JP Morgan's success not what it seems

The sign for JPMorgan on a mirror in the headquarters of JPMorgan Chase in London.

TEXT OF STORY

Kai Ryssdal: There are those who would say the big banks have ended up with the reform bill they wanted. They've gotten bigger, for one thing. And more profitable, as JP Morgan showed today. It did report some strong numbers this morning, but it does seem to have indulged in some, some shall we say, creative accounting to get there. Completely legal, but creative nonetheless. All to make the bottom line look better for investors without changing some underlying problems.

Here's our senior business correspondent Bob Moon.


Bob Moon: JPMorgan Chase announced a big $4.8 billion profit this morning, and some news reports declared the company "blew away expectations." Then, analysts started reading between the lines.

And at Rochdale Securities, Dick Bove saw the performance as stunning, all right -- stunningly disappointing for the country's second-biggest bank.

Dick Bove: It saw a decline in its deposits, it saw a decline in its loans, it saw a decline in the fees that it created, it saw a decline in its margins and it saw a decline in its revenues. It was a terrible quarter.

So how could that yield more than $4 billion in profit? Bove says Chase pumped up its bottom line with an accounting strategy just about all banks turn to in tough times.

Bove: They reduced their reserves, and they took money out of the reserves and put it into profit. Most, if you will, hardcore analysts who look at a company won't accept that as being a valid way to increase earnings.

Bove did not use the phrase "smoke and mirrors" to describe this approach, but the Securities and Exchange Commission has come close since the economy collapsed. It's already investigating sleight-of-hand accounting for leaving hundreds of banks in a precarious state. But if you're thinking Congress must have addressed this bookkeeping hocus-pocus in its new financial fix, securities law professor John Coffee at Columbia University says, guess again.

Coffee: There's very little in this financial reform bill that changes the accounting or disclosures. And there, they have regularly engaged in this short-term gaming of the financial statements by correcting things on the last day of the quarter and that simply blinds investors to the truth.

It shows how investors can't really rely on regulators to keep them safe, so says Charles Elson, who heads the University of Delaware's Center for Corporate Governance.

Elson: While the goal of a regulator is to box in the regulated, the goal of the regulated is to work around the regulator. So no matter what regulations come out, the game always continues.

And with a new round of rules, it's game on.

I'm Bob Moon for Marketplace.

About the author

Bob Moon is Marketplace’s senior business correspondent, based in Los Angeles.

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