Friday, January 15, 2010

A World Upside Down: on Wall St., Down is Up and Bad is Good

JP Morgan Chase was the first big bank to post fourth-quarter results. Revenue fell short of excpectations and the stock fell 87 cents, or 2%, to $43.81.

However, JPMC also reported its profit rose more than four-fold to $3.28 billion in the last three months of 2009.

Got that? Revenues were nearly $1 billion below expectations, yet profits were up in a huge way.

How can this rather incongruous pair of events coincide?

For starters, record-low interest rates — set at near zero by the Federal Reserve — have allowed banking companies to profit while lending money at higher rates.

Secondly, the bank's earnings resulted from profits in its investment banking and asset management business, which flourished during the now 10-month-old stock market rally. The New York mega bank brought in billions just through trading in the booming financial markets.

In Wall Street's strange world, the stock market thrives even as the economy remains anemic. Go figure.

Banks reduced lending in 2009 by about 18%, year-over-year. Much of the money that wasn't lent ended up in the stock market, and the returns have been good for Wall St. — so far.

To celebrate, the overly indulgent fat cats at JPMC announced that they will be handing out bonuses totaling $9.3 BILLION to themselves. That amounts to an average bonus of $379,000 for all of JP Morgan's investment bankers, sales staff and traders.

However, despite all of its own good news and great fortune, JP Morgan Chase made some rather grim projections for larger economy, warning that defaults on mortgages and other loans may not have yet peaked. The Wall St. giant also said it remains cautious about the potential for a second downturn in the economy.

Part of that may be due to the fact that the bank lost $306 million during the fourth quarter in its credit card services business, and predicted losses will remain elevated in the first half of 2010.

So, in summary: JPMC's revenues fell short of expectations, and its stock priced dropped. But profits were way up, allowing for bonuses nearly four-fold higher than last year. The stock market is booming. But the overall economy remains feeble. Looking forward, the projections for the economy aren't good and a second downturn may loom.

So, there's good news for JP Morgan and its Wall St. cronies, and lots of bad news for the rest of America.

Is your cup half full, or half empty?

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