Sunday, October 18, 2009

Jamie Dimon's Chase Increases Risk To Generate Earnings

After the celebrations over JPMorgan Chase's recent revenue and earnings announcements which exceeded "expectations," more sober analysts are noting the increased risks the bank took to generate those results.

On Thursday, the Wall Street Journal's Heard On The Street column called it "J.P. Morgan's Chilling Win."

The article detailed the decline in profitability of the bank's core businesses. Loan volume was down, while loan loss provisions went up, and credit card past-due volumes were up, as well.

According to the Journal, the bank's VAR measure rose as it relied on bond trading for its juiced-up profits.

But, wait!

Isn't excessive risk-taking in trading and non-core banking business precisely what Congress, the administration, regulators and the banks themselves all swore was what caused the recent financial meltdown? That such short-term, excessive risk was to be sworn off by our "too big to fail" financial titans?

Gee, that didn't last long, did it?

Here's a memo- short term fixed income trading isn't a core retail or wholesale commercial bank business. It's what investment banks and brokerages use to boost earnings, but not without accompanying increased risk.

Of course, this country no longer has any large investment banks. They either failed, or begged for commercial bank holding company licenses last year, the better to get access to the Fed borrowing window.

So Chase is basically following Goldman Sachs' lead in relying on risky trading to generate revenue and earnings surprises. Guess how long that's going to last?

So much for anyone having learned from last year's debacle. So much for regulators being serious about oversight and risk management.

Nothing essential has changed about the US financial services sector in the past year, other than a few badly-managed firms were left to fail, while a few others were kept on government-supplied life support.

Nor has anything changed about Jamie Dimon's lack of management skill. Those surprising earnings came courtesy of some fixed income traders and the risk they were allowed to take, not from core lending businesses.

But the Journal is correct. Chase isn't making its money on conventional commercial banking. It's taking extra risks by wagering its proprietary capital at the tables in that little casino we like to call the US fixed income markets.

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