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CNBC EXCLUSIVE: CNBC TRANSCRIPT: CNBC'S MELISSA FRANCIS SPEAKS EXCLUSIVELY WITH MICHAEL CAVANAGH, JP MORGAN CHASE CFO, ON CNBC'S "THE CALL" TODAY, THURSDAY, JULY 16TH AT 11AM ET


FRANCIS: WE'RE GOING TO TAKE A QUICK BREAK FROM THE HEARING. I'M MELISSA FRANCIS LIVE AT JPMORGAN HEADQUARTERS.I'M JOINED MY MIKE CAVANAGH, THE CFO ON THE HEELS OF THE BLOCKBUSTER EARNINGS REPORT TODAY. LET ME ASK YOU QUICKLY BEFORE WE GET TO THAT ABOUT CIT AND JPMORGAN'S EXPOSURE TO THAT, SINCE THAT'S OUR OTHER HUGE STORY OF THE DAY.WHAT'S YOUR EXPOSURE?

CAVANAGH: SURE. NO MATERIAL EXPOSURE, MELISSA, SO WE'RE FINE.

FRANCIS: ANY COUNTER PARTY RISK OR ANYTHING LIKE THAT?

CAVANAGH: NO, NOTHING THAT I WOULD EXPECT TO CREATE ANY MATERIAL ISSUES FOR US NO MATTER WHAT THE OUTCOME THERE.

FRANCIS: OKAY. LET ME ASK YOU ABOUT THE QUARTER. BLOCKBUSTER REVENUES, $27.7 BILLION, WAY MORE THAN PEOPLE EXPECTED. IS THAT SUSTAINABLE?

CAVANAGH: WELL, YOU KNOW, LET ME TELL YOU ABOUT A QUARTER FOR A SECOND, SO $2.7 BILLION TO PROFITS. OBVIOUSLY, AGAINST A TOUGH ECONOMIC BACK DROP, WHICH WE HAVE BEEN HAVING, WE HAVE TO BE PLEASED WITH THOSE RESULTS. 28 CENTS A SHARE, 27.7 OF REVENUES.THAT'S REVENUES IN THE QUARTER ARE A RECORD. ALSO BEFORE CREDIT COSTS, PRETAX PROFITS OF OVER $14 BILLION IN THE QUARTER. SO BOTH THOSE NUMBERS ARE RECORDS FOR THE QUARTER AND THE YEAR. OBVIOUSLY, VERY STRONG RESULTS IN THE INVESTMENT BANK, $2.2 BILLION OF INVESTMENT BANKING FEES ON ALL OF THE UNDERWRITING ACTIVITY THAT WENT ON IN THE QUARTER. BEST FOR US EVER, AND BEST FOR ANY FIRM EVER IN A QUARTER ON THAT $2.2 BILLION FEE LINE.ALSO RECORDS AND IN FIXED INCOME MARKETS. BUT IT WASN'T JUST INVESTMENT BANKING BUT IT WAS CONTINUED STRONG PROFITS, COMMERCIAL BANK, TREASURY SERVICES, ASSET MANAGEMENT AND RETAIL BANKING. THE BRANCH SIDE HELPED BY THE WAMU ACQUISITION VERSUS A YEAR AGO. BUT OFFSET, OBVIOUSLY, BY CONTINUED HIGH LOSSES, CREDIT LOSSES, AND PARTICULARLY THE CONSUMER BUSINESS CREDIT CARD AND MORTGAGE LENDING.

FRANCIS: LET'S TALK ABOUT THAT A LITTLE BIT. BECAUSE THE CRITICISM IS THAT NONPERFORMING LOANS, YOU KNOW, WERE MORE THAN EXPECTED WHILE, YOU KNOW, ADDITIONS TO LOAN LOSS PRESERVE WERE MAYBE A LITTLE LESS THAN EXPECTED. HOW DO YOU ADDRESS THAT?

CAVANAGH: OKAY. NOT MORE THAN I GUESS WE EXPECTED. WE FOCUS HEAVILY ON FUTURE EXPECTED ACTUAL LOSSES. LOSSES ON LOANS OF ALL SORTS. WE TALK A LOT ABOUT THAT, AND ARE VERY EARLY TO ADD TO RESERVES. WERE VERY EARLY. TWO YEARS AGO, WE HAD ABOUT $7 BILLION OF LOAN LOSS RESERVES, WHICH COVER YOU FOR THESE INCREASES IN LOSSES. NOW THEY'RE AT $30 BILLION.SO WE ADDED ANOTHER $2 BILLION ON TOP OF $4 BILLION EARLIER IN THE YEAR. THAT COME OUT OF OUR EARNINGS.SO THE FACT THAT WE'VE MADE MONEY EVERY QUARTER THROUGH THIS CRISIS WHILE BUILDING UP THAT KIND OF RESERVE POSITION, TOGETHER WITH $122 BILLION OF TIER ONE CAPITAL AND 9.7% CAPITAL, ALL OF THAT FACTORS IN OUR VIEWS AND EXPECTATIONS ON FUTURE CREDIT TRENDS. AND SO NOT CONCERNED BY THAT OBSERVATION.

FRANCIS: DO YOU FEEL LIKE YOU'RE ALMOST DONE ADDING TO THOSE LOAN LOSS RESERVES OR DO YOU FIGURE YOU HAVE TO DO MORE?

CAVANAGH: WE DON'T KNOW WHAT THE ECONOMY IS GOING TO DO FROM HERE, SO I CAN'T PREDICT WITH ANY CERTAINTY. BUT WE HAVE SEEN AND TALKED ABOUT ON "THE CALL" EARLIER SOME SIGNS THAT MAYBE WE'RE GETTING CLOSE TO BEING DONE WITH LOAN LOSS ADDITIONS.

FRANCIS: LIKE WHAT?

CAVANAGH: OBVIOUSLY $30 BILLION IS HUGE, 5% OF LOANS. THE WHAT IS REALLY ON THE CONSUMER SIDE. PARTICULARLY IN THE MORTGAGE AREA.HOME EQUITY LOANS, PRIME MORTGAGES, SUBPRIME, AREAS WHERE WE HAVE BEEN, FRANKLY, SURPRISED BY HOW SEVERE THE LOSSES HAVE BEEN PROGRESSING OVER THE PAST TWO YEARS. FOR THE FIRST TIME IN THIS CRISIS, WE HAVE SEEN WHAT WE CALL EARLY BUCKET DELINQUENCIES. THIS IS PEOPLE GOING LATE THE FIRST PAYMENT OR THE SECOND PAYMENT STABILIZED OVER THE LAST 60, 90 DAYS. AND BOTH IN TERMS OF NUMBERS AND DOLLARS. IF THAT TREND CONTINUES, THAT'S A VERY GOOD SIGN, AND WE COULD BE GETTING TO THE POINT WHERE WE'RE ALMOST DONE ON ADDING TO RESERVES. LOSSES MAY STILL TREND HIGHER FOR ANOTHER COUPLE OF QUARTERS, BUT THAT WOULD BE THE POINT AT WHICH YOU WOULD GET TO THE END OF ADDING TO RESERVES.

FRANCIS: SO RATHER THAN GETTING WORSE AND WORSE AND MORE AND MORE PEOPLE DELINQUENT ON LOANS, IT SEEMS LIKE -- STABILIZATION.

CAVANAGH: EARLY STABILITY. A LITTLE BIT OF THE SAME IN THE CREDIT CARD BUSINESS. AND ANOTHER THING WE LOOK AT, JUST TO GET A FEEL FOR WHERE THE ECONOMY MIGHT GO IS SPENDING ON CREDIT CARDS. SO WHAT IS THE CONSUMER DOING? SO WE HAVE OBSERVED COMING OFF THE FALL OF LAST YEAR, AS WE ALL KNOW, TREMENDOUS DROP-OFF IN CONSUMER SPENDING. AND WE WATCH IT WEEKLY, WHAT GOES ON ON OUR CREDIT CARDS, AND WE HAVE SEEN AGAIN OVER THE PAST COUPLE OF MONTHS A STABILIZATION. IT'S LOWER THAN IT WAS SPENDING LEVELS FROM A YEAR AGO. BUT IT'S BETTER THAN IT WAS AT ITS WORST EARLIER IN THE YEAR. AND HAS BEEN RUNNING AT A STABLE LEVEL. SO THOSE ARE THINGS WE LOOK FOR. AND LIKE WE NEED TO SEE THEM CONTINUE. WE'RE NOT YET READY TO CALL IT, BUT THAT IT'S GOING TO STABILIZE AND STAY THERE. THOSE ARE THE THINGS TO LOOK FORTO SEE IF THAT -- THAT AND UNEMPLOYMENT. WHERE UNEMPLOYMENT GOES FROM HERE IS AN IMPORTANT FACTOR IN ALL OF THESE -- AND HOME PRICES AND CONSUMER LOSS.

FRANCIS: DO YOU HAVE A PREDICTION ON THAT, WHERE YOU THINK EMPLOYMENT IS GOING FROM HERE, WHEN IT WILL PEAK, HOW BIG IT WILL GET?

CAVANAGH: NO PREDICTION ON PEAK. WE CONTINUE TO SEE A TREND A LITTLE HIGHER IN THE SECOND HALF OF THEYEAR FROM HERE. BEYOND THAT, IT'S GOING TO BE MORE A FACTOR OF PLENTY OF OTHER DYNAMICS GOING ON IN THE ECONOMY THAT ARE TOO HARD TO PUT A FINGER ON. BUT HOPEFUL THAT MAYBE WE SEE A PEAK SOON AFTER THE LATTER PART OF THIS YEAR AND NEXT. AND THEN IT'S GOING TO BE, WHAT DOES IT MEAN? WHAT'S THE QUALITY OF UNEMPLOYMENT? IF UNEMPLOYMENT STAYS AT A CERTAIN LEVEL, IS IT SOME PEOPLE KEEPING A JOB AND NEW PEOPLE LOSING JOBS, SO THAT THERE IS A SUSTAINED HIGH LEVEL OF UNEMPLOYMENT, OR DOES IT PEAK AND THEN START COMING DOWN?WHAT'S THE NATURE OF JOB RECOVERY.

FRANCIS: WHAT'S YOUR GUESS? WHAT ARE YOU GUYS THINKING?

CAVANAGH: VERY HARD TO SEE. WE'RE NOT SEEING A LOT OF JOB CREATION NOW. OF BUT DEPENDING ON WHAT COMPANIES SEE, BECAUSE THAT GOES INTO WHAT COMPANIES SEE. SO WE'RE LOOKING TO SEE HOW CONFIDENCE IN THE CEO SWEEP BEHAVES LATER IN THE YEAR AS PEOPLE PLAN BUDGETS FOR NEXT YEAR, WE'LL HAVE EFFECTS ON THAT.

FRANCIS: THERE IS A LOT OF CRITICISM THAT YOU GUYS AREN'T LENDING ENOUGH MONEY. JAMIE DIMON HAS SAID IN THE PAST THAT THERE ISN'T ENOUGH DEMAND. I KNOW YOU PUT A 150 BILLION DOLLARS TO WORK WHAT IS DEMAND FOR CREDIT LIKE RIGHT NOW?

CAVANAGH: I MEAN, OUR COMMERCIAL BANK, ONE OF THE LEADING MIDDLE MARKET LENDERS IN THE COUNTRY OPERATES IN ALL OF THE STATES WHERE WE HAVE RETAILED BRANCHES. WE ACTUALLY SAW LOANS COME DOWN QUARTER OVER QUARTER A LITTLE BIT, 4% DOWN TO $105 BILLION OF LOANS OUTSTANDING. YET WE ARE EAGER TO GROW AND INVEST IN THAT BUSINESS. AND, IN FACT, ARE OPENING UP COMMERCIAL BANKING BUSINESS OPERATION IN CALIFORNIA WHERE WAMU NEVER HAD ONE, SO WE'RE HIRING PEOPLE AND EXPANDING BUSINESS, YET DEMAND IS DOWN. FOR THE VERY REASON I JUST DESCRIBED COMPANIES ARE BEING A LITTLE CAUTIOUS RIGHT NOW, SO DEMAND IS LIGHTER. AND THEN LARGER COMPANIES THAT HAVE EXCESS CASH LYING AROUND ARE PAYING DOWN BALANCES. SO WE SEE A LITTLE PRESSURE ON THE DEMAND SIDE RIGHT NOW ON THE COMMERCIAL SIDE.

FRANCIS: AND YOU SAID YOU SEE COMMERCIAL REAL ESTATE GETTING WORSE FOR A FEW MORE QUARTERS TO COME, OR WHAT DOES THAT LOOK LIKE?

CAVANAGH: COMMERCIAL -- A LOT OF QUESTIONS ABOUT THAT ON THE EARNINGS CALL.IT'S NOT A BIG EXPOSURE TO US. NO PNL IMPACTS TO US IN THIS QUARTER. A LITTLE ADDITIONAL RESERVE IN THERE, BUT NOT MUCH.BUT WHAT WE DO EXPECT, IT'S JUST THE FOLLOW-THROUGH, AS CONSUMER LOSSES INCREASE, AND CORPORATIONS HAVE THEIR PROBLEMS, IT GOES ON INTO DEMAND FOR COMMERCIAL REAL ESTATE BY TENANTS COMING OFF. SO WE EXPECT THAT TO BE A LAGGING CREDIT TREND. IT WILL GET WORSE FROM HERE. STEADILY THROUGH PROBABLY THE REMAINDER OF THIS YEAR IN 2010, AT LEAST.

FRANCIS: AT LEAST. WHEN DO YOU SEE A TURN-AROUND DO YOU THINK?

CAVANAGH: THAT ONE IS A TOUGH ONE. ONCE THE ECONOMY ITSELF TURNS, UNEMPLOYMENT STABILIZES, CONSUMER STABILIZES, IT COULD BETHAT IT'S -- YOU KNOW, QUARTERS -- YOU KNOW, BEYOND THAT. MAYBE A LITTLE LONGER.

FRANCIS: LET ME ASK YOU YOU ABOUT BEAR STEARNS AND WAMU INTEGRATION, BEAR STEARNS FIRST. WHAT PERCENTAGE OF THOSE PEOPLE STILL WORK FOR YOU?

CAVANAGH: WELL, WE SAID ABOUT THE TIME -- AT THE TIME, ABOUT HALF OF THE BEAR STEARNS PEOPLE AND THE INVESTMENT BANK ENDED UP WITH JOBS. AND ABOUT THE SAME NUMBER OF PEOPLE THAT LOST THEIR JOBS FROM BEAR STEARNS -- JPMORGAN PEOPLE IN THE SAME NUMBERS ALSO LOST THEIR JOBS, BECAUSE REMEMBER, WE'RE -- WE'RE PUTTING TOGETHER COMPANIES IN THE CONTEXT OF VERY, VERY TOUGH TIMES LAST YEAR. SO WE THINK WE DID A GOOD JOB PUTTING THE BEST ATHLETES, SO TO SPEAK, IN KEY JOBS. INTEGRATION IS DONE WELL.BEAR STEARNS IS MAKING A CONTRIBUTION, ESPECIALLY IN PRIME SERVICES, AND SAY COMMODITIES.

FRANCIS: AND WAMU, YOU KNOW, IS A BUSINESS THAT'S KNOWN FOR LOW FEES FOR LOW MARGIN CHECKING ACCOUNTS. YOU KNOW, YOU'VE HAD TO PAY HIGHER INTEREST RATES TO ATTRACTPEOPLE.ARE YOU RAISING FEES, AS WELL? OR HOW IS THAT GOING?

CAVANAGH: WELL, WE'LL SEE. THIS YEAR -- THIS QUARTER ALREADY, WE SAW A NICE CONTRIBUTION IN RETAIL BANKING, PROFITS UP 300 MILLION YEAR OVER YEAR, AND THAT WAS LARGELY DUE TO HAVING WASHINGTON MUTUAL IN THE RETAIL BUSINESS. WE STABILIZED THE DEPOSITS, WITHIN DAYS AFTER OUR ACQUISITION FROM THE FDIC WHEN THEY SEIZED IT. MUCH UP UNTIL THEN, DEPOSITS WERE RUNNING OFF ALMOST IMMEDIATELY IN OCTOBER EARNINGS CALL TWO OR THREE WEEKS AFTER THE DEAL, WE HAD SEEN STABILIZATION. SO FROM HERE, WE'RE JUST NOW STARTING TO RUN THE BUSINESS. THE CHASE WAY. NEW PRODUCTS, BETTER PRODUCTS, ADJUSTING, THE PRICE WE PAY ON DEPOSITS TO BE APPROPRIATE FOR OUR LOWER FUNDING COSTS. SO WE'LL SEE SOME HIGH-COST DEPOSITS THAT WAMU HAD RUN OFF PROBABLY IN THE SECOND HALF OF THE YEAR, AND WE'RE FINE WITH THAT.

FRANCIS: YOU'RE OUT FROM UNDER THE T.A.R.P. OBVIOUSLY YOU SAW THIS WEEK GOLDMAN SACHS ALREADY GETTING A LITTLE BIT OF BACKLASH ON THE COMPENSATION ISSUE. HOW IS COMPENSATION RUNNING FOR THIS YEAR, AND ARE YOU WORRIED ABOUT A BACKLASH, OR DO YOU FEEL LIKE IT'S YOUR BANK?

CAVANAGH: NO, I MEAN, I'M NOT WORRIED ABOUT A BACKLASH, BECAUSE I THINK WE'VE ALWAYS DONE FAIR AND APPROPRIATE PRACTICES, BEST PRACTICES AND COMPENSATION WILL CONTINUE TO DO SO. JUST REMEMBER, IT'S EARLY IN THE YEAR. WE STILL HAVE A HALF A YEAR TO GO, SO I THINK IT'S A LITTLE -- IT'S EARLY FOR US TO EVEN BE CONTEMPLATEING EXACTLY HOW IT'S GOING TO PLAY OUT.IT WILL BE BASED UPON PERFORMANCE. AND AS I SAID, DIFFERENT FROM MAYBE OTHER PLACES, WE'VE GOT A LOT OF DIFFERENT PERFORMANCE STORIES WHEN YOU LOOK ACROSS THE SIX BUSINESSES INSIDE OUR -- INSIDE OUR COMPANY. SO PERFORMANCE COMPENSATION WILL FOLLOW THE PERFORMANCE IN EACH BUSINESS AND BE DONE ON A VERY FAIR AND CONSISTENT BASIS.AND BUSINESS BY BUSINESS, WE'LL MAKE SURE WE'RE COMPETITIVE, AS WELL.

FRANCIS: BUT YOU KNOW ABOUT WHERE YOU'RE RUNNING, ARE YOU RUNNING TWICE LAST YEAR, OR

CAVANAGH: NO IT'S LOWER THAN THAT I DON'T HAVE THE NUMBER OFF THE TOP OF MY HEAD, BUT IT'S NOT AT THAT KIND OF LEVEL. WE'RE GOING TO -- IT DEPENDS, AGAIN, BY BUSINESS. INVESTMENT BANK IS CERTAINLY UP NICELY FROM WHERE IT WAS YEAR OVER YEAR, BUT, AGAIN, WE'RE ONLY HALFWAY THROUGH A YEAR IN A BUSINESS THAT HAS PLENTY OF ROOMTO SEE WHERE THE REMAINDER OF THE YEAR TURNS OUT.BUSINESSES WHERE CREDIT COSTS ARE VERY HIGH, AND FOR THE COMPANY AS A WHOLE FOR SENIOR MANAGEMENT TEAM, WE'RE WELL AWARE THAT OVERALL PERFORMANCE IS NOT AS IMPROVED AS IT IS IN SOME OF THE UNITS.

FRANCIS: HOW IS THE INVESTMENT BANK BUSINESS DOING? ONE THING WE HAD HEARD EARLIER IN WEEK FROM GOLDMAN WAS THAT THE BACKLOG IS DWINDLING A LITTLE BIT. ARE YOU EXPERIENCING THE SAME THING AND HOW DO YOU BEEF IT UP, IF SO?

CAVANAGH: THE BACKLOG IS REALLY A FUNCTION OF WHAT OUR CUSTOMERS WANT TO DO, AND WHETHER THE MARKETS STAY OPEN.SO I THINK THOSE TWO GO HAND IN IN GLOVE. THERE IS A LOT OF ACTIVITY THAT HAPPENED IN THIS RECENT STRONG QUARTER THAT WASN'T IN THE PIPELINE GOING BACK TO THE BEGINNING OF LAST QUARTER. SO I THINK AS WE SAID ON THE CALL TODAY, IT'S A DECENT AMOUNT OF PIPELINE ACTIVITY, BUT A LOT OF IT WILL BE THE FUNCTION OF HOW RECEPTIVE THE MARKETS ARE. BECAUSE THERE ARE PLENTY OF CLIENTS WHO DO HAVE INTEREST IN tAKING A LOOK AT THEIR BALANCE SHEET, MAYBE MORE ON THE DEBT SIDE THAN THE EQUITY SIDE AS WE SAW IN THE SECOND QUARTER, AND LOOKING TO REPOSITION, LOOKING TO 2011, '12 AND '13 WHERE THEREARE BIG DEBT MATURITY PROFILES COMING IN, AND A LOT OF CONVERSATION ABOUT GETTING AHEAD OF THAT.

FRANCIS: LET ME ASK YOU ONE MORE QUESTION ABOUT COMMERCIAL REAL ESTATE. YOU'VE GOT TO BE ONE OF THE BIGGEST HOLDERS IN MANHATTAN. YOU'VE GOT WAMU, BEAR STEARNS, CHASE, CHEMICAL. IS THAT A POTENTIAL PROBLEM GOING FORWARD WITH ALL OF THE BRANCHES? IF COMMERCIAL REAL ESTATE CONTINUES TO DETERIORATE? WHERE DO YOU STAND ON THAT?

CAVANAGH: NO. ANYTHING WE USE FOR OPERATING OUR BUSINESS IS JUST LIKE ANY OTHER COST WE MANAGE IN THE COMPANY, AND WE'RE DOING A FINE JOB WITH THAT. SO NO CONCERNS WITH US AS A USER OF COMMERCIAL REAL ESTATE. WE'RE OBVIOUSLY LARGE, AND WE'RE OBVIOUSLY LIKE EVERY OTHER EXPENSE WE MANAGE HERE, TRYING TO BE THOUGHTFUL ABOUT DOING THE RIGHT THING FOR THE SHAREHOLDERS THERE.

FRANCIS: AND ON THE REVENUE SIDE, A LOT COMING FROM TRADING, AS WELL.WAS IT -- YOU KNOW, IT WAS A GOOD QUARTER FOR A LOT OF PEOPLEIN TERMS OF THE END OF MARCH. DO YOU THINK YOU CAN KEEP THAT GOING IN THE NEXT QUARTER?

CAVANAGH: I GUESS WHAT I SEE IS, WE HAVE DONE A GOOD JOB IN THE INVESTMENT BANK BOOKS, BOTH ON THE CORPORATE FINANCE SIDE, THE FEE SIDE AND IN THE TRADING SIDE OF ATTRACTING VERY HIGH LEVELS OF CLIENT INTEREST IN DOING BUSINESS WITH US. WE THROUGHOUT THE CRISIS WERE MAKING MARKETS DESK BY DESK, COMMITTING CAPITAL.SO WE BELIEVE WE'VE GAINED MARKET SHARE THAT WE EXPECT TO HOLD ON TO. ALSO, AS MANY PEOPLE HAVE TALKED ABOUT, THIS FIRST HALF OF THE YEAR, SPREADS ARE WIDER. WHAT YOU GET PAID AS BEING A RISK INTERMEDIARY ARE IS BETTER THAN IT HAS BEEN BACK IN 2007. THAT IS STARTING TO NARROW, AS YOU AND EXPECT, AS THINGS GET MORE AND MORE NORMAL. BUT CLIENT LEVELS OF ACTIVITY CONTINUE TO BE HIGH. SO PROBABLY THE LEVEL OF REVENUES COULD COME OFF A LITTLEBIT.BUT NOT A -- WE'LL HAVE TO WAIT AND SEE, I GUESS.

FRANCIS: OKAY.MIKE CAVANAUGH, CFO OF JPMORGAN CHASE, CONGRATULATIONS ON A GREAT QUARTER. THANKS SO MUCH FOR TALKING TO US.




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