Is JPMorgan Throwing Good Money Out With the Bad?
JPMorgan Chase & Co (NYSE:JPM) has reportedly sold off approximately $25 billion of profitable securities, which included corporate debt and mortgage-backed securities yielding over 3 percent, to cushion the effect of its massive $2 billion-plus trading loss at the London investment office.
The bank was probably compelled to sell the securities given the pressure to maintain a respectable profit report for its second quarter — its shares have already fallen 18 percent since the announcement of the trading loss. Analysts have downgraded expectations for earning per share during the second quarter from $1.24 a share before the trading loss was announced, to $0.90 a share.
The bank pushed through the sales recognizing that the move came with a high tax bill. Dimon has said previously: “We can take some of those gains and we can take them to offset this loss,” he said. “But usually it’s tax inefficient, so we’re very careful about taking gains.”
Worse, the securities will likely be difficult to replace and the bank will lose a lucrative revenue stream. According to Lynn Turner, a consultant and former chief accountant of the Securities and Exchange Commission, the bank actually compounded its first mistake of the trading loss with another — “The second is selling assets with high income that they can’t replace,” Turner said.
But a far greater apprehension lurks about the ultimate size of the losses that may devolve on the bank due to trades by the “London Whale” – according to analysts, the figure could be as high as $5 billion because the trades were executed in illiquid credit derivatives markets, and the current prices are not favorable for JPMorgan to bail.
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