JP Morgan Chase, the largest U.S. bank, sold assets estimated at $25 billion to support financial results after recording losses from the transactions made by the famous trader “London Whale” according to a Reuters analysis. JP Morgan’s CEO, Jamie Dimon, said recently that the bank sold bonds and other financial instruments, recording a profit of one billion dollars, which will be used to compensate for losses of over two billion dollars. Following this decision, the negative impact of trading losses on the outcome of the second quarter will be lowered.
The sale of profitable financial instruments from another segment of the bank’s portfolio will increase the costs of the bank by taxing profits and reducing the earnings that the sold assets would have generated in the future, writes Reuters.
Gains from asset sales could provide a contribution of about 16 cents in earnings per share for the second quarter, about one fifth of the total, analysts believe. But instead of creating value for investors, the transaction only moves the profit from financial instruments in the financial report of the bank.
“They made two bad decisions. First one was taking risks on derivatives that they do not understand. The second is the sale of assets with high income, which they can’t replace,” said Lynn Turner, consultant and former chief accountant of Securities and Exchange Commission. In a market dominated by low interest rates, JP Morgan will have problems to generate with the money an income comparable to the one that the assets sold brought in.
Dimon announced the first asset sales in early May, after the loss of over two billion dollars recorded in the bank’s London office by the trader Bruno Iksil, called “London Whale” on the financial markets because of massive positions assumed. At that time, Dimon argued that JP Morgan might record a profit of another eight billion dollars from the sale of financial instruments. It is unclear when JPMorgan sold its assets and the bank has not disclosed the value of assets sold. A bank representative declined to comment.
However, considering reports showing that the bank usually earned a profit of less than 4% from the sale of such assets, JPMorgan would have had to sell financial instruments of $25 billion for a profit of one billion dollars, according to Reuters analysis. Analysts expect a profit of 90 cents per share in the second quarter, compared with a forecast of $1.24 before the announcement of massive trading losses and $1.27 per share during the same period last year. Taxes on earnings of one billion dollars, that would be calculated at the 38% rate used by JPMorgan in briefings for analysts, would leave the bank with a net profit of $620 million, or 16 cents per share.
Bank losses from transactions at the London investment office could increase, amplifying the pressure on the bank to sell new assets. Some analysts said that total losses could exceed five billion dollars, because the derivatives market where the transactions were made has a low liquidity and current prices are not favorable to the bank. JP Morgan Chase announced in May a loss of at least two billion dollars from the London office due to mistakes in the development and execution of financial derivatives trading.
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