Market Overview

JP Morgan Sells Securities to Make Up For Losses


As the new, short week kicks off, it was revealed on Tuesday that JP Morgan Chase has sold off approximately $25 billion of securities in an effort to boost the earnings numbers after seeing terrifying trading losses thanks in no small part to the London Whale.

The bank said earlier in May that it sold corporate bonds and other securities which brought in over $1 billion against $2 billion in losses, meaning that the numbers won't look when they report earnings for the second quarter.

It's an odd move, and really amounts to little more than a person moving money from their savings account to their checking account to make it look like they have more money than they have. On the surface, if you skim over the numbers, it might look better, but in fact it amount to little more than moving the money from one place to another. The overall worth of the company remains the same.

What seems worrying is that a bank the size of JP Morgan uses these practices to "doctor" their figures. It sounds very much like some bad decisions are being made under the watch of CEO Jamie Dimon.

"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."

Careful is right. The results certainly don't seem to make the move look worthwhile. JP Morgan has historically made less than a 4% gain from selling securities in a similar fashion in the past. In other words, to make $1 billion in gains, the bank has to sell $25 billion in securities.

Then, of course, the gains are taxed so take out $380 million (at 38%), and a net gain of $620 million can be added to earnings (or 16 cents per share).

More worrying is the fact that the bank's losses could conceivably continue to grow, which could put it under pressure to sell more securities, losing more money in the process, just to make the earnings look a bit better. One would hope that somebody at JP Morgan will have more sense than that, but it is also understandable that, when placed under intense pressure from shareholders, the relief caused by a better-than-expected earnings report might be too much to resist.

Follow me @BCallwood.

Posted-In: JP MorganEarnings News Management


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