This page has been archived and commenting is disabled.
JPMorgan Uses Surge In Its Default Risk As A $1.9 Billion "Source" Of Revenue And Net Income
A quick look at the JPM earnings this morning would indicate all is well and that the company beat on the top and the bottom line: after all the company generated $23.76 billion in revenue on expectations of $23.26 and EPS of $1.02 relative to an expectation of $0.92. So far so good. The only problem is that unlike in previous quarter, when the primary driver of the bottom line was releasing reserves, this quarter, when everything blew out and blew up, that would have been seen as massively disingenuous, even by such permaclown as Dick Bove (which nonetheless did not stop the bank regardless, and JPM did take a $170 million reserve release, granted less than the $1.2 billion in Q2). So what does JPM do? Why it pulls the "Fair Value Option" card, discussed recently in the context of Morgan Stanley when we speculated whether the bank's biggest asset was their debt. Turns out we had the concept right, but the bank wrong, because $0.29 of EPS Net Income, or $1.9 billion pretax, was a "benefit from debit valuation adjustment (“DVA”) gains in the Investment Bank, resulting from widening of the Firm’s credit spreads." That's right: the fact that JPM spreads blew out in the quarter, and its default risk soared, for one reason or another actually served to "generate" not only net income but also revenue! And now you see why American banks can never lose - in a good quarter, they release reserves; in a bad quarter they take FVO benefits in the form of Debit Valuation Adjustments, or in this case both! Winner, winner, always a chicken dinner for Jamie Dimon. Expect every other bank to do the same accounting BS this quarter to pad their numbers.
So first the 6th sequential loan loss reserve reduction:
And then the DV(D)A in action:
So what happens when one excludes the ridiculous benefit from the DVA? From the earnings presentation:
- Net income of $1.6B on revenue of $6.4B; DVA gains of $1.9B pretax ($1.2B after-tax)
- Fixed Income Markets revenue of $3.3B; Revenue ex. DVA of $2.8B, down 34% QoQ
- Equity Markets revenue of $1.4B; Revenue ex. DVA of $1.0B, down 9% QoQ
- Credit Portfolio revenue of $578mm; DVA gains of $979mm
Said otherwise, JPM's Investment Banking earnings were negative on a rational human being basis, when the bank's overall credit deterioration is not used as a source of Earnings. This means the firm missed not only its EPS but its top line by about $1.9 billion!
And that explains why the stock is down.
For those stunned by this accounting sleight of hand, read our primer on FVO from April 2009:
The Law Of Unintended "Fair Value Option" Consequences
Financial company stock prices have been on a tear these days, undoubtedly based on glowing, solid results. After all didn't Wells just have a blow out quarter? What is that you say, $5 billion in "earnings" were based on FAS 157-4 reversal and accounting gimmicks? Why should that matter to investors who are happy to buy N/M forward PE stocks any time Cramer top ticks the market, or the Power Lunch brigade glowers in the self proclaimed next American Golden Age.
Well, the financial ripfest, while benefiting bank prop desks (or at least the one that is left) may end up having some unfortunate side effects for none other than the banks themselves, and especially their accounting voodoo: the basis for the recently announced stellar financial results.
The issue at hand is the "Fair Value Option", which under US GAAP essentially allows the booking of a pre-tax profit when a bank's debt trades lower in the open market. This benefits banks that opt-in for FVO instead of other accounting approaches such as amortized cost, or historic cost.
And so readers can get a perspective of just how large an accounting "benefit" the FV Option is to financials, observe the table below which compares 2008 bank Net Income with the Pre-Tax Gain from Fair-Valuing of Own Debt.
For a somewhat rough proxy of how the five selected banks' debt securities have traded in recent times, please see the chart below.
Of the 2015 bonds, recent appreciation has been seen in Goldman Sachs and Credit Suisse bonds, while the remainder have remained relatively flat or have even declined. Of course, these are merely proxies and many more securities are calculated for FVO per GAAP.
Regardless, if the equity run up persists, its is inevitable that bond spreads will tighten (see this post for comparisons for credit and equity levels in financials), thereby eroding the FVO pre-tax accounting benefit for companies with appreciating securities, and in fact will result in a negative pre-tax treatment. How much of a negative contributor to EPS it is will ultimately depend on i) how high equity security prices go and ii) how much of a catch up role comparable credit securities play in their price. It is likely that the respective CFOs are too aware of this phenomenon, and could be one explanation for the divergence between equity values and bond prices. If bonds had experienced the same run up as stock prices, the recently announced EPS for the major banks would have been much more adversely impacted.
As for the firm's outlook:
- Not unreasonable right now to expect markets in 4Q to be similar to 3Q
- Expect lower revenue from 3Q11 run-rate due to declines in asset values
- Consumer & Business Banking results will reflect the full negative revenue impact from the Durbin Amendment of $300mm+/- in 4Q; Full year annualized impact of $1.0B+/-
- Consistent with recent trends, expect continued elevated default management and foreclosure-related costs in Mortgage Banking
So much for financials-led "growth"
And the full JPM earnings statement.
»
- 14665 reads
- Printer-friendly version
- Send to friend
- advertisements -
Perversion of accounting, what else is new?
Watch as EZ banks report "record profits" when they change the accounting rules there.
Insolvency just depends on the rules.
a wise man once told me "systemic fraud is evidence of a pending collapse"
but who the fuck knows with these markets. this is surely bullish
Faber on Bloomberg Radio in response to question on buying the banks at these levels
"I speak with many people on Wall Street and they tell me that these banks are trading below their book value, JP Morgan was at $27 last week and it at $32 now"
on China
"China in deep deceleration" "Next to shoe to drop is China ... creating a downward spiral in the world" etc etc
JPEnron
Mark-to-market most of these banks have negative book value so they don't ever have to worry about trading below it
JPM is simply using Bialystock and Bloom accounting methods, which have been approved by FASB (Fuck America, Serve Bankers):
http://www.youtube.com/watch?v=xGdY4jfhKRM
Todays fascist media it's un-American to tell the truth about JP Morgan . JP Morgan Chase had to pay $100,000,000 in fines for defrauding families of military personel deployed over seas . The fascist media and JP Morgan shareholders get a well deserved place as tratiors in American history.
DVDA = How America is getting screwed (Double Vaginal, Double Anal a.k.a. quadruple penetration).
Creative accounting. NO longer bachelor of business, but of the Arts.
Everytime I wave my magic wand over my account statements, money disappears. I'm taking that thing back to wallmarts, today.
I guess venting makes people feel better, but all this detailed analysis really is a complete waste of time. (And I say this as a bean counter.)
Rather than dig into financials, or provide illustrations of selective MtM (eg DVA), it is much more beneficial to step back and realize that the TBTF are part & parcel of the fed.gov. Whether this is a 'good' or 'bad' thing is completely besides the point - mere parlor talk for those interested in politics.
For those focused primarily on how this plays out, all you need to realize is if the banks go down, the USA goes down. Hence, they are not going down. Stop.End.Of.Story.
Knowing this, how does one position themselves & family to 'win'? That's the real question. All this complaining reminds me of the scene from Schindler's List where the woman complains to the commandant. His reaction? He pulls out a pistol and shoots her. End of discussion.
The name of the game is to lie low and operate in the open shadows. Don't look prosperous, don't talk, and keep your opinions to yourself, unless you're damn sure the other person knows what the fuck you're talkin' about.
and wow is tha a great world to live in. If things have gone that far it is our duty as American citizens to take down the government and replace it with a new one based on the original constitution.
Where are we Germany 1935 and all Americans are Jews and the bankers all SS? WTF speak out and get your head blown off.
If that is America and it goes down if the banks go down, take it down.
Who came and removed that commandant from power? A bunch of cowards laying low?
Thanks to the penniless OWS protesters - we should all be there with them.
And thanks to the men who founded this country and created the basis for the wealth you are trying to preserve. If they thought like you, it never would have happened.
Bullshit the sooner those corrupt fascist banks go down the sooner we can return to a more capitalist and just country . To continue to defraud and bailout only does more harm and makes a resolution even more harsh.
give me free speech or give me death
I've always figured I'd burn at the stake if the Christians take power, get my head lopped off if Islam takes power, or get a bullet thru head if Republicans/Democrats remain in power.
I'll go down speakin' thank you.
Accounting .....
Don't you just love it.
Thank god, we have Sarbanes Oxley to regulate every one else but the banks out of a job.
All is well! Phew! </s>
Fuck JPM. Mobsters.
ZH staff u rock
WTF are they buying their own CDs fer crhissake? I mean they claim income when they fukking spreads narrow - how ini the world can u have it both ways??????
Easy. Double-speak, double-truth, double-books, double-GAAP.
And the above-mentioned double-double penny.
Well Jamie, you must love the"new" accounting "rules", eh?
I'm a little confused.. are you saying that should WFC run into a little loan loss trouble, the fat guy in the bathtub can just make a call to Moody's, order a downgrade and trigger a nice earnings beat ? Do they teach this in community college business courses or do I have to attend something like the Wharton school to achieve this level of understanding ?
One must attend the CFR, ICG and Bilderburger conferences for inclusion into that club. Wharton and Columbia are good starts on the road to hell tho.
Eh? I don't know about Columbia. I went there as a Dean's Fellow and there wasn't much Bilderburging going on. Suppose maybe I just wasn't invited to the meetings but none of my friends were either.
Occupy JPM!!!
Occupy the supply of actual(physical) silver and maybe you slay the dragon. One inch punch style.
Occupy the FASB and attorney generals office.
for people struggling to understand this:
"Fair value option is an accounting choice under IFRS and US GAAP allowing companies to account for financial liabilities at fair value and to recognize the difference between fair value and carrying value of the liabilities as gains or losses in earnings. Companies can choose which financial liabilities to elect fair value option for, and once elected, the decision is irreversible. . . .
Yep, you nailed it.
So a loss for the creditor is carried as an 'asset' by the debtor?
If that's the case, Greece is in fine shape, their 1yr bond is trading close to zero.
Got to keep pricing in QE3-4-5 somehow!
The funny thing about this methodology is that as the company moves towards a default, it gets a nice boost to "earning" by being able to discount its liabilities at a higher interest rate, BUT when it does default, all liabilities become due and payable, so the discouting effect vanishes, causing a massive increase in losses at the point of default.
The application of DVA is a perfect example of how the banks use the lobbying system in order to get exactly what they want and the people who sign off on the methodology don't understand what the fuck they are doing.
Imagine trying to explain to your bank manager why, even though you owe them $100k and you have no job, you have a theoretical income of $25k because the probability of them getting their money back has fallen by 25%...
It's more an example of not thinking things through in detail.
It's obviously better, in general, for any balance sheet item to be marked-to-market.
However (in my opinion), *own assets* should not be included.
Sounds like the perfect trading setup.
Heck, this is what is taught from kindergarten on up now - you can never lose.
Never seen it on quite this scale but it explains why BofNY is the only business entity still in existence that dates back to the foundation of our country.
Well I guess we can be happy they didn't do the ol' Lehmand 105 slide of hand...
SILVER, BITChEZ!!!
Level playing field! Kapitalism is healthy and there's nothing to worry about. I'm a good slave. Must watch Grey's Anatomy and buy something. Let's invade Iran. Banks are more important than manufacturing companies. Better living through lobotomy. Weeehhhaaa!!
/insanity off
Alls happy for Jaime till he finds out he is replacing the chicken on the platter.
I wonder how much Blythe Masters contributed to revenue, earnings this quarter. I'm guessing she earned her bonus considering all of the volitility in PMs.
For everybody who is interestet in Richard Suliks own word why he must vote against the EFSF.
His own Blog:
http://richardsulik.blog.de/2011/09/27/slowakei-efsf-stimmen-11925443/
In German.
This bank does not need depositors.
Hopefully people realise it and close their accounts with JPM.
Correction: Winner, winner, always a lobster dinner for Jamie Dimon.
lets take a look at cashflow...
O yeah thanks makes complete sense now...
Marketwatch
JP Morgan Does it Again
"True to form, J.P. Morgan Chase comes in with quarterly results that eclipse Wall Street's expectations. CEO Jamie Dimon highlights Dow industrials component's "fortress" balance sheet."
Cue laugh-track...
Now sharpen the guillotines.
About DVA and FAS 159:
http://macronomy.blogspot.com/2011/10/markets-update-credit-for-whom-vol.html
Same pattern as in 2010:
"With the recent increase in volatility in conjunction with a reduction in debt issuance in the second quarter, banks have had a hard time to reap in similar profits they made in Q1."
Martin
About DVDA:
"DVDA is a comedy band featuring South Park crew members Trey Parker (lead vocals, keyboards), Matt Stone (vocals, drums, bass guitar), Bruce Howell (guitars), and D. A. Young (keyboards, vocals). The name refers to a sexual position meaning "double vaginal, double anal". DVDA's songs appear throughout several other works written, directed, and/or starring Matt Stone and Trey Parker."
http://en.wikipedia.org/wiki/DVDA_(band)
Sooo, they mark the default risk gains to market and take the profit directly onto the income statement, but definitely do NOT mark any loss-making holdings to market because, well, they don't have to and anyway hiding these massive potential losses in a dark corner of the balance sheet is absolutely the best thing to do.
I see.
Why do I constantly read how corupt China is. Yet it seems that the mighty USA is the ring leader. They just do it with white gloves or and a tux with a smile.
The Chinese and American elite are in on this together and have been for quite some time. All will work for Chinese wages soon enough.
Example:
I borrow £10
Asset £10
Debt £10
I loan out the £10 cash, the market value of those loans falls to £8, however since I dont use mark to market accounting its still valued at £10 as an asset. However the fair value of the debt has fallen to £8 as the market recongises that the fair value of the asstes have fallen and my credit risk rises.
Asset £10
Debt £8
Profit £2
Accounting Reality:
Assets £8
Debt £10
Loss £2
The best rule changer ever for the US banks was abolishing Mark to market. That was the ultimate lip stick on a pig move if I've ever seen one.
"Abolishing Mark To Market rule" - as you see JPM is still using that rule, selectively.
You think this is outrageous? Just wait until TARP 2 is passed.
I remember what finally happened to the S&L industry when their accounting rules allowed them to book profits on assets sold at a loss. Again, like peeing in the bed to keep warm - once the warm feeling is over, it can get real cold.
Don't be such a killjoy. It feels really, really good for a few minutes.
Lulz.
JPM Wets Itself.
Morgan Stanley next in line.
The theory with Debit Valuation Adjustment is that it applies mark-to-market (kind of) to all of the company's debt liabilities on bonds it has issued in the past. The basis of this is that if the bonds are trading at, say, $0.90 per dollar of nominal value, it will be cheaper for the company to buy its own bonds at $0.90 than to pay back the dollar at $1.
There are two problems with this theory.
First: if, in the real world, a financial institution like JPM starts buying back its own bonds in quantity, the market price of all the bonds still remaining to be bought will rise. So in reality it can only buy back a small percentage of the outstanding.
Second: in the real world, a financial institution like JPM would need CASH if it wants to start buying back its bonds. Very large amounts of cash. Where is it going to get cash from, if its credit is sufficiently risky that the bonds are devalued?
Therefore, any large-scale own-debt purchasing operation would end up costing $1 for every $1 nominal purchased. Either because the market price of the debt would rise due to the buyback operation, or because the credit-impaired institution would need to pay a premium to borrow the cash it requires to do the buyback.
In other words, there ain't no such thing as a free lunch.
The accountancy 'standards' committees who come up with this stuff seem like they are smart, but they're fairly dumb really, haven't thought it through.
Thanks for the helpful explication for us dummies.
In the real world, which doesnt exist anymore, JPM is a bankrupt piece of shit.
"Not quite" is an understatement. They are marking their "liabilities" to market while keeping their "assets" at fantasy. Total bullshit, yeah let's see JPM sell those assets then and raise the cash. Sorry, won't happen. Fuck these paper pushing fucknuts.
Never mind. AGQ split 1/2 this morning.
What is even more funny---or not, depending on one's sense of the absurd---is that Dimon's bonus is probably calculated on accounting earnings, so the very existence of the "fair value option", means that he might actually be incentivized to trash the bank's credit quality. Bizarre. Then again, not so.
Not bizarre. Reality! You just described the essence of the whole problem. William Black described how you profit from setting your bank up for failure. This new twist allows you to make money on the failure also. If you can perpetuate the failure you can perpetuate the profits.
In a world where fraud is not an actionable offense there is no reason for things not to continue as they are.
Bottom line, governments and banks are criminal organizations. And that's not going to change soon.
Who knew being a piece of dogshit could be so lucrative.
http://online.wsj.com/article/BT-CO-20111013-705629.html
WSJ calls the DVA a "net 5-cent benefit", proving that banks don't have a monopoly on shady reporting...
because privatizing the gains and socializing the losses, just isnt good enough
This remidns me of that great part in Stripes, teh movie where john candy is explaining himself...
"not sure if you have noticed but I have a weight problem..." 'NOO....NOOOOO....NOOOOOO...." from the rest of the company...
classic.
JPM fucking with earnings? nooo noo....
OH I see...now TBTF banks can price in FUTURE 'QE' as profits today!
I guess someone might think thats a great reason to buy stocks, but it wont be me.
Hey, even death is pro-growth if you work for the coroner. Is anyone really surprised?
Funeral home and embalming business booming.
Hey Jamie shoot his cum-load on Buy-Backs using his entire TARP allowment, leaving nothing to buy-back stock in the 4th quarter...
After "Pass this Jobs Bill", I am going to pass out and sleep. It has been a hard few weeks. Crap, must drink. When I wake up, I hope to find honest producing people again. I think they are almost extinct. If you have seen a group of "these people", let all ZH'ers know. If this place exists, I will be moving there.
Peace
http://en.wikipedia.org/wiki/Iceland
without being outside the ZH spirit, a couple of points to note on the above:
1. Isn't DVA adjustment required under accounting rules anyway?
2. When markets rally most of these gains are given back, but I guess you guys would be rather quiet about it then.
3. in order to release reserves you have to take them first. Increasing reserves depressed earnings during 2007-9, didn't it?
4. equity analysts know about DVA, so there will have been some allowance for this in their forecasts, surely?
5. JPM remains probably the best shop in the street.. arguably? Shame I don't work there...
Tell the White House to expel all JPM and Goldman scum immediately. That's a protest worth having.
Ok, everybody chill on the collective hatred of banks, banksters and pretty much everyone from left to right. Let's take a look at JPM's financials. First reserves - in order to release a reserve you have to build one first. Hence it's not "out of nowhere". Where they use for timing of NI may or may not be true, but in fact it's irrelevant for valuation of their stock. Secondly FVO - Anyone bothered to check how much debt is under FVO? (i.e. % of total debt?). I bet, majority of their debt is at cost. And as far as FVO goes? Yes, they could buy their debt back for $X now. So that's their liability. Surely they have enough cash and funding to buy their FVO debt at FV. Am I wrong? And guess what, if they don't buy it back, the current FV will approach 100 towards maturity accruing through income and everyone knows that. So if anyone's confused by the "mis-accounting", feel free to put that accretion into your spreadsheets. Instead of joining the "let's hate all of them"-herd, why don't we focus the fact that there's communist morons running in the streets of Manhattan who think that occupying private property is ok. (See "Call to action" of OWS' website, point on "abandonned" buildings).
Their "assets" are overpriced, period. They could not raise the capital to buy back their bonds. The only thing you are correct on is that this isn't a problem until it is. Fuck the paper-pushing fucknuts. As far as I am concerned the system can crash. At least then compensation (in whatever form you prefer) can find it's way back to productive people and companies that actually create goods and services of REAL VALUE.
Enough with this shell game that keeps leading us into a liquidity trap and destruction of, what would have been, productive capital.
I must have missed the memo on "Their assets are overpriced, period." Apparently that's fact, now. The only reason I go to this site is to learn something, so feel free to point me to a source. While I have great respect for physicists, I would expect one to be able to distinguish certain nuances. So here are the numbers. JPM has $279bn of total debt. $39bn or 14% is under FVO. JPM also has $200bn in cash and deposits with banks. So contrary to the popular belief, they DO have enough cash to buy their FVO debt back, exactly 5 x more cash. And that's excluding FFS and repos. What you consider REAL VALUE is irrelevant to me. As far as the remaining comments go - yeah, let's crash the whole thing, after all it's not like there's common people's money in these banks.
Ask yourself if JPM has enough cash to
- Pay out on trillions of exposure to interest rate and credit default swaps in a distressed market
- Mark all assets to market, not just their own liability
- Cover their manipulative commodity shorts
You can look up the links yourself, I've wasted enough energy.
Wow, keep sucking on that hopium pipe. Life's a long song and if you consider JPM's investing and book value a solid foundation upon which the entire world should move forward, good luck. Just the same, I'll manage my company a bit differently.
Bloomberg BusinessWeek prints the value of ALL gold ever mined at $8t! That's less than 1 year of US GDP!
http://www.bloomberg.com/news/2011-09-21/bullion-vaults-running-out-of-space-as-gold-rally-accelerates-commodities.html
When i read this sort of sh*t... it makes me realise I will never be smart enough, or sociopathic enough to be a top shelf banker.
Just have to stick to being an evil speculator i guess....
While Tyler's analysis exposes more egregious manipulation, the whole "beating EPS expectations" game is a complete and utter joke. Just 30 days ago, the consensus EPS estimate for JPM was $1.21 until management guided all the analysts down to the low $0.90 range. Today, JPM suprisingly announces earnings of $1.02 exceeding expectations by 11% when in reality they missed by 16%. I can't understand why absolute results are generally ignored, in this case down 4% YOY. Someone who jumps over a bar 6 inches off the ground will never be mistaken for an Olympic high jumper.
Not everyone was fooled. JPM down 5% this morning.
Reading through this made me feel so intellectually inadequate.
/wishes he was a banker, nay - an investment banker/finance wizard.
"if you believe it,it is not a lie.
Delusional Fuck-Tards.
Performance bonuses all around, and a little something extra for the boys in accounting.
J.Dimon
Just goes to show that these financial institutions are insolvent, black holes of capital, destroyers of the democratic process, and down right shiesty in everything they do.
End the banking cartel.
The US con show part ll.
as a none finance type...
isn't it illegal for JPM to make money off backing against the failure of their ops?
Insider trading kinda things? Mis-representation?