The world famous magician, Harry Houdini, once said that people would always be more impressed when he made something disappear than when he made something appear. If Houdini was correct, then the world should be astounded by what JP Morgan Chase CEO, Jamie Dimon, managed to make “disappear” this past week – a $5.8 billion trading loss (a loss so big that might qualify for a “Wall Street Hall of Fame”) from their London “Chief Investment Office” (CIO).
Since everyone is fascinated by magic, it is worth taking a look at the “secret” behind Dimon’s “disappearing” magic trick! In the interest of space (and your time), here is as brief a summary of how Dimon did it as I can provide:
1) The first key fact: in mid-April (before Dimon admitted to the trading oss) Chase projected that second quarter EPS would be $1.21/share! You can imagine that pressure on Chase to “make up” the London loss.
2) Fortunately for Dimon, some of Chase’s business had a great quarter. Profits from it’s mortgage business surged by almost $1.3 billion (I admit to having helped there).
3) Since trading losses are deductible from Chase earnings, thereby saving income tax expense, and Chase attributed $4.4 billion of the loss to the second quarter, Uncle Sam covered $1.7 billion of the loss (somewhat like a government “bailout”, eh?)
3) There is a reason Chase has a CIO operation – generally, it makes money. (Dimon claims that if he liquidated the CIO today, he’d provide Chase with an $8 billion gain.) The CIO operation added $630 million to earnings.
4) By federal law, banks have incredible discretion regarding accounting decisions. One obvious example is “loan loss accruals”. If I inform Chase Monday that I can no longer pay a mortgage obligation, it would be required to accrue for the bank’s expected loss on that loan. The total “loss” set aside would need to be reported in the third quarter, and would lower earnings! However, the bank determines what that loss should be, not an objective third party. Interestingly, Chase elected to set aside just a bit more than $200 million for such loss this quarter – thelowest in any quarter since the 2007-08 financial crisis period began, and $1.6 billion less than was taken for the same quarter last year.
- BY: THOMAS PETTY
http://www.examiner.com/article/houdini-has-nothing-on-jamie-dimon-part-i
Related Posts
Also on Market Tamer…
Follow Us on Facebook