Thursday, January 15, 2009

JPMorgan's "Good" Earnings Overshadowed By Bank of America's Need For Bailout

On the surface, JPMorgan's earnings didn't look too bad, relatively speaking (like compared with the run-of-the-mill Citigroup quarter).  The second-largest US bank reported net income of $702 million, or 7 cents a share, compared with $2.97 billion or 86 cents a share in the year-ago quarter.  However, JP's meager profit was boosted by a one-time gain of $1.3 billion from closing a joint venture and "risk-management results" (whatever that means.)  Without the one-time gain the company would've lost 28 cents a share.  This is an earnings "miss" in my book, but investors seem to disagree as the stock is higher on the news.
The scary news out of Bank of America this morning, frankly, overshadows JPMorgan's creative accounting triumph of seven cents of earnings.  According to the Wall Street Journal, Bank of America is close to finalizing a deal for additional aid from the government to help it close the acquisition of Merrill Lynch.  Apparently, Merrill was set to report larger-than-expected losses in the fourth quarter and Bank of America was not likely to complete its purchase.  Bank of America alerted the Treasury Department of the situation in mid-December.  Naturally the Treasury freaked out, fearing another Lehman-like debacle in the market and offered Bank of America help finalizing the deal.  The arrangement more than likely will include new capital in addition to guarantees on further losses.  I suspect this is not the last bailout package we will see for a major US bank.  A friend of the blog asked a very scary but insightful question in recent months.  "What if all bank equity is worth zero?"  I suppose what we'd have left was a bunch of bank stocks trading as if they were call options on some hope for future cash flows that leave something for shareholders, i.e. a bunch of stocks trading in the single digits.  Let review, Citigroup $4, BAC $8.  I'll stop now before it gets any scarier.     

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