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Jp Morgan Can Book A $29bn Windfall

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http://www.bloomberg.com/apps/news?pid=206...&refer=home

May 26 (Bloomberg) -- JPMorgan Chase & Co. stands to reap a $29 billion windfall thanks to an accounting rule that lets the second-biggest U.S. bank transform bad loans it purchased from Washington Mutual Inc. into income.

Wells Fargo & Co., Bank of America Corp. and PNC Financial Services Group Inc. are also poised to benefit from taking over home lenders Wachovia Corp., Countrywide Financial Corp. and National City Corp., regulatory filings show. The deals provide a combined $56 billion in so-called accretable yield, the difference between the value of the loans on the banks’ balance sheets and the cash flow they’re expected to produce.

Faced with the highest U.S. unemployment in 25 years and a surging foreclosure rate, the lenders are seizing on a four- year-old rule aimed at standardizing how they book acquired loans that have deteriorated in credit quality. By applying the measure to mortgages and commercial loans that lost value during the worst financial crisis since the Great Depression, the banks will wring revenue from the wreckage, said Robert Willens, a former Lehman Brothers Holdings Inc. executive who runs a tax and accounting consulting firm in New York.

“It will benefit these guys dramatically,” Willens said. “There’s a great chance they’ll be able to record very substantial gains going forward.”

When JPMorgan bought WaMu out of receivership last September for $1.9 billion, the New York-based bank used purchase accounting, which allows it to record impaired loans at fair value, marking down $118.2 billion of assets by 25 percent. Now, as borrowers pay their debts, the bank says it may gain $29.1 billion over the life of the loans in pretax income before taxes and expenses.

Nice work if you can get it.

Create crisis, bankrupt competition, hoover up assets, rinse and repeat.

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doesnt sound like they will make any more money, just their balance sheet looks "improved".

Its all smoke and mirrors

Oh I expect it will still generate a bonus for over achievement..

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Oh I expect it will still generate a bonus for over achievement..

Yep, their CFO must be a real genius <_<

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Where's the problem?

You buy a distressed asset for £10. Eventually you recover £20 from that distressed asset. You have therefore made a profit.

Why should it be any different when:

1. It is a bank, not "you".

2. The asset is a loan, the value of which was depressed owing to economic circumstances.

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Where's the problem?

You buy a distressed asset for £10. Eventually you recover £20 from that distressed asset. You have therefore made a profit.

Why should it be any different when:

1. It is a bank, not "you".

2. The asset is a loan, the value of which was depressed owing to economic circumstances.

Please see the many threads about how banks create money from thin air and exist solely as a giant confidence trick.

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Now, as borrowers pay their debts, the bank says it may gain $29.1 billion over the life of the loans in pretax income before taxes and expenses.

Thats one large assumption.

Is the Imagine Homes theory of banking?

"Profits yet to materialise"

snake oil accounting.

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doesnt sound like they will make any more money, just their balance sheet looks "improved".

Its all smoke and mirrors

yep - any sane person would say the above is a load of crap that it couldnt possibly happen - wot the hell are the media doing? you'd have to be very naieve to think they havent got a clue- the media are part of the problem rather than reporting the problem.

I'm going to mail the above to peston - lets see what he's got to say about it

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Where's the problem?

You buy a distressed asset for £10. Eventually you recover £20 from that distressed asset. You have therefore made a profit.

Why should it be any different when:

1. It is a bank, not "you".

2. The asset is a loan, the value of which was depressed owing to economic circumstances.

They created the distressed asset in the first place, the losses on it were err... transfered to the US taxpayer (in case you forgot).

Now they make a profit on it. Oh but thats private profit! Thanks very much, that will do nicely.

I love crony capitalism.

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Where's the problem?

You buy a distressed asset for £10. Eventually you recover £20 from that distressed asset. You have therefore made a profit.

Why should it be any different when:

1. It is a bank, not "you".

2. The asset is a loan, the value of which was depressed owing to economic circumstances.

The key is 'eventually'.

What they're talking about is something along the lines of:

Bob owes Fred £1000.

I've paid Fred £100, and Bob now owes me £1000.

I have just made a profit of £900, which i'm going to be taking in bonuses and a nice raise thank you very much.

They'll be long gone before their replacements find out Bob is an alcoholic streetwalker who was only given the £1000 because he asked nicely.

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The key is 'eventually'.

What they're talking about is something along the lines of:

Bob owes Fred £1000.

I've paid Fred £100, and Bob now owes me £1000.

I have just made a profit of £900, which i'm going to be taking in bonuses and a nice raise thank you very much.

They'll be long gone before their replacements find out Bob is an alcoholic streetwalker who was only given the £1000 because he asked nicely.

take that back or I will sue.

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Interestingly Enron made its best ever quarterly profit in its last quarter of trading cos it marked its payables to market:-

Dr payable 99c on the $

Cr profit 99c on the $

Still went bust though and the mess is still being cleaned up in offices and court rooms dotted around the world, from what I hear.

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a four year old rule....sounds very Enron to me, to book as value the future earnings....what if the default rate is higher, and collateral further collapses....booking future earnings is nothing to do with accountancy....its fantasy hope stuff.

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