Early this morning JP Morgan Chase was the first of Wall Street's mega-banks to report first-quarter earnings. Once again, the firm's highly paid team of accountants came through with a spiffy wax-and-buff job, showing headline numbers that at first glance suggest that business is improving. The shine comes more easily, of course, when the green eye-shades stray from GAAP accounting and invent their own numbers, in this case so-called FTE revenues ("fully taxable-equivalent"), which exploded upward in Q1.
For my money, "FTE" stands for something else: Forget The Explosion. Follow the footnotes instead. Garden-variety revenues rose 6% compared to the depressed year-ago quarter. Modestly positive, but enough to justify the 50% share-price appreciation of the past five months? I don't think so. The company's revenue in Q1 2012, as Peter Atwater at Financial Insyghts observes, "was not much different from Q1 2010--eight quarters of 'recovery' ago!"
Federal incentives and low interest rates have kicked off a refinancing wave in home mortgages, boosting JPM's revenues by $2 billion in the quarter. Don't forget, these new loans replace higher-interest loans, effectively reducing the industry's future cash flows. Whatever business JPM is pulling in by offering refinancing is coming at the expense of competitors, whose legacy loans are being prepaid. Refinancing is a zero-sum game (negative-sum, actually, as rates leak lower). Even after stealing market share in the mortgage industry, Morgan's net income decreased slightly from a year ago.
And it's not like mortgage-lending is suddenly risk-free. JP Morgan Chase reduced its loan-loss reserves by $1.8 billion in Q1, but then added that--and more--right back into a reserve fund to cover future litigation expenses (mortgage-related lawsuits just keep on comin'). The charge: $2.5 billion. According to CEO Jamie Dimon, "we expect to see elevated levels of costs and losses associated with mortgage-related issues for a while longer." Dimon had previously estimated that JPM would be booking an annual profit of $24 billion were it not for all those pesky legal liabilities. Can't a guy make a dishonest profit anymore?
Interestingly, the release of loan-loss reserves came during a quarter when the portfolio value of nonperforming loans increased, reversing a two-year trend. Could be a case of premature evacuation:
[update, 4 p.m.--]
Another big bank heavily into home loans, Wells Fargo, followed close behind JP Morgan Chase with its own earnings release, which showed a similar increase in revenues (+6.4 % YOY). Wall Street was not impressed. JPM's common stock just closed down for the day, off 3.6%. WFC was right behind, down 3.5%. Look out below.
A skeptical Matt Stoller has more at nakedcapitalism.com: "the status quo of a thinly capitalized servicer model and odd second lien accounting continues."