How Screwed Are JPMorgan Chase and Wells Fargo?

By Kevin Roose, New York Magazine

22 October 12

uarterly bank earnings season is upon us. And with it, the life-negating sight of hundreds of business journalists all parsing the same labyrinthine financial disclosures for signs of a bank's financial health or illness. This is the quarterly peek we get at the greasy innards of our nation's financial system - who's making money, who's losing it, who's cutting jobs, who's growing like kudzu.

Finding this out isn't easy. If you believe the banks and their press releases, every quarter is a RECORD quarter, with ALL-TIME HIGH profits and GROUNDBREAKING innovation. Problem spots, if there are any, are tucked away, buried in footnotes and tiny type beneath a banner of superlatives.

Here, we've developed a simpler rubric for evaluating banks based on their balance sheets. It's called, "How Screwed Is This Bank?"

First up: JPMorgan Chase.

As expected, the House of Dimon reported "RECORD" profits and "STRONG PERFORMANCE ACROSS ALL BUSINESSES" this morning.

But in this case, the all-caps declarations have some muscle behind them. The bank revealed that it had not, in fact, been swallowed whole by the London Whale and had made $5.7 billion last quarter despite continued fallout from the trading losses of a few knuckleheads in London. Good, old-fashioned mortgages provided a big chunk of the gains, leading Dimon to conclude this morning that "the housing market has turned the corner."

But, but, but, the London Whale! Oh yeah, Dimon got to that, too, saying the trade that created the $5 billion-plus loss had been "effectively closed," according to DealBook, and calling "synthetic credit," the type of derivative that the Whale was trading, "a sideshow." (Apparently, Dimon still loves saying things that could come back to bite him.)

Still, for putting the Whale fiasco behind it (except for those teeny criminal charges investigators are reportedly planning) and remaining vastly profitable in the midst of a PR disaster, JPMorgan Chase is definitively Not Screwed.

Next up: Wells Fargo.

Poor Wells Fargo. Unlike Goldman Sachs and Morgan Stanley, who would never share another bank's earnings day out of pride, Wells Fargo has to ride JPMorgan's coattails. Not to mention it releases earnings at, like, 8 a.m., which is 5 a.m. in San Francisco, where Wells Fargo is based. (Hope they have a K-Cup machine or some 5-Hour Energy bulk packs in there.)

Still, the Californian bank is basically Not Screwed today, because it posted [PDF] "RECORD QUARTERLY NET INCOME" of $4.9 bil, mostly because of increased mortgage business. Again with the mortgages!

Mortgages has not been a pretty word at Wells Fargo this quarter. The bank got sued last week by federal prosecutors, who accused it of lying to the FHA about the quality of the sub-prime mortgages it was underwriting before the financial crisis. But the bank has denied the allegations and is now minting money off mortgages again, presumably without doing all that bad stuff.

Actually, it's worth pausing to contemplate how ironic (in an Alanis way) it is that mortgages seem to be propping up the profitability of big banks this quarter. While bankers are going around bashing President Obama for hurting their feelings with his "fat cat" rhetoric, the government (and, to an extent, the Fed's QE3 bond-buying spree) is actually helping banks make a ton of money, through a series of programs designed to encourage homeowners to refinance their mortgages. (A full 72 percent of all the home loans Wells Fargo made this quarter were refinancings.) Instead of complaining to Chrystia Freeland about how nobody knows the troubles they've seen, banks should be sending Edible Arrangements to Washington every day!

Gratitude. It is a lost art.