Why JP Morgan Asked for a Fed Exemption

If JP Morgan Chase was so confident that it will "remain well capitalized" in the wake of the Bear Stearns acquisition, why did it go to the extraordinary length of asking the Fed to exempt it (or at least $400 billion of its newly-acquired assets) from perfectly normal capital-adequacy guidelines? I think maybe part of the answer comes today, with news that Washington Mutual is getting a $5 billion cash infusion from TPG:

WaMu's latest plan would likely eliminate, at least for now, the potential that the thrift will be acquired by J.P. Morgan Chase & Co. or another large financial institution. J.P. Morgan executives have been poring over WaMu's books since March and made a preliminary offer, but discussions between the two firms ground to a halt last week, according to a person familiar with the situation.

Clearly talks between JPM and WaMu have been going on since before JPM was asked to gallop to Bear's rescue - and it would make sense that Jamie Dimon, who held all the aces in the Bear negotiation, would want to be able to have his cake (Bear Stearns) and eat it too (WaMu).

Still, I'm not a fan of this exemption. Probably the Fed had little choice but to grant it, and if you are going to make such exemptions then the one time you could conceivably justify it is during a time of extreme market stress when you're busy trying to prevent a systemic meltdown. But when you're dealing with one of the three US commercial-banking behemoths (BofA, Citi, JPMC), the capital-adequacy requirements are crucial, because the moral hazard considerations are always front-and-center.

It's more or less inconceivable that the Fed would ever allow any of those institutions to default on their debt - which means that there's trillions of dollars' worth of obligations outstanding from those three banks alone which carry an implicit US government guarantee. In that situation, it makes sense for capital requirements to be policed much more stringently at JPMC than they are normally - rather than happily loosening them, as happened here.

(HT: Alea)