Thursday, July 17, 2008

CEO Dimon Not Buying Wall Street Hype

Sometimes even a CEO must be taken at his word. That's the situation with Jamie Dimon, who runs the giant JP Morgan Chase. He's telling anyone who'll listen that the U.S. banking storm is far from over and the economy remains shaky.
I don't want to believe Dimon, but do.
The Great Minds of Wall Street, however, don't buy into Dimon's dark forecast. They see a silver lining, even though Chase just announced a 53 percent quarterly earnings plunge, compared to a year ago. Wall Street forecasters expected much worse (that's called "a beat" on the Street), so they're confident it's getting brighter out there. After Chase revealed quarterly results, a bank stock rally began.
Whoopee!
But Dimon isn't giddy about the future. Not yet, at least.
In comments that accompanied the earnings report, he asserts the economy remains "under stress", which is prompting Chase to boost quarterly reserves by $1.3 billion, cash designated to cover loan losses.
Moreover, it's not lost on Dimon that his bank's consumer division--the unit that everyday people connect with for mortgages, auto loans and credit cards--suffered a 23 percent earnings decline.
Dimon concedes Chase screwed up by expanding its portfolio of so-called "prime" mortgages, home loans made to Chase's best customers. Those loan losses could climb by $300 million per quarter into 2009. These are chits taken out by upper-income folks, who are suppose to have the money to pay for jumbo loans on McMansions even in a down economy. It's not working out that way.
Rarely does a CEO say his company blew it. But in discussing the prime mortgage debacle, Dimon did just that and more--he actually told JP Morgan Chase investors he was "sorry".That's a word the irascible John Pierpont Morgan never would have uttered.
Dimon can afford to be magnanimous. Right now, Chase is one of the nation's strongest U.S. banks (increasingly, that's faint praise)with a strong capital base and the rare ability to acquire other financial institutions, as it did when it bought the near-bankrupt Bear Stearns with an assist from the feds.
Wall Street is right about one thing: Chase's numbers could have been much worse.
But, that's no reason to go bonkers over the bank's latest results.
There's plenty more bank-related pain coming to this economy. And the culprits will range from major institutions like Citicorp, which reported earnings Friday, right down to some neighborhood lenders.
Jamie Dimon knows it. The rest of us, including those Wall Street forecasters, better accept that fact, too.

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