In Part I, we highlighted Harry Houdini’s famous premise about magic – that an audience is always more impressed when a magician makes something disappear, rather than appear. Assuming Houdini was correct, then the world must be amazed by the magic of Chase Bank CEO, Jamie Dimon – who made the bank’s $5.8 billion trading loss disappear!
Here in Part II, we provide you with “the rest of the story” regarding how Dimon performed this act of legerdemain!
5) As we reported earlier, Chase reported a fresh loan loss accrual for the second quarter of $200 million ($1.6 billion less than the year ago quarter). However, Dimon did not stop there. Chase claimed that past loan loss provisions were higher than needed, so they reduced their loan loss reserve by $1.3 billion. Yes, you are correct – in the “Alice in Wonderland” world of bank accounting… that counts as earnings!
6) When a bank sells some of its mortgages to investors, but remains as the “loan servicer” (collecting payments and distributing interest to investors) it claims an intangible asset called “loan servicing rights”. It’s called “intangible”because no one can claim to know exactly how much it is worth. Do you see a “loophole” here? You are correct! Chase claimed that this intangible asset increased in value during the quarter by $233 million. Last year, they reported one-tenth as much. The real interesting part of this accounting decision is the justification offered for the rise in value: “improved risk management”! In the same year as their $5.8 billion trading loss, as well as their part in a $25 billion settlement with the Justice Department and a separate regulatory action in England, Chase claimed “improved risk management”.
7) Finally, Chase reported that a larger portion of the London loss than originally projected took place in the first quarter. Therefore, Chase adjusted first quarter earnings down by $459 million, reducing second quarter losses by that same amount.
Can you guess what the earnings per share (EPS) reported by Chase totaled for this second quarter? I’ll give you a hint: look at the amount listed in Part I that the bank projected three months ago as this quarter's EPS. Yes, the reported EPS is $1.21 per share!http://investing.businessweek.com/research/stocks/news/article.asp?docKey=600-201207131121UPI_____BUSITRAK_094742_9019-1¶ms=timestamp%7C%7C07/13/2012%2011:21%20AM%20ET%7C%7Cheadline%7C%7CJPMorgan%20Chase%20profits%20fall%209%20percent%7C%7CdocSource%7C%7CUnited%20Press%20International%7C%7Cprovider%7C%7CACQUIREMEDIA%7C%7Cbridgesymbol%7C%7CUS;JPM&ticker=JPM:US
Houdini has nothing over Jamie Dimon. Houdini never made $5.8 billion disappear, but Mr. Dimon did!
I’ll close with this quote from Mike Mayo, an analyst at Credit Agricole Securities: “Yes, I have seen these results, but I have also seen how the sausage is made and I am worried that I might get food poisoning in the future.” http://finance.fortune.cnn.com/2012/07/13/jpmorgan-hid-london-whale/
Submitted by Tom Petty
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