Thursday, October 13, 2011

JPM Calls Surging Credit Default Swap Spreads $1.9 BILLION IN INCOME!

Those of us hoping for horrendous earnings for JP Morgan in Q3 were disappointed with today's release of $23.76 Billion in revenue, and EPS of $1.02- beating expectations.
However, always on top of their game, Zerohedge has discovered that $0.29 EPS of JPM's net income was generated by debt valuation adjustments resulting from JPM's soaring CDS risk over Q3!!
Take away this fairy-tale bulls**** revenue from blowing-out CDS spreads and JPM's Q3 EARNINGS WERE NEGATIVE!
Arthur-Anderson doesn't have anything on The Morgue's accounting!

Turns out we had the concept right, but the bank wrong, because $0.29 of EPS Net Income, or $1.9 billion pretax, was a "benefit from debit valuation adjustment (“DVA”) gains in the Investment Bank, resulting from widening of the Firm’s credit spreads." That's right: the fact that JPM spreads blew out in the quarter, and its default risk soared, for one reason or another actually served to "generate" not only net income but also revenue!  And now you see why American banks can never lose - in a good quarter, they release reserves; in a bad quarter they take FVO benefits in the form of Debit Valuation Adjustments, or in this case both! Winner, winner, always a chicken dinner for Jamie Dimon.
So what happens when one excludes the ridiculous benefit from the DVA? From the earnings presentation:

  • Net income of $1.6B on revenue of $6.4B; DVA gains of $1.9B pretax ($1.2B after-tax)
  • Fixed Income Markets revenue of $3.3B; Revenue ex. DVA of $2.8B, down 34% QoQ
  • Equity Markets revenue of $1.4B; Revenue ex. DVA of $1.0B, down 9% QoQ
  • Credit Portfolio revenue of $578mm; DVA gains of $979mm
Said otherwise, JPM's Investment Banking earnings were negative on a rational human being basis, when the bank's overall credit deterioration is not used as a source of Earnings. This means the firm missed not only its EPS but its top line by about $1.9 billion!Read more: