JP Morgan Puts on a Brave Face

JP Morgan (JPM) released Q2 results and told everyone that Bear Stearns (BSC) does not taste very good. At the same time it is experiencing substantial write offs in most operating areas, as credit quality worsens and spreads compress.

For a financial institution of this size it is not hard to release a blizzard of numbers and declare disclosure has occurred. So you look at the little things and see if you can guess/ intuit/ extrapolate and otherwise back into reasonable conclusions. By the way SEC, if you hear rumors of any kind about JP Morgan, just look at these statements and wonder if you are well informed. Even JP Morgan will admit in an exculpatory caveat that the numbers are on a managed basis.

Several thoughts come to mind. The press release has little to no mention of the words Sub-Prime, Collateralized Debt Obligations, Freddie Mac (FRE) and Fannie Mae (FNM). JP Morgan claims to be experiencing write offs on the consumer side. It makes no mention if this is still from the funny money derivative stuff or are its own direct lending efforts coming up short? Don’t tell me everything was parked in investment banking, we all know that’s not really accurate.

Everyone has been watching Freddie & Fannie, waiting for the other shoe to drop. Somewhere in JPMorgan the risk management guys should know to the penny what its exposures are. The press release did not cover the issue. Perhaps it’s hidden somewhere in the unmanaged portion of the company's financial statements and investors have not found it as of yet.

The gunslinger mentality dies hard. The press release mentions the company's prowess as number one in several investment banking categories. Yet at the same time it is writing off huge amounts within the investment banking area.

Disclosure: None

Comments

[1worldcurrency:]

Dimon is a great shill. Beware the black box.

2008 Jul 22 09:10 AM

[edsbett:]

The black hole in this mystery is the derivatives book. They have long been the hedge vehicle in gold for the producers and are probably choking on this form of financial engineering. Also try and pry the results of the BankOne merger out of these figures. The only thin holding it together is the fact that Dimon gives speeches with Paulson and Bernanke

2008 Jul 22 09:56 AM

[edsbett:]

The black hole in this mystery is the derivatives book. They have long been the hedge vehicle in gold for the producers and are probably choking on this form of financial engineering. Also try and pry the results of the BankOne merger out of these figures. The only thin holding it together is the fact that Dimon gives speeches with Paulson and Bernanke

2008 Jul 22 09:56 AM

[edsbett:]

The black hole in JPM has always been and will continue to be their derivatives book. Take a look at published material and you will find it incomprehensible but growing exponentially. The next mess to come apart is credit default swaps. These things are usually written for 5 years and will begin to have a nightmare as the recession progresses in 2009. They have always had an enormous gold book on the wrong side and haven't yet probably fully hedged. Lastly, the BancOne acquisition will start to show bigger consumer losses, again as we move further into recession. Mark to market is a mysteery. The Bear deal is a total enigma. Nevertheless, Dimon is the one chosen to stand with Paulson and Bernanke as the bailouts/rescues are announced and bad mouths the skeptics.More than one savant on the Street has voiced the opinion Paulson had to stick Bear into JPM to save JPM not get Bear to an undertaker. I remain a skeptic

2008 Jul 22 10:03 AM

[nyka:]

What's a "mysteery"?

2008 Jul 22 11:47 AM

[Emerald:]

Dimon is a good leader for JPM. However, I would like them to disclosure more detail and commentary about their derivatives exposure. Currently available records note that JPM has the largest derivatives book in the world. Buffett called these instruments ticking time bombs. Sell side analysts never comment on this. (Duh!) JPM will probably say they have everything appropriately "hedged". However, counterparties have a higher risk level in a slowing economy with inflation north of 6% and real unemployment at 8% and growing. (We all know Clinton changed the metrics for money supply and job growth in the 90's.) Given JPM's inadequate disclosure, I sold my position last month at break even after holding the stock for six years. I originally bought Bank One stock when Dimon took over there. The punch line: Buffett was (and is) right!

2008 Jul 22 02:54 PM