JPMorgan: A Better Acquirer than Bank of America

Once Citigroup (C) has been broken up, America will have two big financial supermarkets: Bank of America (BAC) and JP Morgan Chase (JPM). There are many differences between them, but a very big one is their track record when it comes to recent acquisitions. Look at this morning's news: Bank of America said it couldn't even close its Merrill Lynch acquisition without substantial extra government help, and is likely to get billions of dollars in federal guarantees. JP Morgan, by contrast, is relying on its recent acquisition of Washington Mutual to keep it in the black:

J.P. Morgan reported net income of $702 million, or seven cents a share, down from $2.97 billion, or 86 cents a share, a year earlier. The latest results included $1.1 billion in gains related to the purchase, along with $853 million in hedging gains on its mortgage-servicing rights.

Excluding the WaMu gain, J.P. Morgan said it would have lost 28 cents a share.

Interestingly, the bulk of those losses -- $2.9 billion -- came from writing down the investment bank's leveraged loans. During the boom years, it was an article of faith that investment banks needed huge balance sheets, because no one would use their M&A advisory services if they couldn't get cheap loans at the same time.

But looking at the scale of these losses, it seems clear that no amount of M&A advisory fees could make up for them: JP Morgan would have been better off financially just simply axing its M&A department altogether.

That's not going to happen: JP Morgan has a genuinely strong M&A franchise. But don't expect Chase lenders like Jimmy Lee to allow themselves to be bullied into uneconomic deals in future, just because the M&A bankers are salivating at the prospect of big fees.

Comments

[bosch1974:]

So if you are looking long term - say 5 years down the road, which is the better buy, JPM or BAC?

Jan 15 12:05 PM

[Big Jack58:]

The difference between JMP and BAC is that the gov't sponsored an immediate bailout of JMP's buy-out of Bears, whereas BAC waited a few months to dip into that well.

Jan 15 12:08 PM

[TheAvenger:]

The “profit” from WaMu is part of the rip-off the FDIC did to WaMu Bond Holders… Also, someone needs to explain why the government promised BAC to help with the acquisition of Merrill but declined to do the same for purchasing Lehman…

Jan 15 01:09 PM

[kruser53:]

Losses at WaMu have been swept under the rug (i.e. written off before the merger). The rest of the balance sheet will not be so easy to deal with post merger. JPM is not out of the woods.

BAC is still going into the woods.

Jan 15 02:36 PM

[Seen All It...:]

So the "known and identifiable losses" were recognized in this accounting period. Controlling information flow is essential flow for reputational perception. Have they identified, marked to market and reserved for all the off balance sheet transactions from Bear Sterns and WAMU? Or is this process still ongoing?

Jan 15 02:54 PM

[donzelion:]

Don't neglect Wells Fargo. Perhaps they haven't grown into a brokerage-bank-grocery store, but then again, that structure hasn't worked out so well, has it?

Of course, perhaps everything we 'know' is wrong, and BofA will turn Countrywide into the coup of the century. I'm not holding my breath...

Jan 15 03:56 PM

[19709:]

If I'm not mistaken, the $10 Billion in additional TARP funds that BAC has requested represent the TARP monies commited to Merrill Lynch prior to BAC's takeover.

Jan 15 04:17 PM