One Year After Bear's Collapse, JP Morgan Reaping Benefits
March 16, 2009
JP Morgan Chase & Co.'s acquisition of Bear Stearns may not have helped its profits last year, but prudent risk management, a relatively strong balance sheet and the rapid integration of legacy platforms has strengthened its customer-facing businesses such as prime brokerage and correspondent clearing.
According to Steve Black, co-head of investment banking, JP Morgan's fee revenue fell by 11 percent last year--from $6.6 billion in 2007 to $5.9 billion--compared to the industry average 35 percent.
Net income dropped from $15.4 billion to $5.6 billion and JP Morgan's investment banking division lost $1.18 billion. In a Feb. 26 presentation to investors, Black noted that "de-risking" Bear Stearns' positions took a greater toll than anticipated. Had the deal not been done, "the heritage JP Morgan investment bank would have shown a modest profit for the year," he added.
The Bear purchase--announced last March and completed May 31--took its toll on employees as well. Black noted that the deal added 11,000 employees to JP Morgan's original 28,000, which is the headcount the bank had returned to by February. Bear Stearns staffers likely took the brunt, especially those involved in fixed income and derivatives--areas that ultimately caused the firm's downfall.
But given that Bear's operationally intensive prime brokerage and correspondent clearing arms were well respected, it's no surprise that Louis Lebedin, who headed up Bear's prime unit, and Joe Triarsi, who co-headed broker-dealers services, have stayed on at JP Morgan in nearly equivalent positions.
In fact, many of Bear's prime brokerage and clearing clients were relieved when the agreement was announced. And non-clients may also have viewed it favorably--"In prime services, the flight to quality clearly benefited JP Morgan," said Black. "It was a great time for us to acquire that business."
With Bear's prime and equities services division, "we have the capability to go out and co-market that with our existing futures and options businesses," he added. On a market-adjusted basis, customer balances have returned to Bear's pre-acquisition levels, according to Black, and the unit generated revenues north of $500 million in 2008. Between June and December, the equities prime brokerage platform more than doubled its number of hedge fund clients managing $1 billion or more in assets, "and we have another 40 to 50 in the pipeline that we're in the process of bringing on board," he said.
Prime Investment
Like peers Goldman Sachs and Morgan Stanley, JP Morgan is focusing on the biggest, most profitable hedge funds. However, as competitors downsize their primes, JP Morgan has put tens of millions of dollars into improving its broker workstation and plans to invest similarly over the next year. When clients "get much more active, we'll see the returns will be just fine in that business," said Black.
On the correspondent clearing side, JP Morgan has been conducting one-on-one discussions with clients since last summer to apprise them of the firm's commitment and new developments. Triarsi said that JP Morgan Clearing Corp., which is essentially the Bear Stearns platform, has signed on seven correspondents this year and is vetting another four or five. "They're significant clients," Triarsi said. "We're focused on doing business with larger, well-capitalized institutions that are likelier to weather the market downturn."
Even those clients are pressed for cash, however, so JP Morgan is working to increase efficiency for hedge fund and broker clients, which share the same core platform. It will soon roll out technology that makes it easier operationally for funds to deal with multiple primes. "This will help them throughout the middle and back office to address issues such as risk management, attribution analysis, performance reporting and reconciliation with all counterparts," said Lebedin, who co-heads the prime brokerage unit with Andrea Angelone in London.
