PhillyDeals: Biggest winner in crisis explains

JPMorgan Chase & Co.

has so far been the biggest beneficiary of this year's Wall Street panic, buying troubled

Bear Stearns Cos. Inc.

in the spring and

Washington Mutual Inc.

on Friday - at bargain prices.

JPMorgan chief executive officer

James Dimon

described one of the main motives of the Bush administration's proposed $700 billion bad-loan bank bailout Friday, when he met with investors to explain his $1.9 billion purchase of WaMu's branches and loans, including what may be tens of billions in bad subprime mortgages.

"If they do it right," Dimon said, "they will lift the value of the assets and make them worth more. That will help the housing market and the mortgage market."

JPMorgan doesn't need the bailout, he added. "We're safer with what the government's doing, but we're not relying on what the government's doing," he said. "We would have done it anyway."

The bailout backers don't just want to boost falling home prices. They also want to get the bond markets working again.

What's a frozen bond market look like? "It was eerie, standing at our fixed-income desk today. Nobody was willing to place any bids,"

Gus Sauter

, chief investment officer of

the Vanguard Group Inc.

, told those gathered at the Convention Center late Friday for a meeting of the Chartered Financial Analysts of Philadelphia.

"We're afraid to take in commercial paper," which big companies sell to raise short-term cash. "We don't know if we can sell it. So we're loading up on U.S. Treasuries" instead.

Tax-free municipal bonds, normally among the safest investments, are also piling up on Wall Street's loading dock. When buyers are scarce, you have to give them a better deal. The cost of selling new tax-free munis has topped the yield on U.S. Treasuries, which is unusual - like water flowing uphill. It's why Philadelphia had to postpone its $3 billion pension bond sale last month.

Bond markets are "locked up" because bonds are mostly traded by brokerage firms, which are having a hard time raising the money they need to finance trades - because the markets are locked up, a vicious circle, Sauter said.

This isn't a problem for stock traders, since the stock market is far more automated; buyers and sellers don't need as much help from intermediaries. It's not so bad for private-equity funds, because they have billions in investor cash.

The bond-market freeze started last year, when traders realized that millions of high-risk subprime home loans weren't getting paid back the way credit analysts at

Moody's

and

Standard & Poor's

had predicted.

Home loans had been bundled into bonds that used the homeowners' payments to finance other corporate borrowing. When the loans lost value, so did the bonds.

When the bonds lost value, banks and investment companies that owned the bonds had to write them down, which meant they had to set some money aside, and they couldn't use it to trade bonds or finance other deals.

That's mostly a problem for traders. It becomes a problem for the rest of us if the bond-market shutdown starts to force big companies to make fewer investments while they find more expensive ways to finance themselves.

Sauter says that's happening, and it's why Vanguard predicts the economy will shrink for the rest of this year. He supports the Bush administration's plan to buy low-value loans in hopes that will bring the markets back.

"If we get those bad loans off the books, banks and dealers can free up capital," and "this could clear up reasonably quickly."

Isn't that a bailout? "It's not Main Street bailing out Wall Street," Sauter said. Wall Street firms are still losing value. And the government may get all its money back when it resells the loans.

Even if the government loses, say, $200 billion of the $700 billion it wants to commit, Sauter figures that's a lot less than the national output would drop in a recession - making the deal a bargain, by his math.

The markets are jittery, and even a rescue can look dangerous.

Wachovia Corp.

shares dived to an 18-year low Friday after the Federal Deposit Insurance Corp.'s decision to "stiff" WaMu bondholders by paying them pennies on the dollar, Sauter said.

"Wachovia bondholders [are] wondering if they're next," Sauter said. Wachovia shares partly recovered after reports circulated that the bank was in merger talks.

Jeremy J. Siegel, a finance professor at the University of Pennsylvania and self-proclaimed "Wharton Wizard," who appeared with Sauter at the Chartered Financial Analysts' meeting, questioned Sauter's view of the Washington Mutual deal.

"Should the Fed have bailed out bondholders when they were giving the company money to make those outrageous mortgages?" Siegel asked.

Still, like Sauter, Siegel wants the bailout to pass Congress. "The plan is good, if it's executed right," he said. "We need to get liquidity to these banks. This investment might pay off for the American public and the financial system."

Plus, he added, the bailed-out banks "might survive."