J.P. Morgan’s bet against J.P. Morgan

Commentary: Sounds crazy, but it worked

By MarketWatch

October, 13, 2011

NEW YORK (MarketWatch)

The post-financial crisis Wall Street is doing one thing right: it’s betting against itself.

J.P. Morgan Chase & Co. JPM -0.41%   became the latest too-big-to-fail bank to take advantage of an interesting trade: the bank hedges the spread on its own debt. When investors bid up the yield — an indicator that they think the bank won’t pay — J.P. Morgan makes money. Read full story on J.P. Morgan earnings .

Hey, it doesn’t have to make sense, it’s Wall Street.

The end result was slightly better-than-expected but lackluster profit of $4.26 billion, for the nation’s second-biggest bank by assets. The bank reported $1.9 billion in revenue from the bets against itself — the net income from the move wasn’t immediately available.

But analysts suggest the move goosed earnings by as much as a nickel per share. At minimum the hedge added a penny or two a share to per-share earnings and, thus, helped the bank come closer to the Street’s expectations.

(As readers have pointed out, J.P. Morgan says this is an accounting measure, not a trade. But that doesn’t explain entirely why you don’t see all banks reporting such huge swings when their debt prices are moving too. And a lack of transparency in bank financial statements makes it difficult to gauge how these numbers can be calculated industry-wide)

J.P. Morgan isn’t alone in this. Morgan Stanley MS -1.39%  offset losses during the financial crisis and beyond by betting against its own debt.

Today’s bank earnings must make even the most devoted investor long for the good old days of quarterly results.

Bank earnings of yesteryear were simple, everyone made a profit and wowed the analysts. Of course, they were juiced by phony mortgages, end-of-the-quarter repurchase agreements, and 25-to-1 leverage, but ignorance was bliss. We understood them. They made us happy.

Now, they’re just betting against themselves. When you stop and think about it, it doesn’t sound so crazy after all.