The Games Played By JP Morgan Chase

The following article is brought to you by Robert Lenzner at Forbes.Com.

This is the Wall Street version of Games People Play, circa 2012. It is played most expertly by the nation’s leading accountancy firms and their counterparts, the chief financial officers of major public companies.

The only way for JP Morgan Chase to report $5 billion in profits for the second quarter was to use accounting maneuvers that gave the bank such rosy profits as to propel its stock higher.

Most incredibly to me the bank arbitrarily reduced its loan loss reserves by the quite formidable figure of $2.1 billion. If it had not taken these “paper profits”– according to CEO Jamie Dimon — the profits for the quarter would have been reduced to $2.9 billion from $5 billion.

Then, there’s the eyebrow raising decision to reduce the bank’s quarterly litigation expenses to a measly $300 million — when a year ago the bank chose to reduce profits by a rather mean sounding $1.9 billion. With all the litigation, regulatory hearings and the like facing JP Morgan Chase, this maneuver to allow the reduction in litigation expense appears a tad clumsy and questionable. Had the litigation expenses been the same level as last year — $1.9 billion — then the earnings for the second quarter would have been a pretty skinny $1 billion.

And, by the way, some $500 million of its trading loss from the CIO muckup was slipped back into the first quarter report, diminishing it by $500 million — while not taking that hit in the 2nd quarter.

My biggest worry is the porous weak risk controls at the $370 billion CIO portfolio. I have to say it is surprising and worrisome due to the loosey-goosey sloppiness of it all.

Another fellow worry-wart in the finance trade has suggested what this means for the JP Morgan Chase derivatives book, which encompasses many tens of trillions of nominal trades. Is Jamie sure all of these positions have been marked accurately? Is he not taking some sickening risk that subpar risk control officers cannot divine? I’d want to comb over all those transactions to make sure there are no bad surprises coming in the volatile period I expect.

Still and all, I’m puzzled why the astute and ordinarily quite frank and honest Jamie Dimon testified before Congress that the size of the loss in the CIO office had been substantially reduced. I reported that hard news revelation — which just does not appear to be accurate — since the total loss is expected to be $5.8 billion — not $2 billion– and could rise to over $7 billion. This inconsistency is puzzling.

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