Monday, July 20, 2009

JPMorgan Creates Illusion Of Profits

While reports of profits by JPMorgan Chase may have boosted the mood on Wall Street, the so called "profits" are merely an illusion created by an accounting loophole and does not mark the beginning of a banking recovery. To find out how the mega bank was able to conceal their massive losses with accounting slight of hand, see the following article from Money Morning.

It takes more than two to make a trend.

JPMorgan Chase & Co. (NYSE: JPM) yesterday (Thursday) became the second major U.S. investment bank – following Goldman Sachs Group Inc. (NYSE: GS) – to this week report windfall profits for the second-quarter. That’s helped fuel a four-day advance in U.S. stocks that’s seen the Dow Jones Industrial Average surge 7%.

Unfortunately, these two decidedly positive developments don’t necessarily indicate that better days have arrived for the U.S. banking sector.

To the contrary, many analysts – including Money Morning Investment Director Keith Fitz-Gerald – say these profits are merely a mirage created by an obscure accounting rule that allows banks to transform “toxic debt” on their balance sheets into income.

JPMorgan, the second-largest U.S. bank, said that that second-quarter profits were $2.7 billion, a jump of 36% from a year ago and 27% from the previous quarter.

A $1.1 billion, one-time reduction that resulted from the decision to repay $25 billion in Troubled Asset Relief Program (TARP) funds was offset by strong gains at the firm’s investment banking division.

Profit at JPMorgan’s investment banking division more than tripled as a result of record investment-banking fees and the strong performance in the fixed-income market. The investment-banking operations generated $1.47 billion of profit, almost quadruple the amount earned in last year’s second quarter.

Investment-banking fees – which zoomed 29% from a year ago and 62% from the first quarter – totaled $2.2 billion, and were a "record for any investment bank in any quarter," according to JPMorgan Chief Financial Officer Michael J. Cavanagh.

JPMorgan’s earnings in the first half of 2009 grew 11% to $4.86 billion, or 68 cents a share, from $4.38 billion, or $1.20 a share, in the first six months of 2008. Revenue jumped 43%, reaching $50.6 billion, from $35.3 billion last year.

JPMorgan’s announcement follows an equally impressive earnings report by rival Goldman Sachs, the largest investment bank in the country. Goldman said Tuesday that its revenue in the three months ended June 26 was $13.8 billion, compared with $9.43 billion in the first quarter and $9.42 billion in the second quarter a year earlier. Net income rose to $3.44 billion, or $4.93 a share.

Still, despite these banks’ stellar results, analysts are hesitant to say that the U.S. financial sector has bottomed, meaning that a rebound is under way.

Fitz-Gerald said last month that large investment banks like Goldman Sachs and JPMorgan would almost certainly generate record profits in the first half of the year as a result of less competition, favorable interest rates, and relaxed accounting standards.

Indeed, the Financial Accounting Standards Board has made it possible for the biggest U.S. banks to book profits on loans that have not been fully repaid.

“Called ‘accretable yield,’ these mega banks will book income on loans that have ‘reduced credit quality’ by recognizing the value of the bonds on their balance sheets and the cash flow those securities are expected to earn,” Fitz-Gerald said. “Please understand, we’re not talking about cash that’s already been earned, and not cash in the bank … we’re talking about cash flow those banks are expected to earn.”

In JPMorgan’s case, the firm took on $118.2 billion in toxic debt when it acquired Washington Mutual Inc. last year. As a receiver of that debt, JPMorgan was allowed to mark that debt down to “fair value,” or $88.65 billion. But now, the bank says that those same debts may appreciate by some $29.1 billion over the life of the loans. And as those loans are paid back, that money is booked as profit.

Of course, this distorts banks’ earnings and camouflages the deterioration in other banking segments.

For instance, consumer-loan losses continued to rise, as did losses on businesses loans. Retail banking earnings of $15 million were down sharply from earnings of $474 million in the first quarter, and $503 million in the second quarter of 2008. The consumer lending division reported a net loss of $955 million, compared with a net loss of $171 million in the prior year and $389 million in the prior quarter.

Home equity charge-offs jumped 4.61% to $1.3 billion. The bank warned that prime mortgage losses may be $600 million “over the next several quarters,” and that subprime losses may be $500 million.

Credit cards lost $672 million, compared to income of $250 million in the second-quarter last year. The bank warned that losses in its Chase credit-card portfolio may be 10% next quarter and will be “highly dependent” on unemployment after that. The unemployment rate rose to 9.5% in June, its highest level in two decades.

The managed charge-off rate, which generally tracks unemployment, climbed to 10.03% from 7.72% in the first quarter and 4.98% in the year-earlier period.

“For JPMorgan Chase, the challenge going forward is going to continue to be deterioration of credit,” Gerard Cassidy, a banking analyst at RBC Capital Markets, said in a Bloomberg Radio interview.

This article has been republished from
Money Morning.

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3 comments:

July 20, 2009 at 10:40 AM Alessandro Machi said...

I posted a similar find on one of my blogs. The Burning Platform dot com did as well. Even the AP ran a story with a very similar first paragraph to my own article, and their story came out 7 hours later.

The bottom line is, people are not coming first under the Barack Obama administration, and I certainly don't want the republicans back in either when they don't have the guts to stand up to their friends in the banking industry.

Forget the Tea Party protests, for now, and instead focus on getting Chase Bank back under control of actual human beings.

Tea Party Protests are primarily Republican backed and are actually a slap in the face to 2 million Chase Bank customers who are being hit with a 2% up to 5% increase in their monthly minimum payment.

I don't disagree with the Tea Party Protests, I disagree with the TIMING of them. Right here, right now, Chase Bank is the enemy.

Chase Bank has done three very evil things at the worst possible time, they have cut home equity lines to well below fair market valuation, they have raised interest rates on most of their cards and have put two million customers in danger by raising their monthly minimum payment on low interest loans that were being paid down on time every month, and banks will not take collateral backed loans.

These three actions are bent on obliterating the average american that used sweat equity to build up home equity in their homes over the past couple of decades.

CONSUMERS to lose 100 MILLION to 1 BILLION DOLLARS A MONTH BECAUSE OF CHASE BANK'S RAISE IN THE MONTHLY MINIMUM PAYMENT ON LOW INTEREST CREDIT CARDS.

Daily-PROTEST.com

BLOGGERS AGAINST CHASE BANK.com

ChangeinTerms.com

CREDIT CARD COMPANIES ME FIRST AGENDA IS CAUSING SOME STATES SERIOUS FINANCIAL LOSSES.

OVER ONE THOUSANDS LETTERS OF FEAR AND LOATHING AGAINST CHASE BANK IN LESS THAN 3 MONTHS AT CONSUMER AFFAIRS DOT ORG.

Chase BANK SUED FOR FREEZING HOME EQUITY LINES.

Jamie Dimon's Competence Called into Question by John Kay.

It has been said of CE of JPMorgan Chase, Jamie Dimon (who does not have a banking qualification), that his dominance exists because at every meeting all the participants know that he could do each of their jobs better than they could. But the business world cannot operate at all if it can operate only with individuals of the calibre of Dimon. --John Kay

July 20, 2009 at 8:25 PM Anonymous said...

If you don't understand how loans are valuated, shut up and don't pretend you understand the concept of cashflow!

July 31, 2009 at 7:35 PM Alessandro Machi said...

Was that anonymous comment directed towards me?

Of course I understand how cash flow works.

And I also understand that the banks have shut off local economies by acting like a two year old child yelling "mine" at anything they can grab a hold of.

Clearly now is the time to LET GO of the INTEREST CHARGES ON THE ONE TRILLION DOLLARS OF CONSUMER CREDIT CARD DEBT as long as customers are paying down that debt.

If you don't understand such a basic principle, then you might just be a delusional banker who thinks the world exists for their pleasure.

CONSUMERS to lose 100 MILLION to 1 BILLION DOLLARS A MONTH BECAUSE OF CHASE BANK'S RAISE IN THE MONTHLY MINIMUM PAYMENT ON LOW INTEREST CREDIT CARDS.

Daily-PROTEST.com

BLOGGERS AGAINST CHASE BANK.com

Chase BANK SUED FOR FREEZING HOME EQUITY LINES.

CREDIT CARD COMPANIES ME FIRST AGENDA IS CAUSING SOME STATES SERIOUS FINANCIAL LOSSES.

OVER ONE THOUSANDS LETTERS OF FEAR AND LOATHING AGAINST CHASE BANK IN LESS THAN 3 MONTHS AT CONSUMER AFFAIRS DOT ORG.

ChangeinTerms.com

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