In light of the just announced huge 8-K which has JPM admitting it was mismarking hundreds of billions in CDS, in effect destroying the CDS market for everyone (as we predicted 2 months ago would happen), the firm's earnings (and CIO losses) are very much irrelevant. But here they are regardless: $5 billion in Net Income, which includes a $4.4 billion in CIO losses offset by $1.0 billion from "securities gain in CIO investment securities" i.e., asset sales; also in Q2, the firm took a $2.1 billion "benefit" from reducing loan loss reserves (the usual accounting gimmick), and $0.8 billion DVA "profit" as a result of its CDS blowing up. Finally JPM also announced $0.5 billion gain on a "Bear Stearns related first loss note." In summary, expectations were for $0.76 in EPS; reported EPS Ex-DVA were $1.09, and ex-all one time gains, $0.67. In other words, JPM's bottom line is totally meaningless, as the bulk of profits are from totally garbage and meaningless numbers. The real question is how much net income is now forever gone as a result of i) the unwind of the CIO's synthetic division, aka the most profitable group at JPM, and ii) the fact that the entire firm's CDS marks were made up and will now have to reflect reality. Now, back to the main news of the day: the fact that JPM just threw the entire CDS market under the bus, and England's Lieborgate just arrived in the US courtesy of CDS-gate.
From the earnings results:
First-half 2012 net income of $9.9 billion, EPS of $2.41 and revenue of $49.6 billion not impacted by first-quarter 2012 restatement; second-quarter 2012 balance sheet and capital ratios also not impacted4
Second-quarter results included the following significant items:
- $4.4 billion pretax loss ($0.69 per share after-tax reduction in earnings) from CIO trading losses and $1.0 billion pretax benefit ($0.16 per share after-tax increase in earnings) from securities gains in CIO's investment securities portfolio in Corporate
- $2.1 billion pretax benefit ($0.33 per share after-tax increase in earnings) from reduced loan loss reserves, mostly mortgage and credit card
- $0.8 billion pretax gain ($0.12 per share after-tax increase in earnings) from debit valuation adjustments ("DVA") in the Investment Bank
- $0.5 billion pretax gain ($0.09 per share after-tax increase in earnings) reflecting expected full recovery on a Bear Stearns-related first-loss note in Corporate5
- Substantial progress achieved in CIO
- Significantly reduced total synthetic credit risk in CIO
- Substantially all remaining synthetic credit positions transferred to the Investment Bank
- Investment Bank has the expertise, capacity, trading platforms and market franchise to manage these positions
- CIO synthetic credit group closed down
- Conducting extensive review of CIO trading losses; CIO management completely overhauled; governance standards enhanced; believe events isolated to CIO
- Fortress balance sheet remains strong
- Basel I Tier 1 common1 of $130 billion, or 10.3%
- Estimated Basel III Tier 1 common1 of 7.9%, after the impact of final Basel 2.5 rules and the Federal Reserve's recent Notice of Proposed Rulemaking
- Strong loan loss reserves of $24 billion; Global Liquidity Reserve of $414 billion
- JPMorgan Chase supported consumers, businesses and our communities
- Provided $130 billion of credit3 to consumers in the first six months of 2012
- Issued new credit cards to 3.3 million people
- Originated over 425,000 mortgages
- Provided nearly $10 billion of credit to U.S. small businesses in the first six months, up 35% compared with prior year
- Provided $260 billion of credit3 to corporations in the first six months
- Raised over $460 billion of capital for clients in the first six months
- Nearly $29 billion of capital raised for and credit3 provided to more than 900 nonprofit and government entities in the first six months, including states, municipalities, hospitals and universities
- Hired more than 4,000 U.S. veterans since the beginning of 2011
As the update on CIO and its residual positions:
For now, CIO will retain a portfolio of approximately $11 billion
notional amount of mark-to-market positions as an economic hedge for
certain credit exposures of the investment securities portfolio and tail
risk for the portfolio. This long protection (i.e., short credit) is
simple, transparent and easy to explain and will likely be reduced over
time.
Full filing here [7].