Saturday, April 17, 2010

JP Morgan - Earnings Fraud Once Again?

If there is one thing we should expect, it is that the center of the storm is not Goldman Sachs, nor Bank of America or Greece or Spain. It's the Fed and its minions. Sure Goldman is the Fed's 85 Broad Street annex, but the Federal Reserve's headquarters and the New York Fed's main office do not reside there, but rather at 270 Park Avenue...just underneath Jamie Dimon's suite.

Jamie Dimon wants you to believe that the results for this quarter reflect a move back to stability. JP Morgan wants you to believe that their stock is worth $50 and that the bank is healthy, well capitalized and stable. They want you to believe that what they show you on the balance sheet is all you have to worry about.

The reality is quite the opposite. JP Morgan was the main driver behind the creation of the Fed in 1913 and has continued to, since its inception, to be its greatest influence. Due to this dangerously close relationship, JP Morgan has benefitted with unlimited access to cheap dollars and credit in addition to lax regulation. JP Morgan IS the Fed's priority driver behind its derivative's based dollar debasement and money supply creation initatives. JP Morgan is the main bank the Fed and Government wants to protect at all costs. Yes even more than Goldman Tax.

As I have indicated in previous posts, the creation of new money, means the creation of new interest which requires more "New Money" to avoid default. The only way to avoid this small problem is to create money out of thin air with no perceived interest component. Additionally, the best way to guarantee that the odds favor your debasement programs, is to ensure that that you use these facilities to ensure that you are net short the dollar and guarantee inflationary trends in assets exchanged for those dollars. That way you transfer all the wealth tot he guy printing the dollars. So, derivatives books like JPM's are not a accident. They represent theoretical money that supposedly backs theoretical defaults, thereby balancing the books for the monetary system.

If we have not learned by now, Bernake, Geithner, Summers, Paulson and Rubin should all be in jail already. Goldman Sachs is not the origin of the fraud. The Fed is.

When you put dessert on the table, you expect people to eat it - not look at it - even if its bad for them. Additionally, if its your table and they are guests, they will eat it even if they don't really like it or want to.

When you throw fractional reserve lending, off balance sheet entities and tons of new money manufacturing facilities in front of bankers - you expect them to use them to line their pockets - even if it is bad for everyone in the end. Its the Fed's table, if you want to be invited again you play their game. The theory of greater fools is a bankers favorite...that's why the Fed has been coming up with ingenious and devious ways of shorting dollars for so many years.

But the above wrecking crew would like us to believe that this is a capitalist and free market system. This system is NOT capitalist. The system is crony capitalism with underpinnings of neosocialism thrown in as a backstop.

So, what does this have to do with JPM? Well, lets look at their nice little earnings report and ask a few questions...
  1. Can it be believed?
  2. Does it reflect actual earnings?
  3. Does it reflect their views in the conference call?
  4. Is everything we need to know included?
"The Firm’s net income of $3.3 billion reflected another strong quarter for the Investment Bank, particularly in Fixed Income Markets, and continued solid performance across Asset Management, Commercial Banking and Retail Banking. Unfortunately, these good results were partially offset by high losses in the consumer credit portfolios" - JP Morgan and Co.
"JPMorgan Chase & Co. , the second- biggest U.S. bank by assets, beat analysts’ estimates as first- quarter earnings rose 55 percent on record fixed-income trading revenue and a reduction in provisions for credit losses. " By Dawn Kopecki April 14 (Bloomberg) 
The answer to those questions is NO. JPM has huge credibility issues, and is not believable. Only their access to and influence on the money manufacturing engine protects them. The earnings report was terrible. The bank is supposed to make money banking, they made money by participating in gambling. Additionally, is making money by lowering loan reserves reasonable? In my book, that is not making money, not withstanding being rather arbitrary and convenient. Ironically, the bank should be increasing reserves not reducing them...this action is ridiculous on its face. So we know what this is, is accounting fraud. Adjusting for loss reserves is just another scam served at the dessert table and legalized by its host - the Fed.

If you look at the actual banking results, they were  terrible. So, hopefully the gambling and accounting manipulation businesses will continue to be good.

How about the balance sheet? Their balance sheet is a shambles...unless its legal to arbitrarily move liabilities into assets columns at will. (Oh, I forgot it is...remember FASB) Their exposure to credit losses is masked by accounting maneuvers and off-balance sheet entities. You see what they want you to see - not what you need to see. Their leverage ratio is nearly 50 to 1 based on their derivative book alone... not considering the accounting frauds and their off-balance sheet liabilities.

“We believe that the global economy is making an important transition to self sustaining growth as the first quarter comes to an end. As part of this shift, GDP growth is re-accelerating following a modest downshift at the turn of the year. However, it is the significant broadening in G-3 demand, rather than the pickup in top-line growth, that will be the key marker for this transition.

We are becoming more bullish on economic growth, both in terms of how fast economies will grow and in terms of confidence that it will actually happen. Activity data across much of the world have surprised on the upside in recent weeks. Most important is that they are showing greater breadth across regions, sectors, and types of spending.” - JP Morgan and Co.
If you believe that, then you can reduce your loan reserves to make your earnings report look better right? But let look at what is really happening. JPM as with most banks increased their risks and leverage over the last year - not reduced it. This was accomplished with smoke an mirrors. i.e. The new FASB accounting rules. The worst of the new FASB rules allow banks to reflect unimpaired asset values on your books as long as banks hold them - only realizing true value when they are liquidated. This piece of garbage accounting maneuver makes not sense and allows banks to take more risk without actually showing the risk.

The other omission, or accounting slight-of-hand, I would like to know about is how much of that trading profit was made on trades on behalf of the Fed? You know the grand Sunday to Monday futures manipulations? I guess the best way to reflect that revenue is to call it fixed income trading revenue. The question is, will they be allowed to buy with abandon for the Fed's accounts next quarter and next year?
"With the worst of the crisis behind the company, Dimon said the board’s “No. 1 priority” this year is finding his replacement. He said many companies have been destroyed by poor succession planning." - Jamie Dimon
Jamie, I have to hand it to you, you are one smart guy. Taking your money and running...sounds like a good plan to me. I think the exit stage left before they try to nail you to the wall is the best policy. Let someone else take the fall.

The funny thing is, that if everything is so great, Jamie has a great job - FOR LIFE! Why leave? he's still young and the bank is still healthy...or does he know something that makes him a little concerned about his future. I rather suspect that we know the answer to that question.
JPMorgan Chase said its nonperforming loans, those that are in default or close to being in default, totaled $2.7 billion, up $946 million from a year earlier but a $763 million improvement from the final three months of 2009.
"We continued to see delinquencies stabilize, and in some cases improve, in our credit portfolios," Dimon said. "Ultimately, the health of these portfolios will track the health of the economy." 
Does the above mean anything? Or is it just the biggest pile of crap you ever heard. They clearly said that "global economy is making an important transition to self sustaining growth" didn't they...

Clearly, everything we need to know is NOT in this report...but its legal for them to release it.  If true, JPM should be liquidating everything in sight if it wants to survive without intervention. (and they really should be - problem is they are the only buyers) However, if JPM wants to cash in on the loan that it extended to the FDIC (so the FDIC can insure it) by triggering the FDIC insurance policies then it only needs to continue the way it's going.

So, cronyism strikes again...and we know who the losers will be.

For reference, below is JPM's stated balance sheet...

JPMorgan Chase & Co. (JPM)
Balance Sheet ($000)3/31/2010
Loans, Gross of Reserve for Losses713,799,000
Loan Loss Reserve38,186,000
Net Loans Receivable675,613,000
Intangible Assets51,589,000
Total Assets2,135,796,000
Tangible Assets2,084,207,000
Total Liabilities1,971,075,000
Liabilities and Mezzanine EquityNA
Common Equity156,569,000
Total Equity164,721,000
Tangible Common Equity104,980,000
Tangible Equity113,132,000
Common Shares Outstanding (Actual)3,975,400,000
As-reported Book Value per Share ($)39.38
Basic Book Value per Share ($)39.38
Book Value per Share ($)39.38
As-reported Tangible Book Value per Share ($)NA
Basic Tangible Book Value per Share ($)26.41
Tangible Book Value per Share ($)26.40
Income Statement ($000)3/31/2010
Net Interest Income13,710,000
Net Interest Income, FTE (if available)NA
Noninterest Income13,215,000
Total Noninterest Expense16,124,000
Pre-Provision Net Revenue10,801,000
Net Income3,326,000
Diluted EPS after Extraordinary Items ($)0.74
Average Balance Sheet ($000)3/31/2010
Average Loans725,136,000
Average Interest-earning Assets1,672,307,247
Average Other Interest Earning Assets947,171,247
Average Assets2,038,680,000
Average Deposits931,835,000
Average Common Equity156,891,000
Average Equity164,246,000
Average Tangible EquityNA
Average Book Value per ShareNA
Asset Quality and Capital Ratios (%)3/31/2010
Nonperforming Assets ($000)NA
Net Charge-offs ($000)7,910,000
Nonperforming Assets/AssetsNA
Nonperforming Assets/EquityNA
Loan Loss Reserves/Gross Loans5.35
Loan Loss Reserves/Assets1.79
Loan Loss Reserves/NPAsNA
Net Charge-offs/Avg Loans4.36
Net Loan Charge-offs/Avg Loan Loss Reserves90.67
Tier 1 Common Capital Ratio9.10
Tier 1 Capital Ratio11.50
Balance Sheet Ratios (%)3/31/2010
Common Equity/Assets7.33
Tangible Common Equity/Tangible Assets5.04
Tangible Equity/Tangible Assets5.43
Tangible Equity and Reserves/Tangible Assets7.26
Loans, Net of Reserves/AssetsNA
Equity + Reserves/Assets9.50
Loans, Gross of Reserves/Assets and Reserves32.83
Profitability (%)3/31/2010
Reported Net Interest Margin3.32
Return on Average Assets0.65
Return on Average Equity8.10
Overhead Ratio21.22
Efficiency Ratio59.88
Net Interest Income/Revenue50.92
Net Interest Income/Avg Assets2.69
Net Interest Margin3.28
Net Operating Expense/Avg Assets0.57
Noninterest Expense/Avg Assets3.16
Noninterest Income/Avg Assets2.59
Compound 5-Yr Growth (%)3/31/2010
Net Loans Five-year CAGR11.28
Assets Five-year CAGR12.62
Deposits Five-year CAGR11.72
Equity Five-year CAGR9.35
Equity Per Share Five-year CAGR5.74
Net Interest Income Five-year CAGR21.27
Net Income Five-year CAGR7.99
EPS after Extra Five-year CAGR3.27
Revenue Five-year CAGR14.55
Regular Dividends Paid Five-year CAGRNA
Additional Growth Rates (%)3/31/2010
Net Loans Receivable Growth49.02
Asset Growth20.43
Deposit Growth-5.57
Equity Growth-1.56
Net Interest Income GrowthNA
Net Income Growth, after Extraordinary Items55.35
Book Value per Share Growth-5.02
EPS Growth, after Extraordinary Items85.0
Growth Rate of Regular Dividends Paid-86.84
Source: SNL Financial

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