An Unbiased Review of JP Morgan’s Q1 2010 Results Yields Less Roses and Perfume Than the Maintream Media Presents

The JP Morgan Q1 2010 review and analysis is available to download
for all paying subscribers: JP Morgan Q1 2010 Review. Just this morning I
posted an article describing how much of the mainstream media suffers
from diminishing revenues due to the fact that they simply rubber stamp
soundbites and produce reports that are simply cardboard cutouts of what
is pushed out by Reuters and the AP.org. Well, JP Morgan’s latest
quarterly earnings release is a perfect example. Before you go on, I
recommend reading “Are
Blogs Truly Competitive With the Mainstream Media in Terms of Quality
of Content?“.

A scouring of the news from last week yields (and this is from the
cream of the crop, may I add):

WSJ
J.P. Morgan Earnings: A Beat!

We’re off to another day of earnings
and the big one of the day comes courtesy of J.P. Morgan
Chase, which beat earnings expectations from Wall Street analysts on
both the top and the bottom lines in its report out earlier this
morning… Importantly, a big part of the better-than-expected performance
on the bottom line came from J.P. Morgan socking away less cash to
cover loans it expects to go bad. Dow Jones reports that J.P. Morgan’s
managed credit-loss provisions were $7.01 billion, down from $10.06
billion a year earlier and $8.9 billion in the previous quarter… As we
mentioned before,
onlookers are hoping that this earnings season brings a bit more
clarity to weather the worst is over for the banks, and J.P. Morgan’s
results are a good sign.

J.P.
Morgan Earnings Takeaways

Short version: We’re at an inflection
point for the loan losses that have dogged banks… Just as a refresher,
better credit trends can translate into better earnings for banks, as
they move some of the cash they socked away to cover the losses they
previously expected, and move that money back into the earnings column.

Reuters
JPMorgan earnings set bar high for U.S. banks

JPMorgan Chase &  Co (JPM.N) reported
quarterly profit that beat forecasts and set a high bar for rivals, as
investment banking earnings gained, loan losses slowed and Chief
Executive Jamie Dimon sounded an atypically optimistic note about the
prospects for a strong U.S. economic recovery.

NYTimes.com: JPMorgan’s
Profit Soars Despite Downturn

Jul 17, 2009 … A new
order is emerging on Wall Street — one in which Goldman Sachs and JPMorgan
Chase are starting to tower over former financial titans.

Now, here are some excerpts from my reader’s subscriber material (JP Morgan Q1 2010 Review):

…Revenues from principal transactions accounted for 16.4% of the
total revenues in 1Q10 against 3.6% in 4Q09 and 8.0% in 1Q09. The
highly volatile nature of the trading revenues trickles down to create
large fluctuations in the total revenues and income levels. Over the
last six quarters, while the revenues from core investment banking and
commercial banking has shown little recovery, the total net revenues
have been recording substantial fluctuations.

Looking at the revenue growth in various segments in 1Q10, revenues from
principal transactions more than doubled compared to same quarter last
year to reach $4.5 billion. Income from core investment
banking including advisory and underwriting grew 5.4% (y-o-y)
to $1.4 billion. Asset management revenues increased 12.7%
(y-o-y) to $3.2 billion. Business contraction in the
commercial banking operations is reflected in the decline of the related
revenue streams. Lending & deposit-related fees
declined 2.5% (y-o-y) to $1.6 billion. Mortgage fees
and related income declined 58.9% (y-o-y) to $0.6 billion and
credit card income declined 25.9% (y-o-y) to $1.4 billion. The
decline in mortgage and credit card related income emanated from a the
decline in securitization transactions. In 1Q10, the total mortgage
origination volume declined to $31.7 billion from $37.7 billion in 1Q09.
See The Next Step in the Bank Implosion Cycle??? for a more
on how this could end with Pan-European drama unfolding (a quick
excerpt):

We have explored this in forensic detail
for subscribers, and have offered a free preview for visitors to the
blog: (JPM Public Excerpt of Forensic Analysis
Subscription 2009-09-18 00:56:22 488.64 Kb), which is free to
download, and JPM Report (Subscription-only) Final –
Professional, or JPM Forensic Report (Subscription-only)
Final- Retail as well as a free blog article on BAC off balance
sheet exposure If
a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to Hear
It?: Pt 3 – BAC).

Now, back to the present…

…The reported net interest income grew 2.6% (y-o-y) to
$13.7 billion from $13.3 in 1Q09 largely owing to consolidation
of securitized assets which added nearly $2.0 billion of net interest
income.  The net interest income from the core
portfolio declined due to contraction in interest earning assets.
Total interest earning assets and total loans (after
adjustments for consolidation of securitized loans in 1Q10) declined 4.5
%( y-o-y) and 14.0 %( y-o-y), respectively.

Interest income declined 6.0% (y-o-y) to $16.8 billion owing
to continued contraction in interest earning assets. Interest expense
came down 31.2% (y-o-y) owing to decline in borrowing costs (an
increase in net borrowing costs, ie. Interest rates, will severely
impact this bank’s bottom line). The interest rate spread
improved to 3.24% owing to improvement in yield on interest earning
assets as well as decline in average rate on interest earning
liabilities.

However, the improvement in yield on interest earning assets
was as result of consolidation of securitized loans. According
to JPM reported figures, while the net yield on interest earning
assets improved to 3.32% in 1Q10 against 3.02% in 4Q09, after
adjusting for the consolidation of securitized loans, the net yield on
interest earning assets declined marginally to 3.32% in 1Q10 against
3.33% in 4Q09.

While marginal recovery was observed in delinquency rate trends, we
feel JPM has been too quick to draw optimistic conclusions and has
drastically reduced provisioning for loan losses. Of course, since such a
provision reduction immediately improves accounting earnings (the
fodder of Wall Street analysts) as well as numbing the following
analysts and media in the case of an increase due to the constant
barrage of credit losses. On one hand, the gross charge-offs
increased sharply in 1Q10 largely owing to consolidation of securitized
credit card loans, on the other hand, the provisions for loan losses
were further cut, which led to reduction in allowance for loan losses.
This is counterintuitive, and should have been picked up by all of those
who proclaimed the “record quarter” for JPM! On a managed
basis, the gross charge-offs increased 36% (y-o-y) to $8.5 billion from
$6.2 billion in 1Q09, the provisions for credit losses declined 30.0% to
$7.0 billion from $10.0 billion in 1Q09.

…The delinquencies of JPM’s total portfolio showed some sign of
moderation, but are still at elevated levels. However, further
deterioration is still observed in the acquired real estate portfolio of
WaMu. We alleged that this would be the case in February of last year: Is
JP Morgan Taking Realistic Marks On Its WaMu Portfolio Purchase?
Doubtful!

A quick excerpt from early last year…

…While the compensation expense declined marginally to $7.3 billion
against $7.6 billion in 1Q09, the total non-interest expense increased
to $16.1 billion from $13.4 billion in 1Q09 owing to increase in other
expenses. The increase in trading revenues trickled down to the bottom
line resulting in net income increasing to $3.3 billion in 1Q10 from net
income of $2.1 billion in 1Q09. Diluted EPS in 1Q10 was $0.74 per share
against a loss of $2.6 per share in 1Q09.

In parting, let me leave you with one of my favorite JPM Graphics…

Earlier JP Morgan Analysis

If
a Bubble Bubble Bursts Off Balance Sheet, Will Anyone Be There to
Hear It?: Pt 2 – JP Morgan

Is
JP Morgan Taking Realistic Marks On Its WaMu Portfolio Purchase?
Doubtful!

Anecdotal
observations from the JP Morgan Q2-09 conference call

The
JP Morgan Public Preview Forensic Report

Reggie
Middleton on JP Morgan’s Q309 results

Reggie
Middleton on JP Morgan’s “Blowout” Q4-09 Results

An
Independent Look into JP Morgan

The
JP Morgan Professional Level Forensic Report

The
JP Morgan Retail Level Forensic Report

Comments

[Mark Beck]

It will take the IRS 5 years to figure out the books, by then it won't matter. Who ever audits their books knows not to ask questions. The effects of the movement in accounting to provide a picture of acceptable leverage and reserve requirement is a shuffle of off balance sheet temporary parking. Also, its hard to get a grasp on the exact real loss exposure. The rule is, if in doubt don't report. One thing is certain if things go south, the leverage exposure will kill cash flow without the help from Treasury, TARP to the rescue?

From the comments made by JPM, we can also see how utterly ridiculous it is not to separate investment from commercial banking.

Mark Beck

[girl money]

Reggie, are you going to submit comments, with the doo-doo 32 list and data?

http://www.fdic.gov/news/board/april06.pdf

thanks again for everything you do to rip apart the bankster soundbytes and headlines, you rock.

[JR]

As you say, Reggie, it’s definitely not all roses and perfume on balance at this “FDIC insured hedge fund with a very large money losing commercial bank attached to it”; and for those Americans and Moms and Pops helping to foot the bill as Chief Executive Jamie Dimon sounds “an atypically optimistic note about the prospects for a strong U.S. economic recovery,” it’s more like swamp cabbage and Eau de l'Oignon.

Excerpt from America’s Economic Recovery Is a Rotten sham by Justice Litle | 04-20-10

Why be furious? A few reasons.

First of all, because these happy-go-lucky knuckleheads spending strategic default "mad money" like water have the attitudes of fiscal dope fiends. They are likely going to go broke again en masse, or otherwise need bailing out, and someone else will have to pay. AGAIN.

Second of all, because it's just damn disgusting that those people who scrimped and saved to own their homes and pay their debts - i.e. the "suckers" who lived by a moral code of personal obligation and free market ethics - have to see such blatant debauchery not just flaunted, but rewarded by the system. It's a breakdown of ethics and common sense that threatens the future of the country as a whole.

And third, because even though the banks are the ones eating strategic default losses, they aren't the ones getting screwed in this deal. TAXPAYERS and SAVERS are the ones getting shafted - people like you and me. (Oh, and your kids too. They're going to pay out the nose for all this. Big time.)

To understand why the banks don't really care about strategic default losses - why they can let defaulters go a year or more without so much as a slap on the wrist - take a look at the following chart from Gluskin Sheff. (The chart shows the financial sector's profits as a percentage of all corporate profits in total. (from 7.5% in 1945 to 34% in 2003 and 2004, falling to nearly 10% in 2008-09 and spiking back to 28% going into 2010.)

Before the crisis hit, the financial sector had worked its way up to more than a third of all corporate profits at the peak - an obscene number in itself. Thirty-three cents out of every dollar earned by way of financial engineering? You don't see that kind of imbalance in a healthy economy... only in a paper casino "phinance" economy, where the "ph" is for phony.

As the financial crisis took hold, the financial sector's profits plummeted, which the chart shows. But then, post crisis, they bounced back with a vertical vengeance. See that rocket ride on the right side of the chart? It comes courtesy of the Federal Reserve and U.S. Treasury, finding any way they can to shovel huge profits into Wall Street's pockets. At the taxpayer's and saver's expense.

Here is how the revolutionary rip-off machine functions:

• Lavish-spending "strategic defaulters" feel justified in ripping off the banks.
• The lawless deadbeat culture spreads - as sparked by the banks' own example.
• The banks don't care because they are in the rip-off game too, on a larger scale.
• The banks can ignore strategic defaults by way of taxpayer-funded profits.

The whole thing winds up being a backdoor political transfer. Washington pumps torrents of money into the rotten banks. The banks look the other way as strategic defaulters catch on that "the way to play the game" is to defraud, deny and spend. And politicians get to enjoy the illusion of recovery.

A License to Print

So how are the banks ripping off the taxpayer, you ask? By way of the record steep yield curve. In keeping short-term rates near zero, the Federal Reserve has given the banks a license to print money.

Thanks to Ben Bernanke, banks can borrow as much as they want for practically nothing... plow that cash into longer-dated U.S. Treasuries... and make perpetually huge profits with little to no risk. It's like a permanent backdoor bailout subsidy.

Meanwhile, again, the powers that be, to the extent they truly know what is going on, are happy about the strategic default situation. They see the defaults and rampant spending binges as a good thing. Why? Because all that "mad money" creates the illusion of a healthy consumer!

All these jokers going out to buy new cars and Hawaiian vacations and whatnot are fueling a new spending surge, which in turn boosts corporate earnings, which in turn gets Wall Street cheering and the average citizen thinking "hey, things are okay."

And as for the banks - why should they trip over pennies on their way to dollars? The big banks have far more money coming in by way of the Federal Reserve's magic gift (zero interest rate policy) than they do going out.

A Criminal Disaster

The whole thing is a criminal disaster. Here's why:

·         Zero interest rates are a cruel punishment for savers, especially elderly savers.

·         Backdoor inflation (via the creation of excess reserves) is a means of rewarding profligate debtors and punishing savers harshly (making "suckers" of them).

·         Businesses are gearing up based on the notion that this consumer spending surge is sustainable, when in actuality it's a giant mirage.

·         The massive profits being accrued by the banks are pooling disproportionately in the pockets of fat cats and deeply connected investment players (as usual).

·         The real backbone of America's economy - small business - is still being neglected. So are genuine savers.

·         The up-and-coming generations - the children that will inherit all the debt being created - are in some ways the most voiceless victims of all in this scheme.

Small Business Pain

Meanwhile, even as corporate America rejoices, small business continues to starve. According to a recent survey from the National Federation of Independent Business (NFIB), the credit picture is worsening for small business now. Despite all the hoopla, the employers of more than half of America's workforce have reason for pessimism, not optimism, in the quarters ahead.

But who cares, right? The economic recovery, or at least the illusion of it, will be carried on by the revolutionary rip-off machine. The Federal Reserve has found a neat new way to funnel cash into the hands of those who least deserve it, just as it did with AIG.

And taxpayers and savers - the few of them left that is - will just keep getting squeezed on both sides. An estimated 47% of Americans pay no taxes at all... and the fat cats at the top of the oligarchy ladder certainly get a lot more out of the system than they put in.

So that leaves the "suckers" in the middle (i.e. you and me) to pay the final tab. For all of it. The whole rotten thing.

Source: http://www.taipanpublishinggroup.com/taipan-daily-041910.html

[lucky 81]

the situation is without a doubt volcanic and soon will explode. or is that implode. nah it won't happen cause their vaults are full of silver.

[Leo Kolivakis]

The name of the game is trading. Fuck consumer and SME loans, trade away and make as much profit as possible in capital markets operations. The banks contiue to print money, not sure if I agree with Reggie's dire assessment.

[Reggie Middleton]

Leo, how do you know if they are printing money or not if they are not obligated to reveal their mark to market losses? For all you know, they could be losing money at all time historical rates (and they probably are).

[goober]

The illusions continue. Our entire economic system is nothing more than QE at this juncture and the banks are the only benefactors while mainstreet gets to pay for generations to come. This completely explains the phenomenom of the "jobless recovery" as well. I am beginning to wonder if the populace will ever wake up and realize what is happening?

[pcrotty41@hotma...]

Thank you...All of the big banks that have so far reported are showing the same pattern.  Namely, massive profits from trading operations and weak profits from traditonal banking activities especially those tied to consumers. 

That some of these investment banks like MS and GS are still classified as bank holding companies is a complete fraud.  Let investment banks be investment banks and let regular banks be regular banks and concentrate on what they should be doing like making loans to people and not trading a pile of money from the Fed in the markets.  Did we not get into this situation with too much risk and volatility?  Now the only way the big banks can turn a profit is by trading in the stock markets?

[IQ 145]

An FDIC insured hedge fund. I like that. Boy are we gonna be sorry.