JPMorgan Chase & Co. (JPM)

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A financial holding Company whose activities are organized into six business segments: Investment Bank, Retail Financial Services, Card Services, Commercial Banking, Treasury & Securities Services and Asset Management.

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Avatar CoolinDulan (96.84) Submitted: 3/26/08 1:07 PM : Start Price: $45.73 JPM Score: 6.41

Don't let the smooth taste fool you.

The Bear deal is not as wonderful as it seems. Yes, they get a $1B building and some prime brokerage business for free.

But Bear Stern was a huge underwriter of credit default swaps (CDS). JP Morgan now takes over that exposure. That is like finding a treasure chest with $1B in cash with a WMD hidden within the stack. You might want to count your money slowly.

JP Morgan itself has over 7.8 trillion in CDS exposure. Yikes.

JP Morgan has not quantified their commercial loan exposure yet. No upside there.

They also have huge leveraged loans that are sitting on their books. For example, they still have not been able to sell their 10B in Chrysler loans. If the auto market continues the way it is going, at some point JP Morgan will have to eat the Chrysler default.

In the end, Bear may have been a blessing and a curse. A short term boost of cash and assets with high risk exposure when things get exciting.

Anyone interested in buying a big soon-to-be-half-empty investment bank building in NY? You can get a $2B building 1/2 off!!!

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Avatar DakotaGold (36.30) Submitted: 3/29/08 3:11 AM

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You forget to mention that the Fed has provided them the safety net in the case of a large credit default -- essentially an insurance policy on the sale., I don't really see how you could see this deal as anything but bad.

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Avatar keenstyle1 (62.28) Submitted: 4/23/08 12:22 AM

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Screw the fundamentals, theirs more funds long this stock than short, thats the side to be on.

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Avatar tigerbanker (< 20) Submitted: 4/24/08 7:07 PM

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Whaaaaaaat? $7.6 trillion in CDS exposure? That would be news to the OCC (who by the way share a floor with JPM in their headquarters in NYC). Probably some rough water ahead for the balance sheet......but my bet is they come out on the other end firing on all cylinders.

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Avatar Glennsgame (38.06) Submitted: 5/05/08 10:44 AM

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If everthing is that tight and uncertain why would they have also done the UBS deal?, a company that had close to 60B in writedowns and conceiably will end up owning a good part of. They will also be making 1.2B off the Visa IPO.

They look to be head and shoulders above their competitors in these market conditions and i think the stock will perform that way throught the end of the year.

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Avatar Banker81 (76.94) Submitted: 5/06/08 11:50 AM

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It's true that JPM inherited some risky stuff but in the long-term the investment company just got more powerful and with a bigger market to make more profits. After boucing from the current recession, JPM will be very attractive and its price is just cheap now.

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Avatar CoolinDulan (96.84) Submitted: 5/28/08 7:08 PM

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I am not really sure where you stand on this because of the sarcasm, but it is not the exposure of loss that is the key issue. It is the threat of one of the counterparties not being able to settle their account with JPM that is the threat. For example, Frontier Airlines just declared bankruptcy on X hundred million dollars worth of debt. Let's say there was 10x hundred million in CDS written on the debt with three different parties. Two parties pay, but the third does not have cash on hand to cover (i.e. a monoline). Can JPM possibly reserve enough capital to address this type of scenario in a time when debt markets are constricted and large numbers of high risk firms that issue debt instruments are forced into bankruptcy?

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Avatar CoolinDulan (96.84) Submitted: 6/23/08 2:37 AM

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[Regarding tigerbanker's JPM pitch reply] The 7.6T is outstanding trades and the exposure is the counterparty risk on settling the CDS trades. I should have been more clear.

Now that the bond insurers are downgraded, do you feel a little more heat now? If you don't I think you need to read the UBS 2Q statements and the LEH 2Q statements regarding their CDS hedging techniques. Both parties used bond insurers and in some cases propped up special vehicles from hedge funds to buy their downside insurance.

I really wish JPM only got the Bear Sterns building transfered to their name in the merger. But since that was not the case, I hope the Fed backstop is enough to carry all of the losses.

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JPMorgan Chase & Co. (JPM)

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