Microeconomics July 7, 2010 JP Morgan/Chase JP Morgan is one of the oldest and financial firms with its leading financial Services. In order to understand how JP Morgan/Chase came to be one of the oldest financial service firms in the world we need to understand the background of the banking institution. The commercial banking started in the revolutionary war and played a major role in the growth of the nation’s economy. One of the first banks was The bank of New York in 1784 and really had no other competition until 1799 when Aaron Burr founded The Manhattan Co.
In 1863 the United States created a dual system of federal and state chartered banks and one of the institutions was The first national bank of Chicago in which in 1863 received federal charter number eight. Following the economic recession of the Civil War John Thompson a Wall Street publisher and banker founded Chase National Bank by 1877 and named it in honor of his friend Salmon P. Chase. It is said that by 1930 it was the world’s largest bank and by then had assets of over two point seven billion. Chase National by 1955 merged with The Manhattan Co becoming The Chase Manhattan Company. www. jpmorganchase. com) John Pierpont Morgan started banking in 1857 at his father London branch when he moved to New York City; he worked at the banking house of Duncan, Sherman & Company, the American representatives of George Peabody & Company. J. Pierpont Morgan & Company was an agent in New York for his father’s firm between1860 to 1864. Between1864–1872, he was a member of Dabney, Morgan & Company. By 1871 they were partners with Drexels of Philadelphia. In 1893 Mr. Anthony Drexel past away and the firm was renamed as “J. P.
Morgan & Company but still remained close with Drexel , Morgan Haries & Company and JS Morgan & Company. Morgan financed the purchase and upgrading of old Hall carbines. Morgan received $5400 and later the company that had originally bought the riffle sued and won and Mr. Morgan was accused by socialist for falsely selling defective gun. The enemies of the banking industries attacked Morgan for his loan of gold in the federal government crisis of 1895 and the panic of 1907. (www. financial-inspiration. com) “The Panic of 1907” almost impaired the economy in America.
Bankruptcy was strengthening major banks in New York until Morgan got involved. Morgan got a team of executives and they redirected money between banks and secure international lines of credit and bought stocks that had dropped as long as they were healthy corporation. Morgan met with President Theodore Roosevelt and was able to get legal immunity on the US Steel and paid $30 million and even supported the move to create the Federal Reserve System. J. Pierpont Morgan started his career working at his father private bank JP Morgan Jr. hen took over when his father died. Mr. JP Morgan before passing away was “becoming one of American’s most powerful and influential bankers, heading what became the nations pre-eminent private bank” The History of JP Morgan & Co (www. jpmorganchase. ) The 1900’s was very important because all the major mergers happened. Chemical Bank of New York merged with Corn Exchange bank in 1986 and then with Hanover Trust Company in 1991. By the 1980’ and early 1900’s Chemical emerged as “One of the leaders in the financing of leveraged buyouts transactions” www. fundinguniverse. com) In 1195 First Chicago merged with NBD Bancorp. By 1996, Chase Manhattan had been weakened by the real state collapse so Chemical bank obtain it. In 1998Bank One Corp merged with First Chicago and stayed with the name of Bank One Corp. JP Morgan merged with Guaranty Trust Company of New York in order to strengthen its position by 2000. The then the largest and the oldest banking institutions combined renaming it JP Morgan Chase & Co. By 2004 JP Morgan Chase merged with Bank One and decided to remain with its name.
Finally, by 2008 JP Morgan Chase merged with Bear Stearns in a stock swap of $10per share since Bear Stearns had lost 47% of the equity value it had and it was rumored that their customers were withdrawing from the bank. The final merged occurred in 2008 when Chase bought most of most banking operation of Washington Mutual. The takeovers cause Washington Mutual shareholders to lose all their equity. ( www. jpmorganchase. com) JP Morgan Chase on March of 2005 was in a legal controversy with World Com. Apparently, major bond were underwritten by JP Morgan two years before the telecommunications firm had filed the largest bankruptcy case in U.
S. history in 2002. (www. washingtonpost. com) Controller Alan G. Hevesi filed a class action case in court, claiming that JP Morgan and World Com advisers which included directors should have discovered the companies accounting fraud and investment that total about 11 billion dollars. J. P. Morgan probably would have gotten out of the WorldCom case for less money but JP Morgan had rejected the deal saying that they were guilty by association and there was no way that their bankers could have discover WorldCom’s fraud.
As the case progress more firms had settled and plaintiffs were getting favorable rulings and eventually J. P. Morgan to settlement went up. “There was a sense from the Ebbers verdict that there were serious issues with WorldCom. Many experts believe that WorldCom’s investment banks ultimately settled rather than risk several billion dollars in exposure from a jury verdict. In a written statement, J. P. Morgan chairman and chief executive William B. Harrison Jr. said, “Given recent developments, we made a decision to settle rather than risk the uncertainty of a trial.
We can now put this litigation behind us and continue to focus on our goal of making JPMorgan Chase the best financial services company in the world. ” (www. washingtonpost. com). The result ultimately led JP Morgan/Chase to agree to pay 2 billion as part of the WorldCom Inc. shareholder lawsuit. JP Morgan did reach a critical point when September 2008 when stock market plunged and credit around the world seized up. Unfortunately, the subprime mortgage crisis is a state and economic crisis that occurred due to the dramatic increase in mortgage wrongdoing and foreclosures in the United States.
It has been said that the mortgage crisis has brought a major undesirable consequences to the bank and financial market around the world also affecting countries outside of the United States. It has been said that the reason for the crisis was because many borrowers had adjustable rate mortgages and after the prices peaked in early 2007 and refinancing became more difficult. The problem occurred when securities backed with subprime mortgages held by financial firms lost their value. (www. stock-market-investors. com) Since, the crisis has tightened credit around the world for many banks and government enterprises including JP Morgan.
Many people started to default and foreclose as initial terms expired and home prices failed to go up as anticipated and (ARM) adjustable rate mortgages interest reset higher. Falling prices in homes being worth less than the mortgage loan provided financial inducement to enter into foreclosure. It has been said that the housing bubble peaked in 2005-2006 due to high defaulting rates on subprime ARM. There was a loan incentive such as easy initial terms and long term trend of rising house prices had borrowers to assuming difficult mortgages in the belief they would be able to quickly refinance at a better terms later on. www. stock-market-investors. com) It was said that while the housing prices were increasing, consumers were saving less and both borrowing and spending more. As more borrowers stop paying their mortgage payments (this is an on-going crisis), foreclosures and the supply of homes for sale increased. The result placed a downward pressure on housing prices, which further lowers homeowners’ equity. The decline in mortgage payments reduced the value of mortgage-backed securities, which caused the net worth and financial health of banks.
The government failed regulation and deregulation contributed very much to the crisis because in 1995, the GSEs like Fannie Mae began receiving government tax incentives for purchasing mortgage backed securities which included loans to low income borrowers. Thus began the involvement of the Fannie Mae and Freddie Mac with the subprime market. (www. sjsu. edu/faculty/watkins/subprime. htm) Economist Joseph Stiglitz criticized the repeal of The Glass-Steagall Act which was an act that was enacted after the Great Depression. It separated commercial banks and investment banks, in part to avoid potential onflicts of interest between the lending activities of the former and rating activities of the latter. He believes it contributed to this crisis because the risk-taking culture of investment banking dominated the more conservative commercial banking culture, leading to increased levels of risk-taking and leverage during the boom period. (www. huffingtonpost. com) The Crisis caused the government to implement several bailout plans. The Federal reserve bank of New, York agreed to provide $25billion to Bear in order to provide Bear Stearns the liquidity for up to 28 days that the market was refusing to provide.
Then the Federal Reserve change its mind and told them that the loan was unavailable. The deal then changed so that the NY Fed would make a 30 billion loan to JP Morgan so that they may buy Bear Stearn for 2 dollars a share so a merger was created but the problem was that such merger would have caused a huge loss in stocks and so they had traded at $172 a share as late as January 2007, and $93 a share as late as February 2008. In addition, the Federal Reserve agreed to issue a non-recourse loan of $29 billion to JP Morgan Chase,]).
Such loan would be as collateral by the mortgage debt so that government would not be seized. J. P. Morgan Chase’s assets if the mortgage debt collateral becomes insufficient to repay the loan. Chairman of the Fed, Ben Bernanke, defended the bailout by stating that a Bear Stearns’ bankruptcy would have affected the real economy and could have caused a “chaotic unwinding” of investments across the US markets. (www. investopedia. com) The TARP program was created which was a government program was created that was managed by the Treasury fund to attempt to change the financial crisis of 2007-2008.
The TARP gave the U. S. Treasury purchasing power of $700 billion to buy up mortgage backed securities from institutions all over the country, in an attempt to create liquidity and un-seize the money markets. Apparently the funds were created by a bill that was made law on October 3, 2008 with the passage of H. R. 1424 enacting the Emergency Economic Stabilization Act of 2008. The Treasury was given $250 billion and the President had to certify additional funds as they were being needed. The additional fund was distributed as $100 billion, and then final $350 billion was given. (www. investopedia. com)
The bailout was to attempt an increase the liquidity of the secondary mortgage markets by purchasing the illiquid MBS. In October of 2008, revisions to the program were announced by Treasury Secretary Paulson and President Bush; allowing for the first $250 billion to be used to buy equity stakes in nine major U. S. banks, and many smaller banks in which JP Morgan was one of them. www. investopedia. com An article was release that JPMorgan Chase & Co. had received permission from U. S. regulators to repay in full the $25 billion preferred investment it accepted through the Troubled Asset Relief Program (TARP).
The article explains how they plan to reapy the funds in full with accrued dividends. U. S Treasury. www. jpmorgan. com JP Morgan the first institution granted permission to repay the TARP. It was said in the article that given their strong financial position they fulfilled their conditions outlined by the US Federal Reserve. In May the company completed extensive testing for major banking institution and then government reviewed the banks capital and financial strength under various scenarios and agreed that JP didn’t need any additional capital. www. nvestopedia. com “Paying back TARP at this time is the right thing for JPMorgan Chase, and it’s the right thing for our country,” said Jamie Dimon, Chairman and Chief Executive Officer. He added, “We feel it’s best for our Government to be able to use these funds for other critical purposes. ” Dimon reiterated the company’s “commitment to continued robust lending and to doing the right thing for the company’s customers, communities, employees and shareholders. ” www. jpmorgan. com It has been said that once JP Morgan pays they are expected to main strong. ith Tier One Capital of approximately $118 billion, or 9. 3%, and Tier One Common of about $93 billion, or 7. 3% anticipated at the conclusion of second quarter 2009. The company also holds over $28 billion in its allowance for credit losses, and it continues to generate significant pre-tax, pre-provision earnings from its industry-leading franchises. www. jpmorgan. com Based on 2009 records JP Morgan Chase has had Revenue of over 100. 434 billions and a Profit of $11. 728 billion with total asset of $2. 031 Trillion and Total Equity of $165. 65 billion. JP Morgan Chase has had their stocks fluctuate but they still remain very strong in the market. In an article in the Business Report title “US Stocks Rise on Speculation Earning s will trigger rebound announce that JP Morgan Chase upgraded their shares to “overweight”. JP Morgan even profit soared in 2009 which was a rebound from the recession and earned 11. 7 billion double ling their profit more than in 2008. The bank earned 3. 3 billion on their fourth quarter and in the first quarter of 2010 their income rose 55%. www. businessweek. com .