JPMorgan Chase Chairman and Chief Executive Jamie Dimon Monday told bank investors that while the current credit market crunch may soon be over, the U.S. economy could still face a deep and extended recession.
The slump in mortgage and corporate loan markets could bottom out this year, said Dimon, whose bank largely side-stepped the losses and mark-downs that have hobbled rivals during the past year.
Yet the economy may face a longer-term challenge even as financial markets begin to function again, the "slower burn" of a recession that may rival the severity of the 1982 contraction, he said.
These challenging conditions, marked by tighter bank credit, new rounds of mark-downs, further capital infusions and asset sales by banks, could last through next year and into 2010, he said.
If that happens, Dimon warned that New York-based JPMorgan and its national consumer lending businesses would suffer some significant losses, such as home equity losses doubling to $900 million by year-end.
Dimon further warned that the bank would have to continue boosting loan-loss reserves if economic conditions deteriorate, further eating into profit.
In the current quarter, Dimon said subprime mortgage losses could rise to between $200 million and $250 million, with prime mortgages generating about $100 million in losses.
Loss rates in JPMorgan Chase's massive credit card business are expected to reach 5 percent in the second quarter and rise to as high as 6 percent next year, while at the same time interest and fee revenue decline.
The third-largest U.S. bank also expects to write down "several-hundred-million" dollars of auction rate securities, he said.
Separately, Dimon said JPMorgan Chase expects to report a $1 billion second-quarter gain related to the Bear Stearns Cos takeover, though some merger benefits will be less than predicted while some losses will drag on results.
Dimon also told a UBS investor conference that JPMorgan has identified positions for 40 percent of Bear's nearly 14,000 employees.
To date, 75 percent of people decisions from the merger have been completed.
JPMorgan has already realized $200 million of losses reflecting its 49.5 percent ownership of Bear since April 8, Dimon said.
He warned that JPMorgan expects about $200 million of further Bear losses.
The projected $1 billion gain reflects the addition of Bear Stearns capital, offset by roughly $9 billion of losses reflecting asset sales, purchase accounting, restructuring, litigation costs and Bear's second-quarter losses.
Dimon also disclosed that JPMorgan now expects its total equity to rise by $2 billion, substantially less than the $5 billion increase previously forecast.
Dimon also projected $900 million in merger expenses through 2009.
Yet Dimon remained upbeat about the deal, which was orchestrated by Federal Reserve officials who worried Bear was in danger of going bankrupt in mid-March.
JPMorgan initially agreed to pay just $2 a share for Bear, but later lifted that to $10 a share, or roughly $1.5 billion in total.
In the short run, integrating Bear's asset management and brokerage businesses will reduce earnings through next year, Dimon said.
JPMorgan intends to close down "a big chunk" of Bear's asset management, while the bigger bank was forced to pay hefty bonuses to retain Bear's productive brokers.
Longer term, Dimon said Bear's investment bank would generate between $800 million and $1.13 billion of earnings for JPMorgan.
JPMorgan also disclosed that Bear's balance sheet has been reduced substantially since JPMorgan announced its takeover in mid-March.
Total risk-weighted assets fell to $150 billion from $225 billion, led by reductions in mortgage and credit trading positions, and that figure is expected to shrink further to $95 billion.
Prime brokerage assets, down 25 percent to $30 billion, are expected to rebound to $50 billion, he said.
Total Bear assets of $410 billion fell by nearly half to $225 billion since March 17, Dimon said.