I’ve been reading John Kenneth Galbraith’s The Great Crash 1929. His descriptions of market manipulation and secret dealings among banks and brokers in the run-up to the collapse of the stock market are making me suspicious about some of the events that preceded the bankruptcy of GM. After all, without Glass-Steagall, there were only feeble regulators to protect the public.

For starters, JP Morgan Chase was one of GM’s lead underwriters, according to Dan Freed writing at theStreet.com. He speculates that it had a large position in automobile manufacturers debt, and held credit default swaps as a hedge. Of course, no one knows if he’s right. He bases his guess on the fact that JP Morgan was lead or co-lead on $105bn worth of outstanding bonds and loans to the (former) Big Three, and may well have been unable to sell off the entire issues to non-affiliates. He points out that they were unable to sell the secured loan to Cerberus Capital, which was used to acquire Chrysler.

JP Morgan was on the Senior Secured Lenders’ Steering Committee dealing with that debt in the Chrysler bankruptcy. The WSJ says JP Morgan’s representative, James B. Lee,Vice-Chairman, told the Administration it would have to pay the entire $6.9bn debt if Chrysler was to survive. “And not a penny less.”

Or not, as it turns out. For a dose of serious whining about the cruel treatment of the worthless collateral of the lenders, take a look at this interview of Thomas Lauria, the lawyer for the committee of non-TARP lenders, the ones who didn’t have the stomach for a fight.

[Q] Why did the group eventually decide to withdraw its objection in bankruptcy court last Friday?

[A] When [Bankruptcy Judge Arthur Gonzalez] denied our motion to file the motion under seal and keep secret the identities of the firms, that was our Waterloo. It was like letting the air out of the balloon. I mean, these people were getting death threats.

Having failed to bully the Obama administration, JP Morgan saw the wisdom of the non-TARP lenders, and kept a low profile in run-up to the GM bankruptcy, as did the entire ad hoc bondholders committee. In late March, 2009, as negotiations were beginning, Andrew Ross Sorkin from the NYT got an e-mail from their press agent, saying that they wanted to work with the administration, but there was just no dialog. He tried to talk to actual members instead of their spokesperson, but was told that the names were a secret. Writing a couple of weeks later, John Stoll of the WSJ seems to have talked to a couple of members, but did not identify them. I e-mailed both, asking if they ever found out who the committee members were, but got no response.

Freed suggests that JP Morgan and other lenders bought credit default swap protection on GM and Ford as an imperfect hedge of their loans to Chrysler. Again, due to the lack of transparency in the market for CDSs, we don’t know if they still held those, whether they bought CDSs to hedge any exposure to GM debt, or whether they had other hedges in place. If they were involved in the negotiations, their position would certainly be different from the other GM debtholders.

Jamie Dimon, CEO of JP Morgan, says this according to Freed;

"The three companies, our total exposure — in other words, how much can we possibly lose at the far end — it would be well less than $1 billion," Dimon said, though he noted this did not include exposure to auto finance companies and suppliers.

Then, there is this Reuters story from July 22, 2008.

Investors should buy bonds of General Motors Corp (GM.N) because the largest U.S. automaker has sufficient access to capital and its bonds have value relative to its peers, J.P. Morgan Chase & Co (JPM.N) said in a report on Tuesday,

J.P. Morgan’s distressed analysis estimates the value of the bonds in a distressed liquidation at 34 percent, the report said.

It’s hard not to notice that this is about twice the current guess on value.

All this (and some Galbraith-inspired paranoia) leads me to speculate on whether the bank side of JP Morgan Chase bought GM bonds or other debt of the Big Three from the securities side, or in matched transactions or something like that. Let’s hope not: that would be a serious conflict of interest. One effect of Glass-Steagall was to keep securities brokers, acting as underwriters of stocks and bonds, from selling them to affiliates, like the bank, in effect parking them until they could be sold, because those transactions are never going to be arms-length. Parking may be prohibited by other laws. Another effect was to prevent the brokerage arm from plumping up the value of securities, like the GM bonds, to benefit the bank affiliate. But that was before, everything was different this time.

I also wonder if the other too-big-to-fail banks have similar issues. If they don’t want to reveal themselves, I’m guessing it isn’t because of death threats. Too much information about the way this mess happened and who profited from the destruction of the car companies would make it harder for them to crush regulation of their lucrative industry.