Remember the kitchen sink?
A few years ago, investor expectations of bank earnings were said to be “at rock bottom.” Bank analysts and journalists explained that the banks would report a “kitchen sink” quarter, in which they would take heavy losses and start “laying the groundwork for a strong recovery,” as a BusinessWeek story put it.
That was 2007.
In hindsight, the financial crisis might look like an easy call. But at the time it was fraught with controversy.
Those of us making the argument that losses might be much worse than banks were letting on were derided as fear-mongers, tools of short-sellers, or simply naïve. As one person asked me when I questioned whether Citigroup’s write-downs went far enough, how on earth could we imagine that we understood the balance sheets of banks better than the bankers?
It’s kitchen-sink time again. Citigroup said yesterday that investors are getting carried away selling shares of JPMorgan Chase.
“A lot of investors’ concerns have gotten to extreme levels,” wrote Citigroup’s Keith Horowitz in a note to clients. He describes the stock as an “absolute buy.”
In a note issued last night, Goldman Sachs also declared JPMorgan Chase a “buy” and described the 20 percent decline in the bank’s stock a “valuation overshot.” Goldman predicts the shares will recover “once investors become more comfortable with the size and scope of the CIO losses." It also predicts the dividend will not need to be cut.
Note the implicit assumptions: that the losses are less than they seem; that the market is getting the price of JPMorgan stock wrong; that the clarity will show the bank is better off, rather than worse.
“The company will increase its dividend 20 percent this year, its earnings will be higher this year, and up 15 to 20 percent next year, so I think we’ve done the overselling by more than a little bit,” Bove said on CNBC’s Worldwide Exchange this morning.
All this confidence in JPMorgan Chase is based on practically nothing. The bank has released only the barest-bones description of its losses. What little we know about the trades that have lost money come from anonymous hedge-fund traders, speaking to journalists.
As even Goldman admits, several key questions remain. From Goldman’s note:
(1) has JPM been able to reduce exposure without incurring additional losses (i.e. through the use of the IG18 index)?
(2) are losses the result of a specific trade or have multiple issues contributed?
(3) what drove the initial VaR restatement and could there be further impact to RWA?,
and (4) what were the shortcomings in risk-management that allowed the position to grow without triggering early warnings?
Without details about the trade, we cannot possibly know the extent of the losses. Anyone outside of JPMorgan claiming to know the losses will be limited is either privy to inside information or just pulling your leg.
Sure, the losses could stay down at $3 billion. Perhaps they might not even be that bad. Maybe JPMorgan is just being overly aggressive on the mark-to-market losses. Maybe they’ve thrown in the kitchen sink.
Maybe. But some of the hedge fund traders are saying these losses could exceed $7 billion.
The truth of the matter is we simply do not know how bad things could get for JPMorgan. Feel free to give them the benefit of the doubt.
This time you could be right. Maybe it isn’t 2007 all over again.
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