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JPMorgan Loses $1.5 Billion since July on Wider Spreads

U.S. investment bank JPMorgan Chase incurred losses of about $1.5 billion since July, hurt by turmoil in the credit and mortgage markets and by wider credit spreads and lower levels of liquidity, the company said in a regulatory filing late Monday.

JPMorgan said trading conditions have "substantially deteriorated" in the third quarter compared with that of the second, and spreads on mortgage-backed securities and loans have "sharply widened." The estimated losses exclude hedging, the firm said.

In addition, if the bank's own credit spreads tighten, the change in the fair value of certain trading liabilities would also hurt trading results, JPMorgan said.

The third-largest U.S. bank was forced to write down the value of its $33 billion in mortgage-backed securities as prices continued to drop in July, the Financial Times said Tuesday, citing people close to the company.

The writedowns were partly driven by Merrill Lynch recent decision to sell $30.6 billion in risky debt to Lone Star funds for just $6.7 billion, or about 22 cents on the dollar, FT said.

Merrill's move ratcheted up pressure on rivals to cut the values of their own subprime assets as they grapple with mounting debts and weakening economies.

As of June 30, JPMorgan held an aggregate $19.5 billion of prime and Alt-A mortgage exposure, $1.9 billion of subprime mortgage exposure, and $11.6 billion of commercial mortgage-backed securities (CMBS) exposure, the filing showed.

"These mortgage exposures could be adversely affected by worsening market conditions, further deterioration in the housing market and market activity reflecting distressed sellers," the company said.

JPMorgan did not immediately return a call seeking comment.

Last month, JPMorgan Chase posted a smaller-than-expected drop in earnings on resilient stock and bond underwriting revenue, but cautioned that the mortgage market and the economy were getting worse.

Cautious Outlook

In the Aug 11 filing, JPMorgan said it expects continued deterioration in credit trends for its consumer portfolios, and that this will likely require additions to the consumer loan loss allowance during the rest of 2008.

Quarterly net charge-offs in the home equity portfolio could continue to increase for the rest of 2008, the company said.

Prime and subprime mortgage net charge-offs were likely to continue to rise "significantly" in the second half of 2008, with deterioration expected to continue into 2009, JPMorgan said.

According to the filing, JPMorgan held $16.3 billion of legacy leveraged loans and unfunded commitments as of June 30.

"Leveraged loans and unfunded commitments are difficult to hedge effectively, and if market conditions further deteriorate, additional markdowns may be necessary on this asset class," the company said.

In a research note to clients on Tuesday, Lehman Brothers cut its 2008 earnings estimates for JPMorgan to $2.30 a share from $2.60, but maintained its "overweight" rating and $50 price target on the stock Shares of the company closed at $41.89 Monday on the New York Stock Exchange.