Bear's Clearing Strengths Attract JP Morgan
March 24, 2008
JP Morgan Chase & Co., in a deal backed by the Federal Reserve, agreed last week to purchase faltering Bear Stearns at a discount price. Bear Stearns' correspondent clearing unit, long second fiddle to the firm's high-profile prime brokerage and trading businesses, could prove to be a significant acquisition for JP Morgan.
"We think Bear will be better for this situation, we'll be better for it, and we have confidence [in Bear] going forward," said Howard Abner, chairman of Jersey City, N.J.-based Abner Herman & Brock, which manages $800 million in unleveraged assets and is one of Bear Stearns' larger brokerage correspondents.
Bear is seeking to foster more than confidence. "We and our new parent company are as committed to this business as ever, and we will continue to offer sophisticated and innovative solutions to help investment advisers and broker-dealers achieve their strategic goals," said Joe Triarsi, senior managing director and co-head of broker-dealer investment advisory services at Bear Stearns, in a statement to Securities Industry News.
JP Morgan announced the deal, for $2 a share, on March 16. Despite less severe reported losses than many rivals' in the wake of the credit market crisis, rumors had been swirling around the fifth-largest U.S. brokerage since the collapse of two of its hedge funds last summer.
After that event, a number of Bear Stearns' hedge fund clients, such as quantitative hedge fund Renaissance Technologies, reportedly opened up accounts at competitors, to diversify custodial risk and ensure the leverage spigots continue to flow. For broker-dealer correspondents of the unit, however, moving to a new clearer is a more complicated affair--the process can involve the transfer of numerous customer accounts and the brokers tend to rely on their clearer's technology.
Even if Bear correspondents were inclined to swap clearers, industry consolidation has whittled the number of clearers servicing institution-oriented broker-dealers--Bear's forte--to a handful. Goldman Sachs, which declined to comment, reportedly has been a prime-brokerage destination for some of Bear's hedge fund clients and, given the prominence of its clearing unit, the recipient of broker inquiries as well. Bank of New York Mellon Corp.'s Pershing unit and Fidelity Investments' National Financial are also options, particularly for brokerages servicing more traditional buy-side customers who are looking for large, stable custodians.
Norman Malo, president and CEO of National Financial, said he regrets Bear Stearns' unexpected circumstances. Nevertheless, he said, National Financial has received a "tremendous increase in phone calls" from the firm's brokerage correspondents and seen increased activity on the Depository Trust & Clearing Corp.'s (DTCC) Automated Customer Account Transfer Service, or Acats. He said the account transfers stem from a variety of sources, including retail investors taking the advice of their registered investment advisers and brokerage correspondents with clearing relationships at both firms. "We've had to add more people to get all these new accounts in," Malo said.
Clearing Savings
Any gains for National Financial, however, could be mitigated by a significant loss down the road, when JP Morgan--currently one of the Boston-based firm's largest correspondents--begins clearing its own retail advisory business, which it is likely to do through its Bear-acquired clearing operations. Indeed, the potential cost savings and control accrued through self-clearing could be a big benefit for JP Morgan.
