Big earners in banking

By Felix Salmon
January 15, 2010
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.

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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.

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