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Pre-Market Primer: JPMorgan to Restate Q1 Earnings, Books Profit in Q2 Despite $4.4 Billion Trading Loss


The Whale's trading loss might have been a bit overstated, but we haven't seen the last of the CIO's damage to the firm's balance sheet.

MINYANVILLE ORIGINAL JPMorgan Chase (JPM) reported its first quarterly financial statement since the London Chief Investment Office disclosed its multi-billion dollar loss in May.

Estimates for the firm's losses related to the CIO totaled $4.4 billion, far behind estimates that ran as high as $9 billion. Shareholders in JPMorgan saw income of $5 billion, or $1.21 per share, on $22.9 billion in revenue. Last quarter's performance was not as strong as the first quarter's but expectations for JPMorgan's earnings were more bearish, and shares are up in the pre-market.

CEO Jamie Dimon stressed the bank's progress since discovering the losses in the CIO. The unit's synthetic credit activities have been closed down.

Since the end of the first quarter, we have significantly reduced the total synthetic credit risk in CIO ---whether measured by notional amounts, stress testing or other statistical methods. The reduction in risk has brought the portfolio to a scale that allowed us to transfer substantially all remaining synthetic credit positions to the Investment Bank.

CIO will no longer trade a synthetic credit portfolio and will focus on its core mandate of conservatively investing excess deposits to earn a fair return.... We have already completely overhauled CIO management and enhanced the governance standards within CIO. We believe these events to be isolated to CIO, but have taken the opportunity to apply lessons learned across the Firm. … While our review continues, it is important to note that no client was impacted.

One impact on shareholders will be a delay in the stock repurchasing program that JPMorgan Chase won an OK for after the Fed's stress tests.

Before releasing the 10-Q earnings statement, the firm filed an 8-K, announcing that it will restate earnings for the first quarter in light of the dodgy dealings in the London CIO. Income is expected to be cut by $459 million.
Traders in CIO were expected to mark their positions where they would expect to be able to execute in the market. In this instance, while the positions were within thresholds established by an independent valuation control group within CIO, the firm has recently discovered information that raises questions about the integrity of the trader marks and suggests that certain individuals may have been seeking to avoid showing the full amount of the losses in the portfolio during the first quarter.

As a result, we are no longer confident that the trader marks reflected good faith estimates of fair value at quarter end and we decided to remark the positions utilizing external "mid-market" benchmarks, adjusted for liquidity considerations. … Our previously filed financial statements for the 2012 first quarter should no longer be relied upon. We expect to file restated financial statements for the first quarter as soon as practical but no later than when we file our financial statements for the second quarter.

In other news, China reported that GDP growth slipped to an annualized rate of 7.6% in the second quarter, the slowest rate since the beginning of the global financial crisis. The country's economy grew by 8.1% in the first quarter. A separate report showed that Chinese industrial production in June expanded by 0.76%, or 9.6% on a yearly basis. In the same month, retail sales in the country grew by 1.08% over May and 13.5% over the June 2011.

Asian stocks showed mixed results after China's data-dump. European equities are trading up today. Moody's downgraded Italian debt today by two notches, but the bond market shows a bit more faith in the country. Italy had a successful auction of three-year debt today, where average yields fell to 4.65% from last month's 5.3%. Gross yield for the those bonds are down 2.37% today to 4.538%. Moody's warns, "Italy is more likely to experience a further sharp increase in its funding costs or the loss of market access than at the time of our rating action five months ago due to increasingly fragile market confidence, contagion risk emanating from Greece and Spain and signs of an eroding non-domestic investor base."

US Stock futures are rising this morning ahead of the opening bell. Dow (^DJI) futures are up 0.28% at 12,537.00 while S&P 500 (SPY) futures rose 0.24% to 1,332.40. Nasdaq (^IXIC) futures are up 0.34% at 2,546.50. The producer price index for June rose 0.1%, or 0.2% excluding food and energy. At 9:55 a.m. EDT, the Reuters/University of Michigan Consumer Sentiment Index will show that consumers are slightly more comfortable than they were last month, according to economists' estimates. The index is expected to rise to 73.5 from 73.2.

Fresh after a $1 billion US fine in connection to the Libor rate-fixing scandal, HSBC (HBC) will be lambasted in the US Senate on Tuesday for allegedly laundering money for Iran, Cuba, and Mexico.

Twitter: @vincent_trivett
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