JPMorgan Chase reports $2 billion loss on derivatives

This isn’t good news for global financial markets tomorrow.

After the close in New York today JPMorgan Chase (JMP) announced that it had lost about $2 billion on synthetic credit securities (derivatives) in its chief investment office. “This portfolio has proven to be riskier, more volatile and less effective as an economic hedge than the firm previously believed,” the bank said in a filing with the Securities & Exchange Commission.

The bank’s shares are down 6.6% in afterhours trading.

At JPMorgan Chase the chief investment office is a unit that makes bets—often very speculative bets—with the bank’s own money. Synthetic credit securities are derivatives that are tied to the credit performance of individual companies. They were supposed to hedge against the bank’s own credit exposure. “In hindsight the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored, said JPMorgan Chase CEO Jamie Dimon. So far this quarter it looks like offsetting gains from the bank’s credit portfolio have resulted in a net loss of $800 million after taxes. The loss could widen or narrow in the rest of the quarter.

Four financial companies actually fail the Federal Reserve’s stress test

The Fed speaks: Lots of surprises.

In contrast to the don’t disturb the waters statement from the Fed’s Open Market Committee earlier in the day on interest rates and the U.S. economy, the Fed’s 4:30 p.m. (New York time) announcement of the result of its annual stress test of 19 big U.S. financial institutions blew a couple of smoking holes in the banking sector.

Yes, 15 of the 19 financial companies tested passed. They’ll now be able to increase share buy backs and dividends. In fact, JPMorgan Chase (JPM) has already announced that it will increase its quarterly dividend to 30 cents a share from 25 cents a share. (Record date for that dividend is April 5.)

But four financial companies failed and won’t be allowed to increase their dividends or buyback plans. And from the market’s reaction in afterhours trading nobody was expecting those results. Read more

You’ve got to have a really long-term view to love any bank stock now–even one as strong as JPMorgan Chase

The market isn’t going to cut even the strongest banks any slack—or look beyond the current quarter.

That’s the message in the market’s reaction to JPMorgan Chase’s (JPM) third quarter earnings report released before the New York market opened. The bank reported better than expected earnings—on a one-time accounting adjustment–but said revenue grew by just 0.1% from the third quarter of 2010.

As of 2 p.m. New York time JPMorgan Chase shares were down 5.4%.

If you’ve got a perspective of more than a quarter or two the size of that drop is surprising. The bank reported a 30% jump in deposits and said, basically, that it was swimming in liquidity. Not a bad thing to have going for you when most of the world’s banks are scrambling for capital. JPMorgan Chase is clearly, in the long run, one of the world’s strongest banks and it should be able to use that strength to pick up business from competitors.

No one, I’d say, is willing to look that far ahead.

Of course, the current quarter had its share of worries besides the tiny gain in revenue. The bank booked a big $1.9 billion pre-tax gain in the quarter that added 29 cents to the company’s earnings in the period. Taking out that one-time gain—and one-time losses in the private equity unit and for additional litigation expense—wipes out 5 cents per share of the company’s earnings. Instead of beating by a very impressive 8 cents a share, the bank exceeded Wall Street’s earnings projections by a much more modest 3 cents a share.

Which sounds pretty good until you notice that my adjusted earnings of 97 cents a share is a big 23.6% lower than last quarter’s earnings of $1.27 a share.

All the evidence is that the banking business just isn’t growing right now.

For example, JPMorgan Chase showed a 13% drop in investment-banking revenue from the second quarter. And the damage was spread across this unit. Investment banking fees fell 31%. Revenue from fixed income markets fell 14% (after you subtract accounting events). Equity underwriting fees dropped 47%.

And profitability is certainly a question. The bank’s return on equity fell to 9% in the quarter from 10% in the third quarter of 2010 and from 12% in the second quarter of 2011.

Which isn’t to say there wasn’t any good news in the quarter. Read more

Banks down, techs up today equals good news for earnings season that begins next week

Today the U.S. stock market is paying attention to sectors. Technology is up. Financials are down. I think that’s good news for investors are we head into earnings season with Alcoa (AA) kicking off third quarter reports after the close on Tuesday, October 11.

Today, as of 2:30 p.m. New York time the Technology Select Sector SPDR (XLK) is up 1.9%. That performance is a major reason that the technology heavy NASDAQ Composite, up 1.69%, is out performing the Standard & Poor’s 500 and the Dow Jones Industrial Average today.

The Financial Select Sector SPDR (XLF), on the other hand, is headed in the other direction, down 0.2% today.

So why is today’s performance by these two sectors good news? Because it shows that investors might be able to push fear to the side for long enough to pay attention to earnings for the next few weeks. I expect financial stocks to deliver disappointing earnings for the third quarter and for technology stocks to surprise to the upside.

For that to turn into actual movements in stock prices, though, investors have to actually pay attention to the results.

Big banks are looking at hits to earnings coming at them from every direction. Read more

Big U.S. banks are leading the U.S. stock market down today.

The driver here isn’t simply the prospect of slower economic growth represented by the lack of any job growth in August data released today—although that certainly doesn’t help.

Bank stocks are reeling because the big U.S. mortgage lenders and mortgage packagers are reportedly facing a suit be filed next week from the Federal Home Finance Administration, the agency that represents Fannie Mae and Freddie Mac, seeking to force these financial companies to repurchase bad mortgages. The amounts at stake, and it’s extremely hard to put a dollar figure on this suit, could dwarf the $20 billion sought in a suit brought by the nation’s states attorneys general. Fannie Mae and Freddie Mac own about $227 billion of the so-called private label mortgages that are the subject of this suit. (Bank of America probably faces the biggest exposure since it sold the most of these private label mortgages to Fannie Mae and Freddie Mac.)

No surprise then that Bank of America (BAC) was down 8.7% as of 3:30 p.m. New York time, JPMorgan Chase (JPM) 4.7%, Goldman Sachs Group (GS) 5%, Citigroup (C) 5.1%, and Wells Fargo 4.5%.

The suit would be the result of 64 subpoenas issued last year to originators and servicers of mortgage-backed securities. The statute of limitations is due to expire next week so the Federal Home Finance Administration has to file or forever hold its piece.

The subpoenas and the likely suit focus on so-called private label mortgage-backed securities originated by mortgage lenders, packaged by Wall Street investment companies, and then sold to investors. Fannie Mae and Freddie Mac were permitted to buy slices of these securities that carried AAA ratings. As of the end of July, the two companies, now owned by taxpayers, held nearly $78 billion and $149 billion in such securities.

Private label mortgage-backed securities have been among the worst performing mortgage-backed assets, showing the kind of losses nobody expects from AAA-rated securities. The likely suit would allege that the banks in question misrepresented the content of the mortgage pools when they packaged them and sold them to Fannie Mae and Freddie Mac. Testimony in front of the Financial Crisis Inquiry Commission showed that a large percentages of mortgages included in mortgage-backed securities deals had received inadequate due diligence and that the big Wall Street investment companies ignored those problems and packaged them in the mortgage pools anyway.

A suit from the Federal Housing Finance Agency would be a nightmare for the big mortgage banks not just because of the sums involved, but because it would also pretty much blow up all other efforts to put together settlements that would cap bank liabilities. Forget about the proposed settlement with state attorneys—a settlement already in danger. And it would almost certainly bring other investors into court demanding that banks buy back their mortgage paper too.

But the effects don’t stop there. Read more