (Source: Levin report, page 47).
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July 17, 2008
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Despite $2.4 billion in second quarter write downs, JPMorgan Chase does better than expected with a net income of $2 billion or 54 cents per share. During the same period last year the bank made $4.23 billion or $1.20 per share (Source: Financial Times).
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July 26, 2008
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Washington Mutual borrows $10 billion from the Federal Reserve’s discount window, the Federal Home Loan Banking system, and open market operations to bolster on hand liquidity (Source: Financial Times).
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July 31, 2008
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Depositors withdraw $10 billion from Washington Mutual in wake of IndyMac failure (Source: Levin report, page 57).
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August 12, 2008
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JPMorgan Chase reports $1.5 billion in write downs in July, and bankers state July was the worst month for mortgage-backed securities since the start of the crisis (Source: Financial Times).
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September 8, 2008
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Washington Mutual ousts CEO Killinger. As a result of the credit crisis, the company’s share price fell from $40 in the summer of 2007 to $3 in fall 2008 (Source: Financial Times).
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September 15-23, 2008
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Depositors withdraw $17 billion from Washington Mutual (Source: Levin report, page 57).
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September 25, 2008
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Washington Mutual fails, subsidiary bank is seized by the FDIC and sold to JPMorgan Chase for $1.9 billion. JPMorgan Chase immediately wrote off $31 billion in losses on the Washington Mutual assets. (Source: The Guardian and Levin report, page 47).
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September 26, 2008
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JPMorgan issues $8 billion in common stock in conjunction with Washington Mutual takeover (Source: The Guardian).
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September 28, 2008
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Washington Mutual Inc., the holding company left after banking operations were seized, files for Chapter 11 bankruptcy (Source: The Seattle Times).
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October 28, 2008
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U.S. uses TARP to buy $125 billion in preferred stock at 9 banks (Source: Levin report, page 47). The 9 banks held over $11 trillion in banking assets or roughly 75% of all assets owned by U.S. banks (Source: SIGTARP report, page 1).
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November 1, 2008
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JPMorgan Chase reveals plan to restructure $70 billion in mortgages for as many as 400,000 borrowers who are having trouble with their payments (Source: Wall Street Journal).
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This blog reports on “primary, secondary, or other extensions of credit” by the Federal Reserve to JPMorgan Chase, Bear Stearns, and Washington Mutual during the period February 8, 2008 to March 16, 2009. The three firms’ borrowings from the Federal Reserve can be summarized as follows, beginning with borrowings in the name of Bear Stearns:
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Borrowing dates:
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First borrowing $27.5 billion on March 18, 2008 for one day, then borrowings continuously outstanding from March 24, 2008 until June 23, 2008.
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Average from
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2/8/2008 to 3/16/2009
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$6.2 billion
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Average when Drawn
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$27.0 billion
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Maximum Drawn
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$100 billion on April 3, 2008
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Number of Days with
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Outstanding Borrowings
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93 days
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We next report on borrowings in the name of Washington Mutual:
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Borrowing dates:
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First borrowing $2 billion for 8 days beginning September 18, 2008. No other borrowings thereafter.
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Average from
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2/8/2008 to 3/16/2009
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$39.7 million
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Average when Drawn
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$2.0 billion
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Maximum Drawn
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$2.0 billion
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Number of Days with
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Outstanding Borrowings
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8 days
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We then report on the borrowings in the name of JPMorgan Chase itself:
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Borrowing dates:
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First borrowing $175 million on March 6, 2008 for one day, followed by borrowings ranging from $12.9 billion to $28 billion March 14 to 17, 2008. Borrowings are continuous from September 22 to the end of the period, March 16, 2009.
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Average from
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2/8/2008 to 3/16/2009
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$11.4 billion
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Average when Drawn
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$22.7 billion
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Maximum Drawn
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$67.5 billion on October 15, 2008
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Number of Days with
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Outstanding Borrowings
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203 days
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Finally, we summarize the consolidated borrowings data for the combination of all borrowings in the name of JPMorgan, Bear Stearns, and Washington Mutual:
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Borrowing dates:
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$175 million on March 3, 2008.
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Average from
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2/8/2008 to 3/16/2009
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$17.7 billion
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Average when Drawn
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$23.7 billion
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Maximum Drawn
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$101.1 billion on April 3, 2008
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Number of Days with
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Outstanding Borrowings
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290 days
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The graph below shows the one month and one year default probabilities for JPMorgan Chase from Kamakura Risk Information Services version 5.0 Jarrow-Chava reduced form credit model. Default probabilities began rising in an erratic pattern two months after the bankruptcy of Lehman Brothers on September 15, 2008 with the rise continuing through March 16, 2009, the last data point provided by the Federal Reserve:
Cumulative default risk is shown below for JPMorgan Chase on March 17, 2008, immediately after the announcement of the combination with Bear Stearns. JPMorgan’s 5 year cumulative default risk was only 1.09%, a small fraction of the Barclays peak of 13.89% in March 2009.
JPMorgan’s first borrowing from the Federal Reserve was $175 million on March 3, 2008, probably a “practice run” in anticipation of the Sunday March 16 announcement that JPMorgan Chase would absorb Bear Stearns in a Fed-supported rescue. The graph below shows the dual peaks in the consolidated borrowings in the names of JPMorgan Chase, Bear Stearns and Washington Mutual. The first peak borrowing for the combined firms from the Fed was $101.1 billion on April 3, 2008, two weeks after the rescue of Bear Stearns. The second peak was $67.5 billion on October 15, 2008, one month after the failure of Lehman and three weeks after Washington Mutual was absorbed. Part of the means of the pay down following this second peak was a $25 billion capital injection in late October 2008 under the Capital Purchase Program of the Troubled Asset Relief Program, according to an October 5, 2009 report of the Special Inspector General of the Troubled Asset Relief Program.
In the chart below, we compare JPMorgan’s consolidated funding short fall to those firms whose liquidity risk we have previously analyzed in this series. JPMorgan’s consolidated funding shortfall, measured by average drawn borrowing of $23.67 billion, ranks third of the firms analyzed in this series to date.
If one ranks the same firms by largest outstanding borrowing on a single day, consolidated JPMorgan ranks second, with a peak borrowing of $101.1 billion, almost four times the $28 billion post-bankruptcy borrowing of Lehman Brothers:
Borrowings During the Bear Stearns Crisis, March 14, 2008 to May 31, 2008
If we focus on the period from March 15 (one day prior to the JPMorgan Chase absorption of Bear Stearns) to May 31, 2008, the consolidated JPMorgan Chase ranks first and Bear Stearns, on a stand-alone basis, ranks second.
If one analyzes the maximum borrowings during the Bear Stearns crisis, March 15-May 31, 2008, JPMorgan-related entities rank 1, 2 and 3:
Borrowings from the Commercial Paper Funding Facility
There were no borrowings from the commercial paper funding facility by JPMorgan Chase, Bear Stearns, or Washington Mutual.
Implications of Funding Shortfall Data
JPMorgan Chase borrowed nearly four times more money, $101.1 billion on April 3, 2008, than the $28 billion withheld from Lehman Brothers until after Lehman declared bankruptcy. Sixth months later, JPMorgan borrowed a second peak of $67.5 billion on October 15, 2008, more than double what was refused to Lehman. Both before and after Lehman, JPMorgan suffered larger funding shortfalls than Lehman. Clearly, JPMorgan was too big to fail and Lehman was not.
Background on the Federal Reserve Data
A summary of the Federal Reserve programs that were put into place and summary statistics are available from the Federal Reserve at this web page:
http://www.federalreserve.gov/newsevents/reform_transaction.htm
Today’s blog focuses on one set of disclosures by the Federal Reserve: primary, secondary and other extensions of credit by the Fed. This includes direct, traditional borrowings from the Federal Reserve, the primary dealer credit facilities, and the asset backed commercial paper program described at the link above. These borrowings do not include commercial paper purchased under the Commercial Paper Funding Facility nor do they include the equity stakes taken by the U.S. government under the Troubled Asset Relief Program.
Kamakura took the following steps to consolidate the primary, secondary and other extensions of credit:
- From www.twitter.com/zerohedge Kamakura downloaded the daily reports, in PDF format, from the Federal Reserve on primary, secondary and other extensions of credit from February 8, 2008 until March 16, 2009, approximately 250 reports in total
- Kamakura converted each report to spreadsheet form
- These spreadsheets were aggregated into a single data base giving the origination date of the borrowing, the name of the borrower, the Federal Reserve District of the borrower, the nature of the borrowing (ABCP, PDCF, or normal), the maturity date of the borrowing, and (in the case of Primary Dealer Credit Facility) the name of the institution holding the collateral.
- Consistency in naming conventions was imposed, i.e. while the Fed listed two firms as “Morgan Stanley” and “M S Co” Kamakura recognized to the maximum extent possible that they are the same institution and used a consistent name
- To the maximum extent possible, the name of the ultimate parent was used in order to best understand the consolidated extension of credit by the Fed to that firm.
For information regarding the Kamakura Credit Crisis Liquidity Risk data base, please contact us at info@kamakuraco.com. Please use the same e-mail address to contact the risk management experts at Kamakura regarding how to simulate realistic liquidity risk events in the Kamakura Risk Manager enterprise-wide risk management system.
Donald R. van Deventer
Kamakura Corporation
Honolulu, Hawaii
July 8, 2011
© Copyright 2011 by Donald R. van Deventer, All Rights Reserved.