Johnson and Warner have taken every penny they might possibly earn from their transactions with J.P. Morgan and put it into a trust fund and donated all that money to charity.
It has been some time since anyone was surprised by something big happening on Wall Street. Not since the Goldman Sachs case and the ensuing political firestorm has Wall Street seen anything truly shocking. But last night we did witness something most of us never saw coming. Shortly after midnight, J.P. Morgan disclosed that its stock had been raised from $16 to $18 per share, raising $2.75 billion in new equity for the bank.
That’s a 400 percent gain in two days, and the next hour or so it fell as the big banks were throwing their money at each other. Other institutions who had been given the green light to issue more stock might not have been so lucky. Should they have?
The fact that this came to light at all was remarkable, in part because it was revealed by the New York Times, a news organization that doesn’t take kindly to attempts to hide details of a gigantic share sale from the public. There’s certainly nothing wrong with a huge sale being discussed openly, if that’s what the private agreement called for. But this time, it clearly violates one of the standards that these shares are supposed to be governed by: that the price of the stock won’t get significantly out of hand.
So why did J.P. Morgan raise the price? It’s not at all clear. Did this mean that the bank, which includes some extremely well-compensated executives, felt it could sell its shares at a higher price than what was originally agreed upon? If so, why? If not, who authorized the raise? Were executives looking for favors in return? What about taxpayers, since the banks may already have used taxpayer funds to buy up stock? Was the raise a bit of arbitrage that boosted the value of the stock for the bank at the expense of investors?
And what does it mean for the investing public? The answer: not a whole lot.
The obvious thing to conclude is that this is yet another demonstration of how little separation there is between investors and management of America’s banks. J.P. Morgan had the option of selling some or all of its shares at any time, and this allows J.P. Morgan to be able to raise money all at once with one very large transaction. If J.P. Morgan already raised its share price, it would have the option of lowering it even further, which the company apparently decided it wanted to do.
Why did it make the decision to raise the price? That’s more difficult to answer. But there are two likely explanations.
First, the firm’s executives wanted to maximize their gains, in a deal that allowed them to do so for a massive fee. (After all, this is J.P. Morgan: if you find yourself short, do you find yourself buying any stock? Sure, why not?) That might explain why the firm raised the price – and why the deal will go through.
But what else? Whatever the underlying calculation, raising the price is incredibly bullish for the market. It means we’re about to receive a lot more profit from what can only be described as a deal by two well-connected Wall Street firms (J.P. Morgan and Morgan Stanley) who kept quiet about the deal.