Felix Salmon

Big earners in banking

By Felix Salmon
January 15, 2010

Let’s be clear about this: JP Morgan’s earnings today were very strong indeed. So why are the shares down? Simply because this is one of those instances where the interests of the bank and the interests of its shareholders are not perfectly aligned. Investor disappointment with the earnings is a function of the bank’s loan loss reserves, which are now a whopping $32.5 billion, or 5.5% of total assets. It’s entirely proper that JP Morgan should be treading cautiously when it comes to loan losses these days: the real economy is still very shaky. Shareholders would doubtless be much happier if the bank took a large chunk of those loan loss reserves and reclassified them as profit, but that’s not the responsible course of action.

JP Morgan’s earnings make this morning’s WSJ report — that financial-sector bonuses are going to hit an all-time high in 2009 — a little more plausible. But if you look at the accompanying interactive graphic, something very weird emerges. The WSJ helpfully breaks out each year’s numbers by constituent firms — but looking at the makeup of the 2006 and 2007 pools, the likes of Bear Stearns, Merrill Lynch, and Lehman Brothers are nowhere to be seen.

In the story, the WSJ writes:

The increase in both revenue and compensation is due partly to the industry’s consolidation during the financial crisis. J.P. Morgan, for example, acquired Washington Mutual Inc. and Bear Stearns Cos. Bank of America bought Merrill Lynch & Co. and Countrywide Financial Corp. Those deals inflated revenue and compensation because the acquirers’ financial results now include the purchased companies.

This too implies that 2007 bonuses at Bear Stearns and Merrill Lynch aren’t included in the WSJ’s 2007 bonus pool figures. If that’s the case, then that’s a serious weakness in the data.

I suspect that the exclusion of Bear, Merrill, and Lehman is in fact exactly what’s going on here, and that it’s a function of a problem with many data service providers. It’s quite easy to get public data for companies which still exist, but it’s much harder — for reasons I don’t fully understand — to get public data for companies which used to exist but don’t any more. (Good luck, for example, finding a share-price chart for Chrysler, from back when it was a public company.) Still, if the WSJ did indeed exclude a large chunk of Wall Street’s bonuses in 2006 and 2007, they should make that clear in the article.

7 comments so far | RSS Comments RSS

That, and the Earnings were low quality — they missed top-line and the tax rate plummeted (to <15%) which added $1bn to the net income.

That, and if you happen to believe that the problem is one of deleveraging at the consumer and that house prices were bubblicious, then JPM seem to either not understand the problem, or are not willing to admit it.

Dimon's money quote on modifications — "we really think that the payment, how much you're paying is more important than principal" (the last time i checked, the two were linked — unless we're going to start amortising mortgages over 80yrs+)

Posted by OurManinNYC | Report as abusive

There’s a fine line between under-reserving and fraud against your creditors.

Posted by dWj | Report as abusive

Well apparently nobody learned anything from last years train wreck. Same people drawing off big salaries and bonuses. Same people in the Fed lending money for no interest. Same mess in Washington. No agreement and no new ideas. SOS

Posted by fred5407 | Report as abusive

Obama will suck these bankers dry. You watch. http://storyburn.com has Obama’s holiday song: Soak the Rich

Posted by muchstardude | Report as abusive

I don’t understand any of this accounting sleight-of-hand and neither do 99.9% of all Americans, including college graduates. All I need to know is that bankers and Wall Street types control a big chunk of my life if I want to own a home, a car, send my kids to college, save for retirement, or start a business, and they have and always will rig the system to their advantage, making themselves gazillionaires. Just tax those gazillions. It will take their CPAs at least a year to find a loophole to avoid paying it the second year, but one year’s worth will help somebody.

Posted by annieL | Report as abusive

Indeed, very poor, but typical murdochian reporting.
Total compensation (not just bonuses) for the 38 financial firms in 2009 is equal to the 2006 total compensation for just the top 9 firms investigated by Cuomo. And don’t mention that a lot of that total compensation is not even U.S. related.

Posted by alea | Report as abusive

Until this administration or the next, or the next after that, removes Goldman Sachs and its off-spring from its influence, nothing will change. I believe it was Bush who installed a non-believer, think his names was Snow. He tried to blow the whistle and how long did he last?

Posted by truebee | Report as abusive

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