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The Week Ahead: A closer look at JPMorgan’s loss

This news story was published on July 8, 2012.
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By Tom Hudson, McClatchy Newspapers –

Superstition holds Friday the 13th as an unlucky day. But it’s not triskaidekaphobia that threatens banking giant JPMorgan Chase & Co.

On Friday, JPMorgan is scheduled to report second-quarter results. CEO Jamie Dimon has been insistent the bank will be “solidly profitable” despite mounting losses from a complex trading strategy tied to corporate bond derivatives. When the trouble was first disclosed in May, losses were $2 billion — but investors were warned they could go higher.

Since then, JPMorgan has not officially changed its estimate, although several reports indicate the strategy has continued to lose money as the bank has unwound it. Losses could climb to between $5 billion and $9 billion. The bank’s second-quarter revenues are expected to be around $22 billion. If its corporate bond derivative trading plan lost more than $5 billion during the quarter, some analysts predict it would wipe out the past three months of the bank’s profits.

Like other large global banks, JPMorgan has plenty of businesses making money, but growth may be slow as the economy sputters along. The bank could use other accounting methods to help its bottom line. For example, if the bank’s own bonds drop in price, rules allow it to mark down the value of those IOUs. Thus, it owes less money, and less debt can mean more profits.

JPMorgan’s reputation as a solid bank went largely unscathed through the Great Recession. While it remains solid, its reputation has been damaged. And in banking, like investing, the value of a strong reputation is no superstition.

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