26 May 2009

Purchase Accounting Rules Set to Deliver $29 Billion Profit Windfall to JP Morgan and Other Banks

"It's Not the People Who Vote that Count; It's the People Who Count the Votes."
Josef Stalin

One of the many benefits of being a leading citizen of the Potemkin economy and a silent partner with the Treasury and Federal Reserve.

There is an analog to this in the tech sector, in which some companies may choose to write down the value of their components and subassembly inventories in fat quarters, and then take them as an improvement to their Cost of Goods Sold (COGS) in lean quarters, to boost EPS even as the top line revenues are flat to down.

And as for merger accounting, there are several companies showing excellent and consistent results using that rolling paintbrush of accounting embellishments.

Things are not always as they appear, especially when viewed through magic lantern of Wall Street.

JPMorgan likely to reap $29 Bln windfall on WaMu bad loans purchase
5/26/2009 8:29 AM ET

(RTTNews) - JPMorgan Chase & Co. stands to reap a $29 billion windfall due to an accounting rule that lets JPMorgan transform bad loans it purchased from Washington Mutual Inc. into income, the Bloomberg reported Tuesday.

Last year, the Seattle-based Washington Mutual, or WaMu, collapsed after it faced $19 billion of losses on soured mortgage loans and its credit rating was slashed, leaving it with insufficient liquidity to meet its obligations.

On September 25, 2008, JPMorgan Chase & Co. acquired all deposits, assets and certain liabilities of Washington Mutual Inc. for about $1.9 billion from the Federal Deposit Insurance Corporation, or FDIC.

The New York-based JPMorgan reportedly has used purchase accounting, which allows it to record impaired loans at fair value, marking down $118.2 billion of assets by 25%. JPMorgan took a $29.4 billion write down on WaMu's holdings, mostly for option adjustable-rate mortgages and home equity loans.

The purchase-accounting rule provides banks with an incentive to mark down loans they acquire as aggressively as possible. One of the benefits of purchase accounting is after marking down the assets, one can accrete them back in, which is said to be favorable over the long run.

Now, as borrowers pay their debts, the bank reportedly says it may gain $29.1 billion over the life of the loans in pretax income before taxes and expenses.

JPMorgan aside, Wells Fargo, PNC Financial Services Group Inc., and Bank of America Corp. are also poised to benefit from taking over home lenders Wachovia Corp., Countrywide Financial Corp. and National City Corp., the report said citing regulatory filings.