In the 2Q 2012, the Total Pretax Income of these 8 US Big Financial Corps was down 11% from the 2Q 2011, after being down 9% in the 1Q 2012 from the 1Q 2011.
The traditional banks.....Wells Fargo and US Bancorp.....did just fine. So did the Financial Sector of GE, which reports separately with the SEC.
But all of the others, where principal trading is a significant chunk of their business, had down earnings from the prior year's quarter.
JPMorgan Chase reported 2Q 2012 Pretax Earnings which were down $1,127 mil from the 2Q 2011. It identified $5,060 mil of Pretax Trading Losses made by its CIO's sector in its synthetic credit portfolio. It was able to soften the blow to its 2Q 2012 earnings by pushing back $640 mil of these trading losses to its already reported 1Q 2012 earnings. Thus, the Pretax trading losses reducing its 2Q 2012 earnings was $4.4 bil.
Derivatives are a zero-sum game. I'd be very interested in finding out which companies were on the other side of these massive $5,060 mil of JPMorgan Chase's derivative losses.
It's pretty clear to me that all derivatives, which are clearly deemed speculative in nature, should be disallowed in the US. If this would have been the case, there would not have been the horrible financial meltdown in the US in 2008, which continues to play havoc on US Unemployment, US Underemployment, US economic growth, and the massive US Deficit. The US Financial Accounting Standards Board has already done an excellent job at defining effective hedge derivatives and speculative derivatives. There is clearly nothing wrong with derivatives that are effective hedges.
The only part of the US Government which is effectively working to clean up the horrible economic mess caused by the financial industry is the Obama Administration.
The Republicans in the US House and in the US Senate just repeatedly attack the Obama Administration, with so many naive and inaccurate assertions, on this issue. With their lack of financial expertise, they have nothing in the way of wise recommendations to help, thus they elect to take the low road with continuing bombastic, sarcastic, irrelevant attacks.
US citizens want results from the US Congress, not just attacks. And US citizens are flat out sick and tired of the repeated unprofessional, unreasonable, irrational, bombastic attacks on US Treasury Secretary Tim Geithner and Fed Chairman Ben Bernanke in televised US House and US Senate Financial Hearings by nearly all of the US House Republicans and also by some US Senate Republicans.
This is one of the many reasons the US Congress has such low approval ratings. The US economy will not be great again, unless there is a major reconfiguration in the US Congress in the upcoming November 2012 election. The Obama Administration cannot do it alone. It needs help from the US Congress.
And it is also the reason the US Congress, which is so devoid of members with savvy financial expertise, needs new members like Massachusetts' US Senate Candidate Elizabeth Warren, whose very strong financial expertise would put her at the very top of the present US Congress.
With these massive $5,060 mil of trading losses, JPMorgan Chase would have to find ways to soften the impact of this on its 2Q 2012 earnings. And did they ever.
First, as stated earlier, it shoved $660 mil of these trading losses to its 1Q 2012 earnings, by restating these earlier reported earnings.
And second, just like many other companies, it focused on areas where the measurements are very subjective.....specifically, its Estimated Reserves.
In JPMorgan Chase's case, there are three huge subjective Reserve areas.....Credit Losses, Litigation and Income Tax.
JPMorgan Chase decided to reduce its Provision for Credit Losses from the $1,810 mil included in its 2Q 2011 earnings down to only the $214 included mil in its 2Q 2012 earnings.....a massive reduction of $1,596 mil.
JPMorgan Chase also decided to reduce its Litigation Expenses from the $1,900 mil included in its 2Q 2011 earnings down to only $300 mil included in its 2Q 2012 earnings.....a massive reduction of another $1,600 mil.
Yeah, when you combine these two expense reductions, it yields $3,196 mil. And then when you also include the $660 mil of trading losses moved to the 1Q 2012, this yields a total of $3,856 mil. Yeah, that's a magical $3,856 mil income recovery of the total $5,060 mil of Pretax Trading Losses.
And to top it off, JP Morgan Chase elected to reduce its effective income tax rate, the rate reflected in its Total Income Tax Expense included in its earnings, from 33.2% in the 2Q 2011 to 29.1% in the 2Q 2012. JPMorgan Chase has a massive $8.9 bil of Income Tax Reserve on its books, higher than any other US company. This Income Tax Reserve is the Estimated Tax Liability to cover all of its income tax audits. With such a huge subjective number covering so many income tax issues, it is easy to fine tune this computation each quarter.
OK, enough on JPMorgan Chase. Let me move to Bank of America.
When Bank of America reported its 2Q 2011 disastrous earnings report, it showed a Pretax Loss of $12.6 bil. Yeah, that's not a misprint, it's $12.6 bil in only one quarter.
And in its 2Q 2011 earnings release, it detailed more than $18.2 bil of adjustments, which turned this Generally Accepted Accounting Principles (GAAP) Pretax Loss of $12.6 bil into a Non-GAAP Pretax Profit of $5.6 bil.
The main items included in this long list of $18.2 bil of Non-GAAP adjustments were $14.0 bil of Provisions for Mortgage-related Representations and Warranties. This $14.0 bil of Provisions was comprised of $8.6 bil related to the resolution of nearly all of the legacy Countrywide-issued first-lien, non-GSE Residential Mortgage-backed Securization (RMBS) Repurchase Exposures, as well as $5.4 bil related to other non-GSE and GSE exposures.
So when Bank of America released its 2Q 2012 earnings report, it reported a Pretax Income of $3,147 mil in the 2Q 2012 and a Pretax Loss of $12,875 mil in the 2Q 2011.
Bank of America did not include that same key $18.2 bil of detailed adjustments, nor its Non-GAAP Pretax Income for the 2Q 2011 in its 2Q 2012 earnings release. It did mention some of its main items in this list in its 2Q 2012 earnings release. Seems very strange to me.....not really being fully transparent on something so key to evaluating the company's earnings.
In my Pretax Income numbers below, I reflected Bank of America's $18.2 bil of Non-GAAP income adjustments in deriving my 2Q 2011 Core Pretax Income number.
Below here is the Pretax Income (PTI) of each of these 8 US Big Financial Corps for the 2Q 2012, and as compared with the 2Q 2011.
| Increase | Increase | |||
| PTI | PTI | (Decrease) | (Decrease) | |
| 2Q 2012 | 2Q 2011 | Amount | % | |
| mils $s | mils $s | mils $s | ||
| US Big 8 Financial | ||||
| Wells Fargo | 7,092 | 6,073 | 1,019 | 17% |
| JPMorgan Chase | 7,000 | 8,127 | (1,127) | -14% |
| Citigroup | 3,702 | 4,299 | (597) | -14% |
| Bank of America | 3,147 | 5,325 | (2,178) | -41% |
| GE Capital Services | 2,238 | 1,981 | 257 | 13% |
| US Bancorp | 1,942 | 1,637 | 305 | 19% |
| Goldman Sachs | 1,415 | 1,612 | (197) | -12% |
| Morgan Stanley | 940 | 1,970 | (1,030) | -52% |
| Total all 8 | 27,476 | 31,024 | (3,548) | -11% |
