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JPMorgan Chase & Co. (NYSE:JPM)

Q2 2008 Earnings Call

July 17, 2008 8:00 am ET

Executives

Michael J. Cavanagh - Chief Financial Officer

James Dimon - Chairman of the Board, President, Chief Executive Officer

Analysts

Glenn Schorr - UBS

Guy Moszkowski - Merrill Lynch

Mike Mayo - Deutsche Bank

Betsy Graseck - Morgan Stanley

William Tanona - Goldman Sachs

Jeff Hart - Sandler O’Neill

Meredith Whitney - Oppenheimer

John McDonald - AllianceBernstein

Ron Mandel - GIC

Operator

Good morning, ladies and gentlemen. Welcome to the JPMorgan Chase second quarter 2008 earnings call. (Operator Instructions)

Today's presentation may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any forward-looking statements reflect management's current beliefs and speak only as of the date hereof. In addition, such statements are, by their nature, subject to significant risks and uncertainties and the firm's actual returns may differ materially from those described in such forward-looking statements. Please refer to JPMorgan Chase's filings with the Securities and Exchange Commission, including its most recent Form 10K and Form 10Q for a description of the risks and factors that could cause the firm's results to differ materially from those described in the forward-looking statements.

Today's presentation may also reference non-GAAP financial measures, and you should refer to the information contained in the written slides accompanying this presentation for information about their calculation. The firm's SEC filings and such slides are available at the firm's website.

At the conclusion of the presentation, you'll have the opportunity to ask questions. (Operator Instructions)

At this time I'd like to turn the call over to JPMorgan Chase's Chairman and Chief Executive Officer, Jamie Dimon, and Chief Financial Officer, Mike Cavanagh.

Mr. Cavanagh, please go ahead, sir.

Michael J. Cavanagh

Good morning, everybody. It's Mike and Jamie here. We're going to do the usual, so you've got a presentation available to you on our website that I will walk through, through all the businesses, and then Jamie and I'll take some Q&A.

So if you go to the presentation, I just want to start right off the bat on Page 1. For the sake of clarity throughout all the numbers, just explain right upfront how the accounting for the Bear Stearns acquisition, which closed during the quarter, affects all the numbers throughout the presentation. And really I'm going to hit this quickly and simply reference you back to what we said the last time we gave you an update here in mid-May. If anybody has detailed follow ups, we can take that offline.

So working through the big items here, first of all, the extraordinary gain, there isn't one. It's zero. We talked about that being possibly as much as $1 billion in May, down from our earlier estimates, so obviously it deteriorated a bit from where we expected to be in May, but for the same reasons we described there at the time we gave the guidance in May. So all it really means is in the pricing of the deal we had cushion which we ended up in fact needing and used all of that up in the deleveraging and accounting for the deal and reserving associated with it.

The next big item is just merger-related items that run through the operating results of the company for the quarter, which totaled $540 million, and we're putting all of those in Corporate. And that compares with $500 million after tax that we had expected or talked about at the time of our last update in mid-May. And that, again, breaks down into two pieces, equity pickup for the shares we owned for the month pre the close of $420 million and other merger-related items, I think merger expenses and other things, of $117 million after tax. So those are the above the line items of $540 million that's Bear Stearns related.

If you think about it, we talked also at last update about merger costs and merger-related expenses that continue past this quarter. We talked about that number being as high as $900 million after tax. Bringing that guidance down a bit; it'll probably come out to be something more in the neighborhood of about $500 million after tax over time. It'll be lumpy. I can think of it being maybe up to $150 million after tax or so per quarter for the second half of the year and then trend down over time beyond that in '09 and after.

Beyond that, though, the real point is that we continue to be very confident that the ongoing businesses we've picked up -- prime, services, equity, etc. -- are going to contribute on a go forward basis $1 billion plus after tax of annualized earnings by the time we get ramped back up and exit '09 going into 2010, so we continue to be confident about that.

And then the last point is just the geography of all this. As I said, we put the merger-related expenses for the quarter and in the future go in Corporate, but the ongoing activities, that $1 billion of earnings that we'll ramp up to, will appear in the Investment Bank and Asset Management business where the Bear Stearns businesses went.

Last point on just the merger-related items, we talked about de-risking the balance sheet that we took over from Bear Stearns, so we're very pleased with the progress we've made on that score. Risk-weighted assets, which we calculated under our Basel I message of about $220 or so billion, reduced by 45% or so as of the June 30th reporting date and VAR reduced - Bear Stearns VAR reduced by about 70%.

So to sum up, at the bottom what it all means in terms of financial impact, the total income of the company after tax was $2 billion or $0.54. That includes in it what I described above, the $540 million in merger-related items or $0.15 worth, leaving us with results ex the Bear Stearns items of $2.5 billion after tax.

Moving on to Page 2, I'm sure you've read all this. These are the highlights from our press release identifying special credit reserving items and marks, underlying growth across the businesses and strong capital position, so I'm going to save this and go through this as we roll through the presentation. So let's skip past Slide 2 as well as Slide 3, which just tabulates the numbers for you on a consolidated basis, and go straight to the Investment Bank's results, which we'll dive into in detail on Slide 4.

So you see here on Slide 4, we had profits in the Investment Bank after tax of $394 million on revenue of $5.5 billion. The June results for Bear Stearns are included in these numbers, and the overall results in the Investment Bank would have been a bit better but for that, so there's a little bit of a drag from Bear Stearns' results for the month of June in the Investment Bank, though we expect that to turnaround and make a positive contribution in the second half of the year.

Working down the revenue components of the Investment Bank you see we had $1.7 billion of investment banking fees, the circled number over there, which is our second-highest quarterly performance of all time, so obviously we feel very, very pleased with the continued strength of our investment banking, corporate finance and advisory franchise, and you'll see some of the rankings on the next page.

Moving down, Fixed-Income Markets, $2.4 billion - $2.3 - down slightly from a year ago, which is very strong, despite the fact that in these numbers we took markdowns of about $700 million on leveraged loans, which I'll go through in a second, and markdowns of about $400 million on the mortgage-related positions we have in the Investment Bank, clearly offset by very strong performance in rates, currencies, and some other businesses, emerging markets and credit trading as well. And a slight positive, $165 million, related to the widening of our credit spread on structured notes in the Fixed Income business.

Equity Markets, $1.1 billion, down a bit from a year ago total revenues and also in there about $150 million of benefit from widening of credit spread.

So moving down to the next circled number you see there, credit costs of $398 million, so we added - there's essentially no charge-offs in the quarter; net recoveries, actually, slight net recoveries - but we added about $400 million to allowance for loan losses, given the deteriorating trends in some of the names in the portfolio and that brings our overall loan loss average allowance to average loans, you see it averaging 3.19% at the end of the quarter. That's 335. Extremely strong, up from 255 at the end of the last quarter, and you'll see that across other businesses as well.

Continuing down you see expenses of $4.7 billion, up over the prior year in part due to Bear Stearns but primarily due to the high comp to revenue ratio in the quarter, which you see is 57%. That brings us to year-to-date comp to revenue of 52%, which we think positions us properly given the environment that we're faced with and the performance year-to-date, and we'll obviously see what the second half of the year brings.

Lastly, we had a benefit on the tax line that contributed to net income being [inaudible] to pretax income.

And lastly, on VAR, you see 142 is our VAR calculation for the quarter, 139 spot at the end of the quarter, up only slightly from the 122 that JPMorgan had a loan at that end of last quarter. So that speaks to the de-risking that we did on the combined balance sheet in the Investment Bank of the Bear Stearns assets we brought on, together with JPMorgan positions that were there to start with, and topped up the common equity that we allocate to the business from $22 billion to $26 billion, which is up a total of 5 versus the year ago period.

Moving on to Slide 5, you can read it for yourself. It's number one working all the way down the page of all the capital raising categories that are here, along with year-over-year increases in share. And as I said, that translates also into number one in global fees. So it's not just league table rankings, it's also fees as well along with being number three on an announced basis in M&A.

Now moving on to Slide 6, I'll just talk you through some of the remaining significant risks we have in the Investment Bank. So remember, I'm talking leveraged lending now on Slide 6, remember that JPMorgan as of the last quarter end, 3/31/08, we had $22.5 billion of total leveraged lending commitments that we talked to you about. From here forward I'm just going to break that down into what we call or are now going to call legacy deals. Think of those as $18.3 billion embedded in last quarter's end that were hung deals from last summer, off-market terms against which we've had to take marks, versus $4.2 billion at the time of the recent commitments done at market terms which are moving in and out the door on a normal type of basis.

So focused only on the $18.3 billion of leveraged loans, you see in the third bullet here that we started with $18.3, we added $1.9 billion related to Bear Stearns legacy commitments. We sold 19% of that combined exposure of $3.9 billion, to end the quarter with $16.3 billion of legacy leverage lending commitments. During the quarter we took the $696 million of markdowns net of hedges, which brings us to cumulative markdowns of $3.3 billion or 20% of that $16.3 billion of commitments. Obviously, that's 20% average mark, and each position is specifically marked where appropriate.

Level III assets, no major change; slight uptick from 6% overall to 7% or so, which you'll see more when we file our Q.

Moving on now to Slide 7, Investment Bank mortgage-related exposures, here look at the second blue row, total mortgage exposure at 3/31 for JPMorgan alone, looking across what we've flagged for you before as the risky components of the mortgage space. $28.2 billion across prime, Alt-A, subprime and CMBS. When you pro forma that for what we acquired and brought onto the balance sheet together with Bear Stearns at that time, it would have increased to $45.8. And then during the quarter from that peak level we brought it down by 28% or $12.8 billion to get down to the $33 billion we have across these categories at the end of the quarter.

Obviously down substantially; still a bit more than we want to have, so we'll be continuing to actively reduce here mortgage-related markdowns, so against all this is where we took the $405 million of marks net of hedges. And I'm not going to talk you through each bullet, which gives you a little bit of texture on what's in each line but just point out that much of what we own is AAA securities. We actively hedge across these categories where we think it actually makes sense, and, of course, see very little subprime when you look at the table. So that's it for Slide 7.

And last point on the Investment Bank, Slide 8, let me just - aside from the financial impact of Bear Stearns, I've got to say we're pleased with the progress we've made on integrating the business into ours. So on the people side, people selection done, 7,000 or so Bear Stearns employees have been identified to join the combined Investment Bank. On the infrastructure side, a tremendous amount of work done to get the May 30th closing done and integration there. And as you can read for yourself, we've got a robust set of plans, business by business, unit by unit, to go all the way through to bringing it fully - a fully integrated infrastructure. So it's a lot of work still to do. We know how to do all this stuff, and that work is under way. Think of that as business as usual execution for us for now.

And at the bottom of the page, a repeat of some of the details of the de-risking that I talked about upfront.

So with that, I'll leave the Investment Bank and move on to Slide 9 to Retail Financial Services, where we'll look on Page 9 at some of the stats that drive the overall performance of the business. So look at these and keep in mind that on the next page you're going to see 15% revenue growth in the Retail Financial Services businesses overall, and this is what's driving it. So you see continued growth momentum across these stats.

So starting with the Regional Bank you see deposits of $214 billion, up 3% from a year ago, and checking accounts below that circled at $11.3 million, up 9% from a year ago. Along with that comes the, you know, continued growth in sales activity against the customer base, mortgage originations, investment sales, credit card sales, all up and all continued focus on investing in the growth of this business for the long term.

The other side of it is tightened underwriting standards in the lending businesses driving home equity originations of $5.3 billion in the quarter, down 64% from a year ago, and then mortgage loan originations, $56.1 billion in the quarter, which is up from a year ago. Our share in the business is actually up from in the mid-single digits to something like 14% or so overall, which we're pleased with. And you'll see that much of that, more than 90% of that origination is conforming to government standards, so moving along through to the agencies.

And lastly 15% growth in the servicing book.

Moving on to Slide 10 you'll see how that translates into P&L, so total profit in the business, $606 million after tax for the quarter, which is down year-over-year despite the 15% revenue growth, the $5 billion that you saw from the prior page. And the big driver here is credit, so you see circled the $1.3 billion of total credit costs in the Retail business, which includes higher charge-offs across all the major categories that I'm going to go through in a second along with additions to reserves, loan loss reserves, of $430 million primarily related to the subprime and prime mortgage portfolios.

And then additional to that we added $170 million in loan loss provision to get to a total of $600 against the residential mortgage portfolios. That $170 relates to prime loans we hold in the Corporate investment portfolio, booked in Corporate, which you'll see in a second as well.

Expenses, modest growth, really reflecting the top line growth that you see. And then you can read for yourself where the profit growth really comes from, with tremendous improvements in growth in the profits of the deposit-taking Consumer and Banking business, which is up to $674 million of profits.

Let me dive down for a second now into the credit picture for the Retail business. So on Slide 11, you've seen all these pages before; I'm not going to walk through every piece of it here. Let me take you immediately to the upper right hand corner here, Key Stats, where you see the total portfolio at $95 billion in home equity.

We had $511 million of net charge-offs, up from $447 last quarter and obviously up very substantially from a year ago. Now, we talked about this as being a portfolio that versus the first quarter $450 or so of charge-offs was potentially going to grow to $900 million of charge-offs by the fourth quarter of this year is what we told you at our Investor Day. And what I would say now is the $511 is still going to deteriorate by maybe a couple of hundred million dollars to get to a quarterly level that could be or may be less than $900. It could be around $700 million or so. But it's still too early to declare victory on that, but the trend of deterioration may be slowing a bit here. But we'll wait and see.

Moving on to subprime, though, on Page 12, go to the same upper right box and you see the $14.8 billion portfolio  which, by the way, is in runoff at this stage; we've effectively eliminated all new production in this bucket, so that $14.8 billion deteriorating credit continues - so charge-offs of $192 million in the quarter, up from $150 last quarter. And here I would say these numbers could increase to something to the tune of $350 million per quarter some time in 2009 if we continue to see no improvement in some of the loss curves, as we've talked to you about before.

And then lastly on the prime side, Slide 13, you see in total - split between what sits in Corporate and what sits in the Retail business - $47 billion of prime loans, and charge-offs related to that of $104 million split between those two categories, Corporate and Retail, for 91 basis points of charge-offs, obviously very high and up dramatically from a year ago. And here again, the loss curves, unless they abate, we'll could see these quarterly losses growing to be as high as $300 million a quarter by some time in 2009, but likely to take a few quarters before we get there.

Card, moving along from Retail to Card on Page 14, pretty much as we expected in May, so you see that we had net income of $250 million, down year-over-year. The big driver here is credit costs, so you see a charge-offs rate of $498, so just shy of 5% or right at 5% as we talked about, along with - we added $300 million to the allowance for loan losses in the credit cost line during the quarter.

And so even though you see decent growth relative to the competitive field and average outstandings up 4% from a year ago and flattish from prior quarter and charge volume growth of 7% in sales volume, despite that, you see a pretty weak revenue growth, just up 2% year-over-year and, as we talked about, we would have expected that to be a little stronger given the weakening of the credit environment. But the somewhat good news is that the low level of early delinquency rates, the 30-day delinquencies, still at 346 or so, together with continued relatively strong payment rates in this environment, is not giving us the revenue pickup we'd usually expect to see in the business. So we'll see whether that continues in the second half of the year or not.

Moving on to the Commercial Bank, Slide 15, great results here. You see for yourself record profits of $355 million, up strongly from a year ago on record revenues of $1.1 billion, which is up 10%, happening across all products. You see the balance sheet, 19% growth in loans and 18% growth in liability balances as the people in this business do a great job of capitalizing on a challenging environment for many of our competitors, taking market share.

In particular on the revenue side, I just want to point out, remember we talked about at the time of the Bank One merger the opportunity here to grow annualized investment banking revenues delivered to this customer base from something like $400 or $500 million annualized to $1 billion was our goal? This quarter we set a record there and with $270 million per quarter of investment banking revenues have exceeded that target for the first time.

Credit actually continues to be well-behaved here. Charge-offs running 28 basis points below through the cycle average here, and very strong allowance to loan coverage to a 261 ratio there. We feel very good about that. And a very modest change in nonperformers in the course of the quarter.

Also now moving on to Treasury & Securities Services, you see excellent results here as well. $425 million of profits, up 21% from a year ago. That's a record, as is the revenues of $2 billion, up 16% from a year ago in both the Treasury Services and Worldwide Security Services segments and liability balances, again, think deposits up 23% from a year ago and assets under custody to $15.5 trillion, up 2% from a year ago. A little bit of seasonal benefit in the dividend season in Europe gives some revenue lift from the first quarter to the second that will abate a bit as we go from second to third.

And moving on lastly across the businesses to asset management, here was had $395 million of profits, up from last quarter, down from a year ago. The decline from a year ago obviously driven by the lower market levels driving management fees down as well as a year-over-year decrease in performance fees driving the changes in the Institutional and Retail segments you see there.

Private Bank revenues up very strongly, and we've continued to do what we need to do to continue to build what we think is a great business here.

On Corporate, Slide 18, just break it down into three pieces as you're used to seeing two of them and Bear Stearns is new. So Private Equity had after-tax profits of $99 million on pretax gains of $220 million. The portfolio ended at $7.7 billion of carrying value. The Bear Stearns numbers, the $540 after tax negative is exactly what I talked to you about on the first page, so I won't bother talking about that. And then Corporate, excluding both of those pieces, $19 million to the positive.

You see on the bullets to the right, I'll just break out - there's obviously always lots of ins and outs here. I'll just point out two of them in this particular quarter. We did have a gain after tax related to sale of MasterCard shares of $414 million positive result in there. And then, as I've already told you, we had after-tax credit costs related to the prime mortgages we hold in the investment portfolio originated by Retail of $157 million to the negative after tax on both higher charge-offs and reserve additions there.

Moving to Slide 19, I'll just spend a second on the capital position. So you see here in the middle of the page the Tier 1 capital ratio, very strong at 9.1%.

I will tell you that we had talked about the relief that we got in our risk-weighted assets for our intended liquidation and reduction of the Bear Stearns balance sheet over the next year or so is relief in the risk-weighted assets number. Without any of that relief, we would still have been at an 8.1% Tier 1 ratio, which we think is obviously excellent that this is a quarter with challenging markets for reducing balance sheet and risk. We nonetheless absorbed the entirety of Bear Stearns and still maintained our target range of 8% to 8.5% Tier 1, even without the relief that we have here. And the relief suggests that we intend to continue to reduce risk there as time goes by.

You look down the page, all the ratios, whether it's on a with-relief basis or without, extremely strong. And I'll just point out at the top of the page you see Tier 1 capital of $99 billion, up from $89 billion last quarter. If you recall, we issued $6 billion of a straight DRD preferred stock issuance in the quarter, and tangible common equity obviously up without that just do to growth in the retained earnings position of the company. So a very strong capital position.

But I will point out that in that Tier 1 capital, our mix of components of Tier 1 capital is more heavily weighted on average to common equity and your traditional trust preferreds. So, like we did the straight DRD preferred in the first quarter, we have ample room to issue hybrid type of capital instruments to help us make sure we're in a position to meet organic balance sheet growth needs of our businesses in what obviously is a great time to have capital to deploy yet still be confident that we're going to be able to maintain very strong capital ratios, if we choose to do so.

And that is it for the current quarter. Let me just take you through Slide 20 and just talk you through what I haven't already in terms of outlook. So in the Investment Bank in particular, obviously, the markets look to remain challenging and volatile and stressed for the remainder of the year and liquidity is not as strong as we'd like to see it just yet, so it's a reasonable expectation to see continued lower levels of earnings than we'd like to see over time in the Investment Bank for now.

While we have strong loan loss reserves in the Investment Bank - and, as I said, a low level of current losses  credit is pretty idiosyncratic in this segment, so a single [inaudible] in the portfolio has problems and you could see a significant P&L event in any given quarter. And despite our satisfaction with what progress we made in balance sheet derisking during the quarter, as you saw from the page that I flagged, we still have substantial remaining risks to remain focused on.

In Retail, the underlying growth, we're going to continue to invest in growth, so you can count on that. Also, as I said, continued deterioration in the financial mortgage credit factors, and just a broader point that the weaker that housing gets you're going to start to see more and more areas of potential deterioration, so pointing out two that could emerge somewhat in the future would be a greater level of loan repurchases and also, well, losses taken if mortgage insurers can't meet their obligations to the banking industry.

Card Services, nothing different that what we said before, losses 5% or so in the second half of the year, plus a little bit, and could average 6% in 2009 and continued pressure on the revenue side, both charge volume and outstandings.

Commercial Bank, continued underlying growth. Same in Treasury Services.

Asset Management, you've got to remain focused on market levels because that obviously affects both management and can have an effect on performance fees.

And then lastly in the Corporate segment, Private Equity expect that in these market conditions it will trend lower than we have over time would be our best estimate, so lower levels of realized gains than what we've seen for the first half of the year.

Bear Stearns, as I said upfront, $500 million of after-tax merger costs remain to be booked could run up to $150 a quarter after tax in the third and fourth quarter and trend down from there.

And lastly in Corporate, I'll just remind you that we typically talk about a net loss after tax of [inaudible] in the range of $50 to $100 million. Now there's two exceptions to that. One is going to be on top of that we'll have the prime mortgage credit costs as that portfolio works itself through. And remember that was $157 million after tax in this quarter. And then investment portfolio volatility, just changes in values of positions there could cause some volatility in any given quarter.

So with that I wrap up the comments here, and Jamie and I will just take some questions.

Questions-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Glenn Schorr - UBS.

Glenn Schorr - UBS

I think you mentioned in the comments that Bear was a slight drag on the Investment Bank. I'm assuming you meant some form of P&L comment, but can you talk about the strength in investment banking and then particularly in FIC trading on JPMorgan versus Bear, and then maybe a little bit more on the color commentary by product?

Michael J. Cavanagh

You know, we don't get - I mean, I flagged some of the - let's take it in two pieces. A little bit of drag means that just for the month of June, the Bear Stearns ongoing activities contributed somewhat to the marks we took in leveraged loans and mortgages as well as, you know, we basically have taken on expenses ahead of revenues, so a little bit of drag after tax related to that.

All that's saying is the $400 million of after-tax profits in our Investment Bank could have been a couple of hundred million higher had it not been for including the Bear Stearns results in the second quarter. But, as we said, those results are going to trend to the positive. Beginning in the second half of the year, they'll be incrementally positive.

And as we said, the areas of strength, as you'd expect, very strong results in rates, currencies, emerging markets, credit trading, so some areas really with standout performance.

Glenn Schorr - UBS

But you can't help us with the breakdown of what was - it's going to be impossible going forward, but the breakdown between JPMorgan and Bear's contribution to the FIC line in the quarter?

Michael J. Cavanagh

Oh, yeah. No, I wouldn't even think of it that way. I mean, we -

James Dimon

There was no contribution - very - almost no contribution to FIC in Bear in this quarter.

Glenn Schorr - UBS

That's a great quarter then. And then maybe, you both touched on a drop but maybe as a follow up, is how'd you balance, Jamie, your outlook commentary in the text, which is realistic, I think, and then how you grow, because I never know what to root for in terms of growth in Cards and Retail at a time when credit's starting to break down. Obviously, you try to price for it, but maybe just comment on that.

James Dimon

When you look at the growth numbers in Retail, you know, the revenues are up 15%, and almost all categories are growing. Deposit accounts, investments - our mortgage share is up to 11%, and while right now that isn't very profitable, I would have pretty good hopes that that will be far more profitable down the road. And that's just opening branches and hiring salespeople and doing the things you always do. You know, some of the credit costs are - you could almost look at them as a sunk cost at this point.

And Card, where actually spend is up 7% - but the way to look at it a little bit is we're gaining share in consumer and small business, albeit obviously, you know, sales themselves are down a little bit. So we're continuing to invest in marketing in that business just like any other business. We're not going to stop doing that because you have credit losses.

Operator

Your next question comes from Guy Moszkowski - Merrill Lynch.

Guy Moszkowski - Merrill Lynch

I guess my first question is, as you think of kind of a waterfall where you're looking at initially $11 or $12 billion of book value in Bear Stearns, and you pay $1 billion and change for that. I know you've got a page that looks a little bit like this in your Appendix, I guess, Page 23. And you try to work down to the extraordinary gain of zero, within all of these transaction-related costs that add up to the difference between what their capital initially was and the lack of the gain or negative goodwill, how much of these transaction-related costs that you're talking about here are essentially reserved, hung up on the balance sheet, which over time, if not used, could work their way into earnings?

James Dimon

I think, Guy, the way to look at it is very little. That, you know, there are some reserves for litigation and taxes and things like that, but those are best estimates in the ordinary course now. They'll be changed over time if the expectations change, and most of the severance and real estate and stuff like that really is actual cost. We know the cost at this point. And then all the things related to the balance sheet, de-risking, deleveraging, conforming accounting, think of that as gone.

Michael J. Cavanagh

Yes. And those operating losses are already spent.

James Dimon

Yes, there's nothing else there.

Guy Moszkowski - Merrill Lynch

So de-risking and deleveraging costs essentially are realized losses on disposition of the portfolio?

James Dimon

Realized or just marked down.

Michael J. Cavanagh

To appropriate values.

James Dimon

As at the rest of the company.

Guy Moszkowski - Merrill Lynch

Okay, so you don't want us to think that some portion of this is essentially like traditional purchase accounting?

James Dimon

Absolutely not.

Guy Moszkowski - Merrill Lynch

Well, on the home equity side, changing topics here completely, it sounds like you've lowered the guidance of what we might expect the loss rate to look like by year end to about $700 a quarter from $900 million a quarter, and I was wondering if you could elaborate a little bit on what trend lines it is that are giving you a little bit more comfort there?

James Dimon

Right. So one of the things Mike mentioned is that that number's come down a couple hundred million, but the expected loss of the subprime and prime is up by a couple hundred million, so it's kind of a wash in our eyes. It's just that you look at the latest numbers of delinquencies and roll rates, you know, people go from 30 days to 60 days to 90 days, it looks like it might be a little bit lower than it was before. It is very early. We do not know. It's June, and a lot of people could argue there's some seasonality in that, so - but it's a little ray of sunshine which, you know, it's okay to grab onto for now.

Guy Moszkowski - Merrill Lynch

Right. But like you said, there's other clouds in a couple of other portfolios.

James Dimon

That's absolutely correct.

Guy Moszkowski - Merrill Lynch

The point you made about actively hedging when you were talking on Page 7 about some of the various mortgage exposures, could you remind us what your monoline exposure looks like there and whether any of your actions this quarter included any write-downs to that?

James Dimon

There were no write-downs this quarter to monoline. There may have been some modest marks or something like that.

I want to point out we've only showed the gross exposures. Some are hedged and some aren't hedged because we've always acknowledged that there are risks on both sides of that, and there is no real perfect hedge, as you well know. And some things like Alt-A really can't be hedged.

And the monolines, you know, we took on some - I think we told you in the past that for JPMorgan alone, you know, unless there's an actual default, the risks are not high. We took on some additional risk from Bear Stearns. I would still make that statement, that the risks, you know, you're talking about, unless there's a major default of one of the major ones, that they're really not that high. There could be marks up or down a couple hundred million dollars, but we're not relying - we're relying a little bit more than we used to on the monolines for some of the things because Bear Stearns had some, but it's really not a major thing for us. I mean, put it this way, the worst case isn't that bad.

Guy Moszkowski - Merrill Lynch

In the Investment Bank you mentioned the comp levels and comp ratio, and they do seem quite high, especially given that your result was actually quite strong, even with your charges. Your year-over-year fixed income results, for example, were actually up a little bit or, sorry, modestly down. But, I mean, really in very good shape. And so when I look at a 57% or so comp ratio, it just seems very, very high. Maybe you can give us a sense for what's driving that that's not recurring and where we ought to think about that ratio for the full year.

James Dimon

That ratio obviously is high, and I think it was a very healthy reserve relative to results. Ongoing, it should probably look a little bit more normal, and it's just reflective of how we think we need to pay people, etc., but, you know, obviously it was a fairly healthy addition this quarter. We don't want our people getting depressed, put it that way. We want to keep morale up.

Guy Moszkowski - Merrill Lynch

Well, I certainly applaud that sentiment.

James Dimon

Exactly.

Guy Moszkowski - Merrill Lynch

And then the final thing I'll ask you is on Basel II, obviously the pure investment banks are showing us TSE Basel II ratios at this point obviously very difficult to compare. What's your timetable for beginning to show us Basel II?

Michael J. Cavanagh

Guy, we're working on that now. As you know, we're under the different regulatory regime for Basel II and examination of the investment banks, and we're hoping to be the first major bank to be approved to go into parallel run potentially as early as the fourth quarter of this year.

James Dimon

And our Basel II number as we currently see it would be very strong. And I think if we use the same rules and requirements that the investment banks use, it'd be even stronger than that.

Guy Moszkowski - Merrill Lynch

And maybe you can give us a sense for how it would compare to those, you know, 12 percentage numbers that we're seeing from those guys.

James Dimon

I challenge those numbers, okay? I'm not sure that those investment banks are using true Basel II-type numbers, but we don't know the detail. Ours would be very strong, too. So we've just got to wait until it sorts out. Now you saw recently the Fed and the SEC have an agreement to be sharing stuff like that so there'll be some commonality down the road in how people do Basel II. I would question whether those Basel II numbers are the same as ours.

Guy Moszkowski - Merrill Lynch

Any particular area in which you would question that?

James Dimon

No, but you just do your analysis of the facts.

Operator

Your next question comes from Mike Mayo - Deutsche Bank.

Mike Mayo - Deutsche Bank

Can you elaborate more, you mentioned home equity might be a little bit better than you expected. You talked a lot about that at your Investor Day. But prime mortgage going from 48 basis points up to 91 basis points linked quarter, can you just elaborate more on what you're seeing there and why?

James Dimon

Mike, it's exactly the same risk factors and all the other things. It's high CLTV, high LTV, it's stated income, it's California, Florida, Arizona. And I agree with you, they're staggering numbers. You know, it might be higher because, you know, we have all the politicians telling people it's okay not to pay your mortgages. It's just really hard for us to tell. Our current expectation is those losses could triple from here. And we're prepared for that, and we will reserve for that appropriately going forward.

Mike Mayo - Deutsche Bank

I'm sorry. Prime mortgage losses could go from 91 basis points to 270 basis points?

Michael J. Cavanagh

Yes.

James Dimon

Yes, that's what I said. We had $100 million a quarter, and we could go up to $300 million a quarter. We don't [expect it to] happen next quarter, but if you look at current trends - and maybe we're being a little overly conservative - that could be $300 million a quarter some time in '09. For awhile, not forever.

Mike Mayo - Deutsche Bank

That's a lot worse than you expected before, and now you're expecting home equity to be a little bit better, so how do you reconcile those two?

James Dimon

Mike, we don't. We can't.

Mike Mayo - Deutsche Bank

And then unrealized securities losses, what are those or how much non-agency MBS do you have?

Michael J. Cavanagh

So our total OCI, you know, deteriorated by about a billion dollars in the quarter to be - if that's the question, Mike.

James Dimon

Non-agency MBS where?

Mike Mayo - Deutsche Bank

Firm wide, just because of the decline in value.

James Dimon

Okay, I think if you looked at non-agency MBS, that is the number we're talking about at prime, which is held both in Retail and in Corporate, that is non-agency [whole] loans, most jumbo whole loans.

Mike Mayo - Deutsche Bank

How about securities?

James Dimon

Very little. Very little other securities which are non-agency. There's some. You know, we buy and sell securities all the time. I mean, we bought some credit card BBB loans, and we've bought some CLOs and, you know, we have a huge portfolio we try to manage for total return.

Mike Mayo - Deutsche Bank

And just to reconcile two other comments. You said continued lower investment banking results, but on the other hand Bear's contribution should get a lot better. So what are you thinking about going forward that might be a drag?

James Dimon

Yeah, so Bear, what we hope to see is that, you know, it'll be a positive contribution next quarter and build up to, you know, some time in '09 to $250 million a quarter. And the underlying results are outstanding. I mean, the trading results, the investment banking results, I mean, really outstanding. And if you talk to clients, I think they'd be very happy with us across the board.

But you have to look at the environment today and just assume it's going to continue for awhile. There are still assets we want to get down. There's a lot of risk in holding syndicated loans and mortgages. You know, the values are much better because they're already been written down so much. You know, Mike mentioned the average leveraged loan is now $0.80 on the dollar. But in an environment like this, we assume that as we sell stuff, hedge stuff, that it, you know, we will probably have to pay a little bit more going forward. Eventually that will end, and you'll get the real underlying results.

And the only other thing in there, because we do have a lot of credit exposure, which is very idiosyncratic. You have rate reserves, but, you know, you have some big surprise in a credit loan somewhere, you know, that could cost us. And we should be prepared for that, too.

Mike Mayo - Deutsche Bank

Last question, mergers? I think you've been waiting your whole life for this environment or planning for it, so what is the impediment to you pursuing a merger right now in the Retail Banking side? Is it lack of willingness of sellers and boards? Is it the mark-to-market accounting? Is it the lack of your willingness?

James Dimon

I think the mark-to-market accounting makes it harder for a bank to buy a bank because you have to, you know, basically write the loans to a market value, but it does not make it impossible, certainly not for us because under the right circumstances we're sure we could raise the capital we need to do it, but it does make it harder. And, you know, this is a good environment. I would expect - I'm speaking generically now - that this will lead to more mergers over time. Nothing is impeding us, but it's not just up to us, as you pointed out.

Mike Mayo - Deutsche Bank

If you close a deal by year end, do you still have to do the mark-to-market accounting on the loan book?

Michael J. Cavanagh

Yes. That's effective immediately, right? That's not a -

James Dimon

I believe so, Mike.

Michael J. Cavanagh

Effectively immediately and it's effective from now going forward, unless it gets changed. And we don't know if it'll be changed or not.

James Dimon

We wouldn't do a deal or not do a deal based upon pure accounting like that. We would do a deal or not do a deal based upon how much value we thought it added to shareholders. It just makes it harder, that's all.

Operator

Your next question comes from Betsy Graseck - Morgan Stanley.

Betsy Graseck - Morgan Stanley

Just two questions, one on the Bear Stearns assets. You did sell down a dramatic amount relative to prior expectations. How much more do you anticipate reducing from here?

James Dimon

Well, it's not, you know, I wouldn't look at it like they're Bear Stearns assets anymore because these books are combined and run by a consolidated management team at this point, but I think if you look at the assets that Mike spoke about - mortgages, leveraged finance, and obviously some other categories that we didn't spend time on  they'll be coming down over time.

Betsy Graseck - Morgan Stanley

And as you executed that selldown of assets, did that at all help the trading line? I mean, I know you indicated that there wasn't much in Bear Stearns' operating business in your trading line, but I'm wondering if there was any, gain on sale given where rates had gone during the quarter that may have helped out that line at all.

Michael J. Cavanagh

No. I would think of that as, you know, liquidation is a large contributor to consuming the book value that we were talking about earlier between write-downs and operating losses as we deleveraged.

Betsy Graseck - Morgan Stanley

And then lastly I just wonder how you're thinking about the dividend policy given the very strong capital ratio that you ended the quarter at and well above, I think expectations.

James Dimon

Well, we applaud our friends at Wells Fargo, but we don't have quite that much guts going forward. We bear some more risk and, you know, we're not going to create the dividend until we see clear daylight.

Operator

Your next question comes from William Tanona - Goldman Sachs.

William Tanona - Goldman Sachs

Just help me understand the kind of decision to increase the equity in the Investment Bank by $4 billion. If you looked at Bear Stearns, you know, prior to this deal, the equity was at $11.5 billion, and we all know that they were far greater levered. And, you know, looking at how much it took risk-weighted assets down, it's about 45%. If you just keep the same kind of leverage ratio, it kind of implies $6.5 billion of equity. So just trying to understand why you only allocated the $4 billion to the Investment Bank.

Michael J. Cavanagh

Well, remember we took, Bill, we took equity up in anticipation somewhat of all this by $1 billion in the first quarter from $21 to $22. Remember also that our allocated equity is really just allocated common equity, so when you look at, you know, pure comparisons you've got to add a share of the non-common equity component to the firm's capital to get to the real kind of denominator when you do some of the calculations that are often done. So we go through all that.

And I guess the one last thing to remember is that, when we do our own internal compares of capitalization to get to sort of stand-alone single A type of ratings, you've got to parse through versus our competitors that hold asset management businesses, private equity businesses, etc., inside their overall units. When doing a comparison of our Investment Banking unit to those, you have some parsing to do to arrive at what real pure comparisons look like.

So on all that kind of basis, I think we get to a place that we feel like is appropriate, and we continue to watch it and look beyond just the nominal levels and look at some risk weightings and our sense of where risk really sits and compare to economic capital calculations internally as well.

James Dimon

I think it's good to point out [inaudible] capital buy because Mike mentioned, you know, our Tier 1 has a much higher component of common equity, which you could say is higher quality Tier 1. But across the board, you know, we try to be conservative. I always talk about quality of capital, which is maybe a peculiar concept, but loan loss reserves are very strong. You know, our BOLI/COLI is very strong. We're massively over reserved by a couple of billion dollars in our pension plans. We got out of the auto leasing business. Our card IO is very small. So it's really across the board.

You know, you can look at all these things and call us pretty conservative. And we really believe in maintaining a strong balance sheet on all counts, not just [drawing] Tier 1 but all these other things I just mentioned.

William Tanona - Goldman Sachs

And then I guess the follow-up question - and I've got to go back to it because I can't let you off that easy  but helping us reconcile the commentary in terms of prime mortgages versus home equity. I mean, what is it precisely  I know you can't obviously comment about the industry as a whole or choose not to - but in terms of our individual portfolio, what is it about your prime mortgage portfolio that you expect losses could potentially triple from here? You know, is it just the segments that you're in? Just trying to understand and reconcile that as well as, you know, the commentary between the home equity.

James Dimon

You know, you saw subprime go first, and then, on a slight lag, you saw home equity, and now in the lag you're seeing prime go. And it's exactly the same lost factors. But remember, the components of where we are in the states and all the stuff like this, it's very different. And we started doing more jumbos in '07, so a lot of that is - part of that's '07 vintage, which I think I told you at the time we're going to do and grow a balance sheet and gain share. And we were wrong. You know, we obviously wish we hadn't done it.

So when you adjust for all of those things - vintages, CLTV, stated income, where it's done - that's what we're seeing. You know, it's very early in the loss curves, so the 300's just - it's just kind of rolling forward and projecting. You know, we hope it doesn't to there but it easily could.

Michael J. Cavanagh

It's the same as our guidance on home equity was. It's where things could go depending on a set of views internally.

William Tanona - Goldman Sachs

Yes, I mean, I guess I understand that. I just, you know, as you think about them potentially going up to 3 or 250 or whatever it may be and, you know, given your new guidance on home equity, which would also put that at 3, I guess it's just tough to imagine how home equity, given everything that's going on there with housing prices that that number could be as low if you do really expect prime to potentially double or triple from here.

James Dimon

At different locations, different vintages, different - but we understand your point. We disagree. It's that prime looks terrible, and we're sorry. There's nothing - we could say it eight times, but it looks terrible.

Operator

Your next question comes from Jeff Hart - Sandler O’Neill.

Jeff Hart - Sandler O’Neill

Sticking with the prime mortgage for a second, when you talk about deterioration, I look at your prime mortgage portfolio and it's dominated by jumbo and Alt-A. Can you give us any color as to how the jumbo bucket's performing versus the Alt-A versus what I'll guess I'll call other prime mortgages that don't make up as big a part of your portfolio?

James Dimon

You know, I think - I don't know the number offhand. Mike, do you know the number?

Michael J. Cavanagh

No. I mean, the way I might explain it, Jeff, is we've significant ratcheted back our underwriting standards in prime to be fundamentally much more of a traditional underwriting standards, much less stated income, LTVs from here that are targeted to not be in excess of the expected home price in given areas. So we're in some parts of the country max LTV currently at 65%, etc., etc.

So when you layer that through and look at our portfolio split between the balances that we would continue to underwrite on our given standards and those that we wouldn't, for what we would continue to underwrite the existing credit performance is substantially lower than its overall level of 91 basis points of loss. So we feel confident that our current underwriting is wholly different than sort of the pig and the snake that we have just working through of what has been already underwritten with the risk factors that Jamie described.

And I think one of the real drivers is home prices in some of the areas where we put on loans has come down so substantially that, you know, where we were in situations of, you know, relying on - rather, because it was prime, not relying on mortgage insurance and home values have dropped even below 80% original LTVs, we're taking losses. So that's, you know, those are some of the dynamics.

James Dimon

And I should just point out, though, what we see is if home equity goes we're going to be north of 3 by a little bit, and that the prime will be 220, 230, 240. You know, it may be temporary. It may just - it may hit that and then come down fairly quickly.

Jeff Hart - Sandler O'Neill

But is prime going to that level a function of over three-quarters of your portfolio being jumbo and Alt-A versus just kind of the overall what you'd call housing market?

James Dimon

It may be. You know, I mean, that's all we have so that's - we don't have a great compare point, you know, because that's the preponderance of what we have in portfolio.

Jeff Hart - Sandler O'Neill

Are you seeing better - I mean, from what you have in portfolio, are you seeing better performance away from jumbos?

James Dimon

We mostly have jumbos so -

Michael J. Cavanagh

That's my point, Jeff. I don't have a good compare point inside of the portfolio because that's the preponderance of what we have actually on balance sheet. Conforming stuff obviously goes straight out the door to the agencies and doesn't stay on balance sheet.

James Dimon

I think the jumbos are more proportionately California, too, so that probably has a lot to do with it.

Jeff Hart - Sandler O'Neill

And on the Commercial side of the business, we're seeing what's still pretty good loan growth. It's very nice loan growth. We're seeing really good credit quality as far as charge-offs go, but we're seeing you build reserves. Can you talk a little bit about whether that reserve build is in anticipation of troubles in commercial or just a function of how quickly you're growing your balances?

Michael J. Cavanagh

I'd say it's two pieces. You know, there's a - we've been cautious related to commercial real estate, as we've talked about the Commercial Bank. But when you look at some small portions of the portfolio related to homebuilders, you saw in the first quarter really the more significant additions to reserves in the quarter. And that's really, you know, as time goes by and certain portions of the portfolio go under stress, they get downgraded and require incremental reserves.

In aggregate, we feel confident about where we're putting on growth from here, but it's just the dynamics of degradation in certain sectors, particularly anything related to homebuilders.

James Dimon

By the way, the portfolio - and thanks for pointing it out - is very strong. I would think you should expect nonperformers to go up. We have never seen environments like this where that doesn't happen, even in a strong portfolio. And all of the growth, we really are comfortable. We see enormous opportunities to grow it and feel kind of like Wells felt about it, that there are a lot of clients, they need loans, they want to grow. There are a lot of municipalities - a lot of the growth is coming from government and not-for-profit, which is generally very secure, so we feel pretty good about it. But it almost has to deteriorate in an environment like this.

Operator

Your next question comes from Meredith Whitney - Oppenheimer.

Meredith Whitney - Oppenheimer

I'm out of gas in terms of home equity and prime questions, but I just wanted to ask a separate question, which is on uninsured deposits and any type of market share moves and obviously important moves within that sector - you know, $2.5 trillion sector - and your thoughts on visuals of IndyMac and what's going on there, please.

James Dimon

Well, again, thanks for pointing out that our deposits in asset under management are like up 25% and TSS up 15% and Commercial Bank up 19%, which shows you, you know, kind of the power of this franchise over time. And, you know, we worry about us. You know, some - I think there are going to be issues. I think you've heard a lot of regulators talk about some of the issues with banks out there which may have more problems in their commercial real estate, and that'll cause, obviously, some depositors to be concerned about it. But we think we'll be a beneficiary of all that.

Meredith Whitney - Oppenheimer

Anything in terms of just an industry comment?

James Dimon

You know, it's different all over the place, the competition for deposits right now. And we're not really chasing it, so you're not seeing growth in our deposits because we're chasing them. I think some of the people have really raised rates, not just uninsured but have raised rates because they need them.

Meredith Whitney - Oppenheimer

What do you see in terms of, you know, any type of Northern Rock issue, where people are actively splitting accounts or anything like that so you're starting to see - I mean, how long would the line be where we'd start to see real market share moves?

James Dimon

Honestly, we don't know the answer to that question.

Operator

Your next question comes from John McDonald - AllianceBernstein.

John McDonald - AllianceBernstein

Just two questions on potential accounting changes. I was wondering how much of a concern the potential changes in the QSPEs might be in terms of impact on capital ratios, and then also the potential changes in the credit card billing practices.

Michael J. Cavanagh

Yes. So, I mean, just, first of all, we don't think the change in accounting - you know, remember you're talking about '09 and 2010 - would be consequential at all, though it'll could put hundreds of billions of dollars back on the balance sheet, the risk-weighted assets may be different. It's really not clear.

But I think - and we may show you a lot more of this next time because it's come up many times, but we analyzed it, we don't think it's that big a deal for us. And we understand the regulator's points, but it's putting too much fear in people's eyes that is a little bit unjustified, particularly in our case.

And the credit card changes, you know, it really depends. You know, we already got rid of double-cycle billing and we already got rid of [offers] default pricing or [offers] repricing at all. So the new changes coming up, depending on [how it] gets rolled out, could have an impact. It could be fairly material. A lot of it will be one shot, just one time, it'll hurt you for a year or something like that. But it really remains to be seen how it gets implemented and really how competitors react.

Remember, you change price or something like that, everyone's going to - all the competitors react and do something bad in the first place. The interchange thing could also be [dramatic] though I would be surprised if you have pricing controls like that in the United States of America.

John McDonald - AllianceBernstein

And the margin hit that you saw in credit card this quarter, you mentioned, you know, the credit quality is impacting it, but do you have any flexibility? You know, typically card issuers have some flexibility to raise pricing. Should that flow through over the next couple of quarters as you [reprice] folks?

Michael J. Cavanagh

That would be some of our hope, John. You know, that potentially some response on our part to what we're seeing could be a factor in the second half of the year.

Operator

Your last question comes from Ron Mandel - GIC.

Ron Mandel - GIC

In regard to FAS 140, I just saw your comment about not being that worried. You know, you have $75 billion or so of off balance sheet managed credit card loans. If that came back on, that would be about - which is, I think, is highly likely - would be about, you know, 50 basis points or so of capital.

James Dimon

It would be $50 billion of risk-weighted assets.

Michael J. Cavanagh

Correct. So, you know, clearly, Ron, just remember, that is the accounting effect; that we would agree that that's probably likely, that credit card QSPs come on. So that $70 billion and maybe something less than $50 billion of RWA, I think, being conservative, come on, which obviously will eat into Tier 1 capital ratio. But the regulators get to take their view themselves and not necessarily follow accounting on how they're going to handle all that when they - and we just don't know enough yet on how that's all going to play out.

If that were the outcome, we could handle it, obviously.

James Dimon

But also remember, Ron, we're retaining a lot of capital. Our dividend is low. We're retaining capital even at these low earning numbers. You know, we kind of expect that to continue. [inaudible] we're retaining capital. And you're talking about, you know, '09, 2010, 2011. So we'd be in very good shape for that.

Ron Mandel - GIC

Have your conversations with regulators indicated that they will take a different approach than the accountants?

Michael J. Cavanagh

It's too early to tell.

James Dimon

It's too early to tell, which is why I'm saying if you go through what I would consider almost the worst case, it's still not that big a deal. So, you know, so it hurts your Tier 1 ratio by 50 basis points, other ratios, who cares? It's just, you know, at one point it's just another number on a piece of paper. And, you know, we've got plenty of ways to raise capital or add preferred stock or reduce asset growth or something like that -

Michael J. Cavanagh

Or recalibrate our capital targets because nothing fundamentally is changing as accounting changes, right?

Ron Mandel - GIC

Right. And are there any third-party vehicles that you manage or otherwise that might - third-party related assets where you manage the conduit that might come on the balance sheet.

James Dimon

The conduit can go on the balance sheet, but that would barely impact capital because it's already included in capital 

Michael J. Cavanagh

On a risk-rated basis. And then there's a couple hundred billion of other forms of securitizations, VIEs, you know, totaling up. But like Jamie said, we can take you through at a future time. But there's plenty of business actions that we would see taking to make adjustments to likely make any impact from any of that very manageable.

James Dimon

Some of that would be irrational. We have absolutely no risk. We've got to put it in your balance sheet. So  but even when I say it wouldn't matter, but remember we have a very, very forward-looking view of capital, so we already project our capital throughout '09, and we already know that we can handle all that stuff easily. It might change what we do elsewhere, but we already know we can handle that easily.

Ron Mandel - GIC

And then I just had one last question. I guess I can't let go of the home equity, and that was at one point you indicated the amount of home equity loans as a percentage that was over 90% current loan to value. I think you said it was 22%, and I'm wondering if you have an updated figure.

James Dimon

That was over 100%. That was like they would go into negative equity, and I think the number - that was a forecast, right, to the end of the year?

Michael J. Cavanagh

I think it was 10 and negative equity at the beginning, you know, on a forecasted - on a current basis going to potentially 20. So we're somewhere along that spectrum of 10 going to 20 in negative equity, I would say, Ron. But we can confirm that for you.

James Dimon

And what we really don't know, which is - you know, we can't really project - is how will people act who go negative equity who've been living in a home for three or four years, because you're hitting different vintages now. People who've actually been there, their kids are going to school. So it's a very different thing than maybe people who bought their homes on a 100% LTV in, you know, 2006 or 2007. That's possibly why you're seeing some improvement here.

Ron Mandel - GIC

So you don't really have enough data to see how the people with no equity are going to act?

James Dimon

No, we're assuming they won't act well.

Michael J. Cavanagh

But it's possible that they aren't as bad as we might expect.

Thank you, everybody, for joining us. Look forward to next quarter. Take care.

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Source: JPMorgan Chase & Co. Q2 2008 Earnings Call Transcript
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